CAAD Ruling 211/2018-T: Stamp Tax on Building Land Under Verba 28.1 TGIS Annulled

ARBITRAL DECISION

I – REPORT

1. A..., LDA, taxpayer no...., with registered office at ..., no...., in Lisbon, requested the constitution of a collective arbitral tribunal, pursuant to the combined provisions of Article 2, No. 1, paragraph a) and Article 10, both of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "RJAT") and Articles 1 and 2 of Order No. 112-A/2011, of 22 March, in which the Tax and Customs Authority (hereinafter referred to only as "AT") is Respondent.

2. The request for arbitral pronouncement, submitted on 26-04-2018, has as its object the declaration of illegality and consequent annulment of stamp tax (IS) assessments for the year 2014, provided for in item 28.1 of the respective General Table of Stamp Tax (TGIS), in the amount of € 229,070.91 (two hundred and twenty-nine thousand, seventy euros and ninety-one cents), with reference to the following urban properties (building plots) registered in the respective property registers:

Articles ... and ... of the parish of ..., municipality of Lisbon;
Articles ... and ... of the parish of ..., municipality of Porto;
Article ... of the parish of ..., municipality of Lisbon; and
Article ... of the Union of parishes of ... and ..., municipality of Sintra.

1. It further requests the condemnation of the Respondent to reimburse the amounts paid concerning the aforementioned assessments, plus the respective indemnity interest, in accordance with Articles 43, No. 1 of the General Tax Law (LGT) and 61 of the Tax Procedure and Process Code (CPPT), calculated from the date of the improper tax payment until the date of processing of the respective credit note.

2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to AT on 27-05-2018.

3. The Applicant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of paragraph a) of No. 2 of Article 6 and paragraph b) of No. 1 of Article 11 of the RJAT, the President of the Ethics Council appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of their appointment within the deadline.

4. On 14-06-2018 the Parties were notified of the appointment of arbitrators, no objection being raised.

5. In accordance with the provisions of paragraph c) of No. 11 of the RJAT, the Collective Arbitral Tribunal was constituted on 04-07-2018.

6. On 09-07-2018 the Respondent was notified, in accordance with Article 17, No. 1 of the RJAT, to submit its response within 30 days, if desired, and to request the production of additional evidence.

7. It was further notified to submit, within the same period, the administrative file (PA) referred to in Article 111 of the CPPT.

8. On 09-07-2018, the Respondent submitted its Response, defending itself by exception and by impugnation, arguing, respectively, for the merit of the exception invoked and consequent dismissal of the case, or, should it not be so understood, for the lack of merit of the request for arbitral pronouncement, by not being proven, maintaining in the legal order the tax assessment acts impugned.

9. On the same date it attached to the case file the respective administrative file (PA).

10. Considering that the Parties did not request the production of any evidence other than the documentary evidence that the Applicant attached to the request for pronouncement, the Arbitral Tribunal, in light of the principles of autonomy in the conduct of the proceedings, speed, simplification and procedural informality, inherent in Articles 16 and 29, No. 2 of the RJAT, by order of 03-10-2018, dispensed with the holding of the meeting provided for in Article 18 of the same statute.

11. By the same order the Applicant was invited to respond, if it so wished, within five days to the exception invoked by the Respondent, the Parties being able, within the simultaneous period of 20 days, counted from the end of that period, to submit written submissions, on fact (essential facts they consider proven and not proven) and on law.

12. The date of 10-12-2018 was also set as the deadline for rendering and notification of the final decision.

13. The Parties were notified of this order on 03-10-2018, the Applicant having, on 29-10-2018, submitted Response to the exception as well as Written Submissions, which the Respondent also did on 06-11-2018.

14. On 29-11-2018 the AT requested the attachment to the case file of Judgment No. 605/2018 of the Constitutional Court, of 14-11-2018, rendered in Cases No. 339 and 340/16, which was accepted.

Position of the Parties

Of the Applicant

It supports its request for arbitral pronouncement, in summary, as follows:

That, as results from the respective property registers, the said urban properties have the following characteristics: They are building plots; and they have a Tax Patrimonial Value ("VPT") exceeding 1,000,000 Euros.

However, despite having proceeded to pay the assessments now impugned, concerning the year 2014, in the total amount of € 229,070.91, it considers that the building plots do not fall under the provision inherent in item 28.1 of the TGIS, as they violate the principle of equality enshrined in Article 13 of the Constitution of the Portuguese Republic ("CRP"), being, at the same time, contrary to the principle of tax equality and contributory capacity, enshrined in Article 104, No. 3 of the same Statute, being unconstitutional, relying on Judgment No. 250/2017 of the Constitutional Court, of 24-05-2017.

According to this judgment "the change in wording made by Law No. 83-C/2013, which added building plots to item 28.1, introduced a distorting factor in the system of taxation of real property that represents not only a distortion in the internal consistency of the tax system as a whole, or even of the Stamp Tax considered in isolation, but a distortion in the internal consistency of the tax rule contained in the said item".

Indeed, in accordance with the same judgment "(…) if behind the tax imposed on the owner of a residential house with patrimonial value exceeding one million euros there may be a taxpayer with sufficient economic strength to bear the respective tax burden, behind the tax imposed on the owner of a building plot there will normally be an entrepreneur, generally in the form of a commercial company engaged in real estate development, regarding whose economic strength we know nothing. In fact, we cannot presume that such a taxpayer has economic strength proportional to the value of the plot, which is merely instrumental in relation to their economic activity. We do not know what profit margin they will derive from its exercise, if they are even in the legal and economic conditions to develop it, or if they do not even have a negative net position."

That the relevant taxable fact for the application of item 28.1 of the TGIS is based on the ownership of a real right over a building plot with a VPT exceeding € 1,000,000.00, whose construction, authorized or planned, is for residential purposes.

However, building plots are not capable of being used solely for residential purposes and will only be so if and when the construction authorized or planned for them is built on them, that is, it corresponds to a potential buildability, legally consolidated in the legal sphere of the property owner, but not yet materialized.

This same understanding is contained in the aforementioned judgment, according to which the taxation of building plots whose construction, authorized or planned, is for residential purposes "is based on a 'mere expectation' of allocation, i.e., on the existence of an authorization or a forecast that the plot in question will be built on and that such construction is intended for residential purposes".

But the legislator, in bringing together in the same item the taxation of luxury houses and building plots, proceeding on the assumption that both generically fall under the category of real property with high VPT, which does not correspond at all to the reality in question as previously demonstrated, departed from the genesis of item 28.1 of the TGIS.

Making once again an appeal to the cited judgment, there would have been, on the part of the legislator, a confusion as regards the object aimed at by the rule contained in item 28.1, thus confusing "manifestations of wealth with factors of production of that same wealth", a circumstance even more serious in the case of companies holding real property, property on which the obtaining of their income depends, as is the case of the Applicant, which exercises the activity of buying and selling real property with CAE 68100, being able to choose to keep building plots in portfolio (which it acquired for sale and even though nothing is built on them) for several years, in order to await better market conditions.

For which reason, in the limit, even if construction were never completed, the Applicant would have to bear annually the IS arising from the ownership of plots with potential construction buildability, with an aggravated effect of decapitalization, deteriorating, perhaps decisively, the economic conditions and development of its own real property commercialization activity, for which reason, as is stated in the cited judgment "the application of this taxation to those companies takes as evidence a contributory capacity in excess of what is a mere productive factor, a prerequisite for obtaining income, a simple means for the exercise of their economic activity – which cannot be accepted."

In the same sense goes the arbitral decision of 27-06-2017, rendered in Case No. 541/2016-T of CAAD, in terms of which "where companies whose object is the commercialization of real property are concerned, it will infringe the principle of equality and contributory capacity (with arguments a contrario of those stated above) to apply item 28.1 of the TGIS to the properties that such commercialize".

Thus, it is demonstrated that building plots, when constituting property of commercial companies dedicated to the commercialization of real property, are merely a means of pursuing their economic activity, and do not reflect increased contributory capacity, for which reason there is no reason to distinguish between companies that commercialize building plots for residential building purposes and those that commercialize building plots for other purposes.

Still in the same sense goes the arbitral decision rendered in case No. 507/2015-T, of CAAD: "It is unequivocal that companies engaged in the commercialization of building plots are subject to a significant additional burden compared to the generality of companies, based on a hypothetical index of contributory capacity that does not necessarily correspond to reality, since the imposition of taxation has no relation whatsoever to the actual income of the activity carried out by the companies and burdens them even if they have negative results, with taxation being accentuated, cumulated annually, precisely in situations where, due to the failure of commercialization activity, the plots are held for several years and, therefore, there would be less justification for the imposition of additional taxation, private to this type of companies."

They conclude, thus, that the holding of building plots, as investment assets allocated to the activity of buying and selling real property developed by the Applicant, cannot represent increased contributory capacity that would justify their subjection to special taxation in Stamp Tax, for which reason the interpretation made by AT of item 28.1 of the TGIS materializes an unjustified negative discrimination of companies commercializing building plots, which implies its material unconstitutionality, by breach of the principles of equality and contributory capacity, for which reason, once again, one must conclude that the assessments are illegal due to error in the factual and legal premises.

Furthermore, it notes that arbitral jurisprudence, in particular that derived from CAAD cases No. 507/2015-T and 452/2016-T, has been unanimous in declaring the unconstitutionality of item 28.1 when interpreted to include building plots for which construction is provided or authorized only with residential units of value less than € 1,000,000.00.

For which reason it is its understanding that the IS assessments to which the building plots it held were subject did not take into account their building typology, as they did not consider the specific destination that will be given to them after the construction is materialized, which is the construction of collective residential buildings with multiple units, and the number of these, for each property to be erected on the respective building plot, is of such a high level that the corresponding VPT will, individually, be much less than € 1,000,000.00.

That the VPT of building plots corresponds, in accordance with Article 45 of CIMI "to the sum of the value of the building footprint to be constructed, which is located within the perimeter of fixing the building to the ground, measured from the outside, plus the value of the land adjacent to the footprint", and the "value of the building footprint varies between 15% and 45% of the value of authorized or planned buildings".

Even when buildings are composed of units capable of independent use, the courts have been clear in considering that it is the value of each of the units that is relevant for assessing the applicability of item 28.1 of the TGIS, regardless of whether or not separate property is established, see judgment of the Supreme Administrative Court of 9 September 2015, rendered in case No. 047/15.

Being to conclude that the rule contained in item 28.1 is unconstitutional due to violation of the principle of equality, as it applies to building plots with VPT equal to or exceeding € 1,000,000.00, for which the authorized or planned construction does not include any autonomous fraction – unit capable of independent use with VPT exceeding that reference, see arbitral decision of 17-03-2016, rendered in CAAD Case No. 507/2015-T.

For which reason it is clear that the mere fact that a building plot has a VPT equal to or exceeding 1,000,000.00 Euros cannot serve as justification for subjecting it to taxation in Stamp Tax, when the construction of residential units of value less than € 1,000,000.00 is provided or authorized, since taxation in these terms will be inadequate to satisfy the purpose of the rule, which is to impose increased taxation on real property patrimonies of greater value, for which reason a restrictive interpretation of the rule is necessary, in the sense of considering that building plot lots are subject to taxation, but solely and only in case the authorized or planned construction is for high-value residential properties, that is, for residential units of value exceeding one million Euros.

It concludes by arguing for the merit of the request for arbitral pronouncement and thereby for the annulment of the impugned assessments with all the consequences provided by law, including the reimbursement of the amount improperly paid plus the corresponding indemnity interest provided in No. 1 of Article 43 of the LGT and Article 61 of the CPPT.

Of the Respondent

Defending itself by exception, it invokes:

That the Applicant, throughout its entire petition, does not allege any illegality against the assessment acts, which are the object of impugnation in these arbitral proceedings, arguing that it does not agree with the aforementioned IS assessments, being certain that these violate the principle of equality enshrined in Article 13 of the Constitution of the Portuguese Republic ("CRP"), and are, in parallel, contrary to the principle of tax equality and contributory capacity, enshrined in Article 104, No. 3 of the same Statute, being therefore unconstitutional.

Thus the Arbitral Tribunal is incompetent ratione materiae to consider the request for declaration of material unconstitutionality of item 28 of the General Table of Stamp Tax, by violation of the principle of contributory capacity, as an aspect of the principle of equality, provided for in Articles 13 and 104, No. 3 of the CRP.

For which reason absolute incompetence ratione materiae constitutes a dilatory exception that prevents the continuation of the proceedings, leading to dismissal of the case concerning the respective request, in accordance with Articles 576, No. 2, 577, paragraph a) and 278, No. 1, paragraph a) of the CPC, applicable ex vi Article 29, paragraph e) of the RJAT.

For the foregoing it argues for the merit of the dilatory exception invoked and consequent dismissal of the case.

Defending itself by impugnation, it invokes the following arguments:

The Applicant bases all its reasoning on the unconstitutionality of the rule of incidence, notwithstanding that the Judgment of the Constitutional Court No. 250/2017, of 24 May 2017, was revoked by Judgment No. 378/2018, rendered on 04/07/2018, and decided "Not to consider unconstitutional the rule contained in Item 28.1 of the General Table of Stamp Tax, approved by Law No. 55-A/2012, of 29 October, amended by Law No. 83-C/2013, of 31 December, insofar as it imposes annual taxation on the ownership of a building plot whose construction, built, authorized or planned, is for residential purposes, whose tax patrimonial value is equal to €1,000,000.00".

That by consulting the certificate of the content of the urban property and the property register which is the basis of the present assessment, it is verified that the building plots are allocated to residential use and thus subject to stamp tax, with the legislator having opted to determine the application of the methodology for assessing real property in general to the assessment of 'building plots', as results from the expression 'value of authorized buildings' to which Article 45, No. 2 of CIMI refers and applying to it accordingly the allocation coefficient provided for in Article 41 of CIMI.

In this sense, it refers to Judgment No. 04950/11, of 14/12/2012, of TCA South, where it states: "The system of assessment of the tax patrimonial value of building plots is established in Art. 45 of CIMI. The assessment model is the same as for constructed buildings, although starting from the building to be constructed, taking as a basis the respective project, the value of the building plot for construction corresponds, fundamentally, to a legal expectation, embodied in a right to construct on it a property with certain characteristics and with a certain value. It will be that expectation of production of wealth materialized in a property to be constructed that increases the value of the patrimony and the wealth of the building plot owner once the property in question starts to be considered as a building plot. For that reason, the greater the value of the property to be built, the greater is the value of the building plot underlying it (see Art. 6, No. 3 of CIMI)."

For which reason, in the assessment of building plots, the legislator intended that the methodology of assessment of urban real property in general should be applied, thus all coefficients must be taken into account, in particular the allocation coefficient provided for in Art. 41 of CIMI, with such legal imposition also resulting from No. 2 of Art. 45 of CIMI, by referring to the value of buildings authorized or planned on the same building plot.

In the property registers of the properties, the type of property is "building plot lot", for which reason it cannot be doubted that we are faced with a 'building plot', more specifically, faced with a lot of urban building plot, with the areas of the building footprint and construction perfectly defined and identified in the urban property registers, as is also described above.

That the legislator does not refer to 'property destined for residential purposes', having opted for the concept of 'residential allocation', an expression different and more broad, whose meaning will be found in the need to integrate other realities beyond those identified in Article 6, No. 1, paragraph a) of CIMI.

At first sight, in a very literal interpretation limited to the letter of the law, the meaning that the Applicant seeks to give to it could be derived from the text, but as our jurisprudence has declared, this is not the best interpretation of the law, and in the hermeneutic task, the literal element, constituting the starting point and limit for extracting the meaning of the rule, is not the decisive element, nor even the most important, a role reserved for 'the unity of the system', in accordance with No. 2 of Article 9 of the CC.

Thus, in the interpretation of the law, beyond the aforementioned grammatical element, there is also the logical element to be considered, which requires, in particular, that the purpose aimed at by the legislator in elaborating the rule be considered (teleological element), in particular in order to ascertain its nature and its temporal scope of relevance, and to consider the place occupied by the interpreted rule therein (systematic element), with only the combination of all these interpretative elements yielding the true meaning of that rule, see Baptista Machado, Introduction to Legitimating Discourse, Almedina 1983, pages 182 and 189.

Item 28 of the TGIS is a general and abstract rule, applicable indistinctly to all cases in which the factual and legal premises are met, for which reason the impugned assessments remain fully valid and legal, concluding in favor of the legality of the same.

It concludes by arguing for the total lack of merit of the request for arbitral pronouncement and absolution of the Respondent.

The Parties submitted submissions, having maintained the positions set forth in their respective pleadings.

II. SANATION

1. Because the dilatory exception invoked (incompetence of the Arbitral Tribunal ratione materiae to consider the constitutionality, in abstracto, of item 28.1 of the TGIS) may constitute an obstacle to the consideration of the merits of the case, giving rise to dismissal, see Articles 576, No. 2, and 278, No. 1, paragraphs a) and d) of the CPC, it should be considered sua sponte and with priority – Articles 578 and 608, No. 1 of the same code.

Thus:

The Applicant does not formulate any request for declaration of unconstitutionality, arguing only and solely the unconstitutionality of the said rule (item 28.1 of the TGIS) by violation of the constitutional principles of tax equality and contributory capacity.

Indeed, pursuant to paragraph a), No. 1 of Article 281 of the Constitution of the Portuguese Republic (CRP), it is the Constitutional Court that has the power to consider and declare the abstract unconstitutionality of any rules (abstract and concentrated control).

However, the Arbitral Tribunal, like any other court, can, more correctly, must, set aside incidentally a rule that it considers unconstitutional (diffuse control), as per Article 204 of the CRP.

Moreover, regarding arbitral tribunals, this is what follows from No. 1 of Article 25 of the RJAT when it states "The arbitral decision on the merits of the claim lodged that terminates the arbitral proceedings is subject to appeal to the Constitutional Court insofar as it refuses to apply any rule on the grounds of its unconstitutionality or applies a rule whose unconstitutionality has been raised."

In such terms, the invoked exception of material incompetence of the Arbitral Tribunal is deemed unfounded.

1. The Parties have legal personality and capacity, show themselves to be legitimated and are regularly represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March).

2. The proceedings are not affected by nullities and the request was timely submitted.

3. The Arbitral Tribunal is regularly constituted and is materially competent to consider and decide the request, see Article 2, No. 1, paragraph a) of the RJAT.

4. There are no other circumstances that prevent consideration of the merits of the case.

III - SUBSTANTIATION

Established Facts

With relevance for the consideration and decision of the substantive issue raised, the following facts are given as established and proven:

1. The Applicant is a commercial company by quota whose statutory object consists of the buying and selling of real property (CAE 68100).

2. On 31-12-2014 it was the owner of urban properties (building plots) registered in the respective property registers under the following articles:

1. The building plot registered under article ... has the following characteristics:

It has an area of 1,988 m² and is intended for the construction of a multi-unit residential building. The gross construction area is 8,010 m², with the gross area intended for residential use being 4,850 m², corresponding to 54 units (independent residential units). The remaining area (3,160 m²) is intended for parking and storage.

It has a tax patrimonial value of € 2,107,500.00, determined in 2015. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 35.

1. The building plot registered under article ... has the following characteristics:

It has an area of 1,400 m² and is intended for the construction of a multi-unit residential building. The gross construction area is 12,020 m², with the gross area intended for residential use being 7,820 m², corresponding to 65 units. The remaining area (4,200 m²) is intended for parking and storage.

It has a tax patrimonial value of € 3,232,300.00, determined in 2015. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 35.

1. The building plot registered under article ... has the following characteristics:

It has an area of 2,931 m² and is intended for the construction of a multi-unit residential building. The gross construction area is 14,839 m², with the gross area intended for residential use being 10,198 m², corresponding to 70 units (independent residential units). The remaining area (4,641 m²) is intended for parking, storage and technical spaces.

It has a tax patrimonial value of € 2,298,490.00, determined in 2015. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 30.

1. The building plot registered under article ... has the following characteristics:

It has an area of 2,894 m² and is intended for the construction of a multi-unit residential building. The gross construction area is 13,243 m², with the gross area intended for residential use being 8,118 m², corresponding to 58 units (independent residential units). The remaining gross construction area (5,593 m²) is intended for commercial use, corresponding to 5 fractions, and the basement, which is for parking, storage and technical spaces.

It has a tax patrimonial value of € 1,993,710.00, determined in 2015. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 30.

1. The building plot registered under article ... has the following characteristics:

It has an area of 12,350 m² and is intended for the construction of a multi-unit residential building. The construction area is 13,116 m², with the gross area intended for residential use being 8,500 m², corresponding to 44 units (independent residential units). The remaining area (4,616 m²) is intended for parking and storage spaces.

It has a tax patrimonial value of € 3,414,180.00, determined in 2015. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 30.

1. The building plot registered under article ... has the following characteristics:

It has an area of 13,503 m² and is intended for the construction of a multi-unit residential building. The construction area is 15,477 m², with the gross area intended for residential use being 11,013 m², corresponding to 56 units (independent residential units). The remaining area (4,464 m²) is intended for parking and storage.

It has a tax patrimonial value of € 4,092,200.00, determined in 2016. Pursuant to No. 2 of Article 45 of CIMI, the percentage of the land value for the building footprint to be constructed was fixed at 32.

1. On 20-03-2015 the Respondent proceeded to assess the stamp tax, provided for in item 28.1 of the General Table of Stamp Tax, added by Article 4 of Law No. 55-A/2012, of 29 October, and amended by Article 194 of Law No. 83-C/2013, of 31 December, in the following amounts, charged against the tax patrimonial values of the aforementioned building plots, recorded in the property registers on 31-12-2014:

Article ... - VPT € 2,810,907.08 x 1% = € 28,109.07
Article ... - VPT € 4,336,421.61 x 1% = € 43,364.22
Article ... - VPT € 2,994,173.13 x 1% = € 29,941.73
Article ... - VPT € 2,594,849.75 x 1% = € 25,948.50
Article ... - VPT € 4,618,611.65 x 1% = € 46,186.12
Article ... - VPT € 5,552,126.63 x 1% = € 55,521.27

Total stamp tax assessed … € 229,070.91

1. The following payment notices were issued for payment in three installments, in the months of April, July and November, all in 2015:

1. The first installments were paid on 27-04-2015; the second on 30-07-2015; and the third on 26-11-2015.

Unproven Facts

There are no relevant facts for the decision of the case that should be considered as unproven.

Motivation

Regarding substantive fact, the Tribunal does not have the duty to pronounce upon all the facts alleged, but rather has the duty to select those relevant to the decision, taking into account the ground (or grounds) of the claim that substantiate the request formulated by the claimant [(see Articles 596, No. 1 and 607, Nos. 2 to 4 of the CPC, applicable ex vi Article 29, No. 1, paragraphs a) and e) of the RJAT)] and record whether it considers it proven or unproven (see Article 123, No. 2 of the CPPT).

According to the principle of free appraisal of evidence, the Tribunal bases its decision, in relation to the evidence produced, on its intimate conviction, formed from the examination and evaluation it makes of the means of proof brought to the proceedings and in accordance with its experience of life and knowledge of persons (see Article 607, No. 5 of the CPC). Only when the probative force of certain means is pre-established by law (e.g. full probative force of authentic documents, see Article 371 of the Civil Code) does the principle of free appraisal of evidence not dominate in the appraisal of the evidence produced.

Thus, the Tribunal's conviction was based on the documentary record attached to the case file as well as on the positions assumed by the parties.

IV - MATTER OF LAW (SUBSTANTIATION)

Subject Matter of the Dispute

The issue that constitutes the thema decidendum reconduits itself to determining whether, being the Applicant the owner of six properties (building plots) whose patrimonial value, individually, exceeds € 1,000,000.00, the same are subject to stamp tax (item 28.1 of the TGIS) given that, in light of the building typology, they are intended for the construction of multi-unit residential buildings whose tax patrimonial values of the respective units will, certainly, be much less than that value, given the high number thereof.

Issues to be Decided:

• Of the (il)legality of the impugned assessments in the following aspects, by reference to item 28.1 of the TGIS:

(Un)constitutionality regarding annual taxation on the ownership of a building plot whose construction, authorized or planned, is for residential purposes, whose patrimonial value is equal to or exceeding € 1,000,000.00;

(Un)constitutionality due to taxation of the substrate of an economic activity: Issue of the incompatibility of the rule with the constitutional principle of equality, in the part concerning building plots, due to negative fiscal discrimination dispensed to companies that regularly exercise the activity of buying building plots for construction and resale; and

Violation of law due to error in factual and legal premises.

• Of the request for reimbursement of stamp tax (im)properly paid, in the amount of € 229,070.91, and condemnation of the Respondent to pay indemnity interest.

Substantiation (Cont.)

The Law

A - On the Invoked Unconstitutionalities – General Notes

(i) Annual taxation on the ownership of building plots whose construction, authorized or planned, is for residential purposes, whose patrimonial value equals or exceeds € 1,000,000.00 (Article 45 of ppa)

Judgment No. 250/2017 of the 1st Section of the Constitutional Court, of 24-05-2017, referred to several times in the request for arbitral pronouncement, held unconstitutional the rule of item 28.1 of the General Table of Stamp Tax, approved by Law No. 55-A/2012, of 29 October, amended by Law No. 83-C/2013, of 31 December, insofar as it imposed annual taxation on the ownership of building plots whose construction, authorized or planned, was for residential purposes, whose tax patrimonial value was equal to or exceeding € 1,000,000.00.

However, this judgment was revoked by Judgment No. 378/2018 of the Plenary of the same Court, of 04-07-2018, in response to the appeal filed pursuant to Article 79-D of the Law on Organization, Operation and Procedure of the Constitutional Court (LTC), in the following terms: "Not to consider unconstitutional the rule contained in Item 28.1 of the General Table of Stamp Tax, approved by Law No. 55-A/2012, of 29 October, amended by Law No. 83-C/2013, of 31 December, insofar as it imposes annual taxation on the ownership of building plots whose construction, authorized or planned, is for residential purposes, whose tax patrimonial value is equal to or exceeding €1,000,000.00".

This issue of possible violation of the principles of tax equality and contributory capacity had already been analyzed by the Constitutional Court, in the sense of non-unconstitutionality, in the following judgments: Judgment No. 590/2015, of 11-11-2015; 568/2016, of 25-11-2016; Judgment No. 83/2016, of 04-02-2016; 247/2016, of 04-05-2016; 692/2016, of 14-12-2016; and 70/2017, of 16-02-2017.

(ii) Unconstitutionality due to taxation of the substrate of an economic activity (Articles 73 of ppa)

This Arbitral Tribunal follows the jurisprudence of CAAD on this matter, in particular that contained in the decisions rendered in Cases No. 664/2017, of 26-06-2018; 668/2017, of 24-04-2018 and 676/2017, of 16-07-2018, among others, as to the constitutionality of Article 135-A of CIMI, by affinity with the rule in question (item 28.1 of the TGIS), regarding the taxation of the substrate of an economic activity, that is, when companies whose object is the commercialization of real property are concerned, as in the present case.

To better understand what was decided, the following illustrative excerpt from the arbitral judgment rendered in case No. 664/2017 of CAAD is transcribed: "It has also been understood that the taxation of patrimony, alongside the taxation of income, constitutes a projection of contributory capacity, functioning as an extension of the personal tax on income and as a reinforcement of qualitative discrimination (Sérgio Vasques, 'Contributory Capacity, Income and Patrimony', Tax Law – Journal of Tax Law and Management, No. 23, Coimbra, 2005, pages 33 and 36).

The ownership of real property, for purposes of sale and transformation, with a view to obtaining economic results, does not cease to constitute a patrimonial asset that is revealing of an increased contributory capacity that goes beyond the tax that affects the taxable profit on account of the economic activity developed. What is at issue, therefore, is not the taxation of the real income earned by those entities through the activity developed, but the complementary contributory capacity that arises from the ownership of the patrimony and which alone may facilitate the obtaining of credit or the reinforcement of their negotiating position in the celebration of contracts (idem, p. 36)".

B) The Issue Sub Judice

In its wording applicable to the situation under analysis, item 28 of the TGIS provided that the following situations were subject to Stamp Tax:

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

28.1 — For property with residential allocation — 1%;

28.2 — For property, when the liable parties are not natural persons and are resident in a country, territory or region subject to a clearly more favorable tax regime, included in the list approved by order of the Minister of Finance — 7.5%."

There are thus cumulative requirements for the application of the rule contained in item 28.1 of the TGIS: that the property to be taxed be an urban property "with residential allocation" and that its tax patrimonial value, for purposes of IMI, exceeds € 1,000,000.00.

And No. 7 of Article 23 of the CIS provides, as to the assessment of this tax:

"Where the tax is due for the situations provided for in item No. 28 of the General 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 CIMI."

Regarding taxation in light of the aforementioned item 28 of the TGIS, various doubts arose as to whether or not to include in the scope of Stamp Tax properties which are in separate ownership, constituted in fractions of autonomous and independent use, with residential allocation, and in which the tax patrimonial value, in the sum of the fractions, is equal to or exceeding one million euros, but in which none of them, separately considered, for purposes of IMI, has a value equal to or exceeding that amount. This is because Article 28 itself provides that the patrimonial value relevant is the "used for purposes of IMI", and, in the case of separate ownership, each of the fractions of independent use is assessed autonomously.

The aforementioned rule emerged following Legislative Proposal No. 96/XII – 2nd of the Assembly of the Republic, contained in DAR, I Series, No. 9/XX/2, of 11 October 2012, where it is stated that, with the legislative change intended, it is sought to create "a rate in the form of Stamp Tax affecting urban properties with residential allocation whose tax patrimonial value is equal to or exceeding one million euros". "These measures are fundamental to reinforce the principle of social equity in austerity, ensuring an effective distribution of the sacrifices necessary to comply with the adjustment program. The Government is strongly committed to ensuring that the distribution of these sacrifices will be made by all and not just by those who live from the income of their work. In accordance with this objective, this statute extends the taxation of capital and property income, encompassing equitably a broad set of sectors of Portuguese society".

Appeal is thus made, alongside the creation of another mechanism generating revenue, to the need to accommodate the principles of social equity and tax justice so that they especially contribute natural persons who are holders of houses valued at or exceeding € 1,000,000.00.

It seems obvious that the intent was, first and foremost, to create a way to provide an increase in revenue, since the statute itself says nothing more on the subject, without prejudice to having sought to convey the idea that this increase in revenue provided for in the rule would come only from the taxation of those individual citizens who demonstrate greater contributory capacity through the use of real estate assets of high value. And indeed, in item 28.2 properties not held by natural persons that have their seat in countries, territories or regions in which a more favorable tax regime prevails, included in a list contained in a Government Order, are also considered as subject to tax.

Well then, taking into account the letter of the law, the essential elements for the existence of taxation can be thus summarized: stamp tax is charged on the ownership, usufruct or right of superficies of (i) urban properties, (ii) held by natural persons, (iii) with residential allocation, (iv) whose tax patrimonial value recorded in the register is equal to or exceeding 1,000,000.00€, (v) to be calculated on the same patrimonial value that is used for purposes of IMI.

Also to be taken into account, as absolutely essential for the case, the provisions of Article 67, No. 2 of CIS - which establishes that "(…) to matters not regulated in this Code concerning item No. 28 of the General Table, the provisions of CIMI shall apply, subsidiarily" - and of Articles 4 and 12 of CIMI, containing the definition of what urban properties are and specifying the latter that, for purposes of IMI taxation, "each floor or part of property capable of independent use is considered separately in the matricial registration, which also distinguishes its respective tax patrimonial value" (VPT) (underlining ours).

Not insignificant is also the circumstance that there is express systematic reference from the Stamp Tax Code (CIS) to the rules of CIMI (see, for example, Articles 4, No. 6; 5, No. 1, paragraph u); 23, No. 7; 44, No. 5; 46, No. 5; and 49, No. 3 of CIS).

Naturally, no doubts would arise if each floor or part of the property constituted an autonomous fraction in the separate ownership regime since CIMI clearly provides that each fraction is regarded as constituting a property (see Article 2, No. 4 of CIMI).

But what seems clear is the equal treatment given by CIMI between properties in separate ownership and properties in total ownership, treatment justified by the absence of material differences between the two types of properties and, consequently, by treating the two types of properties in the same way, the legislator complied with the constitutional principle of equality.

On the other hand, having especially in mind that it was the taxation of the so-called "luxury properties" that was at the basis, as has been seen, of the creation of the aforementioned wording of item 28.1 of the TGIS, this purpose of the rule is only fulfilled when the urban property is considered in its function of individual residence, that is, in light of a concept of property as an independent or individual economic or tax unit, whether or not it is constituted in the separate ownership regime.

In this perspective and in light, in particular, of the constitutional principles of equality, justice and contributory capacity, no differences in tax treatment can be established in the application of Article 28.1 of the TGIS between a taxpayer owning a building constituted in separate ownership and another owner of a building identical in all respects but not constituted (or not yet constituted) in the separate ownership regime.

Thus, being the value to be considered for purposes of calculating the rate to be applied for purposes of the provision in item 28 of the TGIS the tax patrimonial value used for purposes of IMI, this will necessarily be that of each one of the units or parts of the property allocated to residential purposes and with autonomous VPT.

And it has been in line with these conclusions that jurisprudence has been oriented, in a practically unanimous manner (see, for example, the arbitral decisions rendered in CAAD cases No. 14/2014-T, 35/2014-T, 245/2014-T, 249/2015-T, 413/2015-T, 432/2015-T, 530/2015-T, 632/2015-T, 668/2015-T, 743/2015-T, 765/2015-T, 777/2015-T and 453/2016-T, all of which can be consulted on the CAAD website, www.caad.org.pt).

In the case at hand, all the building plots are intended for the construction of multi-unit residential buildings that correspond to a high number of units (independent residential units) varying between 44 to 70, with the remaining areas of all of them being intended for parking and storage, and in the case of articles ... and ... these are also intended for technical spaces and the last one also for commercial purposes.

On the other hand, having analyzed the property registers and respective assessment elements, it is concluded that the percentages for calculating the footprint areas were fixed between 30% and 35% of the value of the authorized or planned buildings, resulting in this way from the VPT (tax patrimonial value) of the building plots in the sum of the value of the building footprint to be constructed and the value of the land adjacent to the footprint such that the value of the authorized or planned buildings will correspond more or less to three times the value of the footprint area, plus the value of the adjacent land. That is: it will never exceed three times the VPT of the plots.

Concluding: none of the fractions of the properties to be erected on the aforementioned six building plots will have a VPT exceeding one million euros.

Which means, in terms set out above, their exclusion from taxation by Item 28.1 of the TGIS, since the value to be considered will necessarily have to be, as has been seen, that of each one of the units or parts of the property allocated to residential purposes and with autonomous VPT.

The Request for Indemnity

The Applicant requests the condemnation of the AT (Tax and Customs Authority) to reimburse to the Applicant the improperly paid tax and to pay indemnity interest, at the legal rate of 4%, calculated from the dates of the improper payments (27-4-2015, 30-7-2015 and 26-11-2015 – See 11 of the established facts) until full reimbursement of that improperly paid tax.

In harmony with the provision in paragraph b) of Article 24 of the RJAT, the arbitral decision on the merits of the claim lodged that is not subject to appeal or challenge binds the tax administration from the end of the period provided for appeal or challenge, such administration being obliged, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of sentences of tax courts, to "restore the situation that would have existed if the tax act object of the arbitral decision had not been enacted, by adopting the acts and operations necessary for that purpose", which is in harmony with the provision in Article 100 of the LGT [applicable by force of the provision in paragraph a) of No. 1 of Article 29 of the RJAT] which establishes that "the tax administration is obliged, in case of total or partial merit of a complaint, challenge or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation which is the object of the dispute, including the payment of indemnity interest, if applicable, from the end of the period of execution of the decision".

Although Article 2, No. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in CAAD, making no reference to condemning decisions, it should be understood that the powers which in judicial challenge proceedings are attributed to tax courts are comprised in their competencies, this being the interpretation that accords with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first directive, that "the tax arbitral proceeding should constitute an alternative procedural means to judicial challenge proceedings and to the action for the recognition of a right or legitimate interest in tax matters".

Judicial challenge proceedings, despite being essentially a proceeding for the annulment of tax acts, admit the condemnation of the Tax Administration to the payment of indemnity interest, as is apparent from Article 43, No. 1 of the LGT, where it is established that "indemnity interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the services from which results the payment of the tax debt in an amount exceeding that legally due" and from Article 61, No. 4 of the CPPT (as worded by Law No. 55-A/2010, of 31 December, corresponding to No. 2 in the original wording), which states that "if the decision recognizing the right to indemnity interest is judicial, the period for payment shall be counted from the beginning of the period for its spontaneous execution".

Thus, No. 5 of Article 24 of the RJAT, when it states that "payment of interest, regardless of its nature, is due, in accordance with the terms provided in the General Tax Law and in the Tax Procedure and Process Code" should be understood as permitting the recognition of the right to indemnity interest in arbitral proceedings.

In the case at hand, it is manifest that, as a consequence of the partial illegality of the assessment acts, there is occasion for reimbursement of the tax, by force of the aforementioned Articles 24, No. 1, paragraph b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would have existed if the tax act subject of the arbitral decision had not been enacted".

As regards indemnity interest, it is also clear that the illegality of the act is imputable to the Tax and Customs Administration, which, on its own initiative, enacted it without legal support.

One is faced with a violation of substantive law, embodied in error in the legal premises, attributable to the Tax Administration.

Consequently, the Applicant is entitled to indemnity interest, in accordance with Article 43, No. 1 of the LGT and Article 61 of the CPPT, calculated on the sums it improperly paid and from the dates on which it did so.

Thus, the Tax and Customs Authority should proceed to execute this judgment, in accordance with Article 24, No. 1 of the RJAT, determining the amount to be refunded to the Applicant and calculating the respective indemnity interest, at the legal rate applicable to civil debts (currently 4% per annum), in accordance with Articles 35, No. 10, and 43, Nos. 1 and 5 of the LGT, 61 of the CPPT, 559 of the Civil Code and Order No. 291/2003, of 8 April (or statute or statutes that may succeed it in the meantime).

Indemnity interest is due from the dates of the payments until that of the processing of the credit note, in which they are included (Article 61, No. 5 of the CPPT).

V. DECISION

In accordance with the foregoing, this Tribunal decides:

a) To judge the request for arbitral pronouncement to be well-founded, annulling the impugned assessment acts concerning the Stamp Tax provided for in item 28.1 of the respective General Table of Stamp Tax, concerning the year 2014, in the amount of € 229,070.91 (two hundred and twenty-nine thousand, seventy euros and ninety-one cents);

b) To judge the request for condemnation of the Tax and Customs Authority to reimburse the sums improperly paid by the Applicant, plus indemnity interest, at the legal rate, from the dates of the payments until the date of processing of the respective credit notes, to be well-founded; and

c) To condemn the Tax and Customs Authority, respondent entity, in the costs of the proceedings.

VI - VALUE OF THE PROCEEDINGS

In accordance with the provision in Article 306, No. 2 of the CPC, 97-A, No. 1, paragraph a) of the CPPT and 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 229,070.91.

VII - COSTS

In accordance with Article 22, No. 4 of the RJAT, the amount of costs is fixed at € 4,284.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Respondent as decided above.

• Notify, including the Public Prosecutor's Office [Esteemed Office of the Attorney General of the Republic], given the mandatory nature of appeal (Article 280-3 of the Constitution of the Portuguese Republic).

Lisbon, 10 December 2018

The Collective Arbitral Tribunal

The President Arbitrator

(José Poças Falcão)

The Arbitrator Member

(Rui Ferreira Rodrigues)

The Arbitrator Member

(Ricardo Marques Candeias)