Stamp Tax on Properties with Independent Units: CAAD Ruling on Verba 28.1 TGIS Threshold (Process 249/2015-T)

ARBITRAL DECISION

The arbitral tribunal operating with a sole arbitrator constituted at CAAD – Administrative Arbitration Centre pursuant to the legal framework established by Decree-Law No. 10/2011 of 20 January[1], to which was appointed by the respective Deontological Council, the arbitrator from the Centre's panel Nuno Maldonado Sousa, hereby renders its arbitral decision.

1.1. Report

1.2. Constitution of the Arbitral Tribunal

A…, LDA, legal entity No. …, with registered office at Rua…, No. …, …, …-… LISBON, registered at the Commercial Registry Office of Lisbon under No. …, filed a request for constitution of the arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of the RJAT and Articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, in which the Tax and Customs Authority is Respondent[2].

The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 16-04-2015 and was notified to the Tax Authority on 24-04-2015.

Pursuant to the provisions of Article 6, No. 1 and Article 11, No. 1, paragraph b) of the RJAT, the Deontological Council appointed as arbitrator of the singular arbitral tribunal the undersigned, who communicated acceptance of the office within the applicable period, and notified the parties of such appointment on 09-06-2015. In accordance with the rule contained in Article 11, No. 1, paragraph c) of the RJAT, the arbitral tribunal was constituted on 25-06-2015.

On 28-12-2015 but with effects as of 04-01-2016 (first business day following the judicial recess then in progress) this arbitral tribunal extended the period for issuance and notification to the parties of the arbitral decision by 2 months, pursuant to Article 21(2) of the RJAT.

1.3. The Applicant's Claim

In its Initial Petition the Applicant requested the annulment of 38 assessments relating to Stamp Tax for the years 2012 and 2013[3] in the total amount of €44,504.40.

The Applicant's claim is based on the fact that it owns an urban property (building) which is not subject to the condominium ownership regime and is composed of various parts capable of independent use, one as a retail shop and nineteen for housing, and that these together have a taxable property value of €2,225,220.00 but none of these parts, considered individually, has a taxable property value equal to or exceeding €1,000,000.00. It argues that item 28.1 of the SGIT should apply to the value of each division of the property (9th and 30th IR), using the same value to determine whether each of them should be subject to taxation because its respective taxable property value exceeds the defined threshold. It also argues that it is not lawful to add the values of the property divisions to determine their tax liability.

1.4. The Position of the Tax Authority

The Tax and Customs Authority submitted its Response[4] defending the legality of the assessment and argued for the rejection of the claim and its grounds, maintaining that the taxable property value of the urban property, for purposes of determining the lower limit of application of item 28-1 of the SGIT[5], results from the sum of the taxable property values of its parts capable of independent use with residential allocation. It therefore considers that item 28.1 of the SGIT is applicable to properties in which parts capable of independent use coexist, where the addition of the taxable property values of those parts with residential allocation results in a value equal to or exceeding €1,000,000.00. It concludes by defending the maintenance of the challenged acts.

1.5. Case Management and Submissions

The Tax Authority requested exemption from holding the 1st meeting of the arbitral tribunal with the parties as well as from production of submissions (64th R-AT) and the Applicant, invited to comment on the necessity of holding a meeting of the tribunal with the parties and submissions, made no such request. As no additional evidence production was requested beyond the documentary evidence attached to the case file and as the defence of lapse of time was discussed in the parties' submissions, the tribunal considered the holding of such meeting unnecessary and the production of submissions unnecessary.

By Order of 12-11-2015, the Respondent was notified to remit to these case files the Administrative File organized pursuant to Article 111 of the CPPT. The Tax Authority reported the non-existence of this item, because the Stamp Tax assessment is embodied in the very payment collection documents and because the Applicant did not initiate any administrative procedure for gracious complaint or ex officio revision. It added that it had nothing further to allege regarding the documents submitted by the Applicant.

1.6. Preliminary Matters

The arbitral tribunal was regularly constituted and has subject matter jurisdiction according to the rules of Article 2, No. 1, paragraph a) of the RJAT.

The Parties have legal personality and capacity (that of the Tax Authority pursuant to the discipline contained in Article 4, No. 1 of the RJAT and Article 10, No. 2 of the same diploma and Article 1, paragraph a) of Ordinance No. 112-A/2011, of 22 March), are legitimated and are regularly represented.

There are no nullities which vitiate the proceedings.

Accordingly, there is no obstacle to the tribunal's examination of the merits of the case, and therefore a decision must be rendered.

The Tax Authority raised the question of timeliness of this action. It is understood that because this involves examination of a peremptory exception, its consideration should not be made in the group of questions that should be examined first (Article 608(1) CPC), particularly as resort must be made to the factual findings. Therefore, consideration of this exception is deferred to the decision.

1.7. Decision

1.8. Factual Matters

1.8.1. Facts Deemed Proven

The following facts were established in this case:

A. Registered in the urban property matrix of the parish of …, of the municipality of Lisbon, with the Applicant as titleholder, is the urban property corresponding to the property registration article …, located on Av. …, No. … to …-… in Lisbon, described as "property in full ownership with divisions capable of independent use" in the number of 20, with the "total taxable property value" of €3,021,390.00, intended for housing and commerce, composed of a basement, ground floor and nine storeys, the basement consisting of parking for tenants, the ground floor of a shop – stand for commercial use and the 9 upper floors of 19 divisions capable of independent use, with residential allocation.

B. The Applicant received from the Tax Authority with origin in the Tax Service of …, 38 Stamp Tax assessments, all with indication "item of the SGIT 28.1", with assessment date of 14-12-2014, with payment deadline in March 2015 and with the following identifying elements:

1.8.2. Facts Deemed Not Proven

No other facts with relevance to the decision of the case were alleged.

1.8.3. Reasoning of Proven Factual Matters

The tribunal's conviction was based on the documentary evidence contained in the case file and on the position taken regarding each fact by the Parties in their pleadings.

1.9. Legal Matters

1.9.1. Timeliness of the Arbitral Action

In its Response the Tax Authority raised the question of the timeliness of the challenge by arbitration (1st to 5th R-AT), arguing that the period for filing the request for constitution of the arbitral tribunal was not complied with, which it claims is 90 days from the expiry of the period for voluntary payment of the tax.

It sustained its position by stating that the "Applicant merely alleges and does not prove, through documentary evidence, that the assessments it challenges refer only to a single payment in 2012". It further confirmed the accuracy of the documents submitted by the Applicant and considered that these "fully instruct the present case, including for the purpose of assessing the timeliness of the request for arbitral pronouncement". By Order of 12-11-2015 the Tax Authority was invited to articulate the specific facts supporting the exception it invokes and chose not to do so.

The Applicant reaffirmed the timeliness of its request for constitution of the arbitral tribunal and for annulment of the Stamp Tax assessments of the years 2012 and 2013 to which the assessment notices it submitted refer and which have the payment deadline of March 2015, as was already established.

The relevant elements for analysis of the timeliness of this action are therefore:

a) Of factual nature: (i) the payment deadline for the challenged acts, which was established for March 2015; (ii) and the date of filing of the action, which occurred on 16-04-2015.

b) Of legal nature: The period for requesting constitution of the arbitral tribunal, which is 90 days, counted from the expiry of the period for voluntary payment of the tax obligations of which the Applicant was notified (Article 10(1)(a) of the RJAT and Article 102(1)(a) of the CPPT).

It is evident that the filing of the action by the Applicant occurred well before the period established for that purpose, which is 90 days as mentioned, and therefore the lateness of the claim invoked by the Respondent is entirely unfounded and without merit.

1.9.2. Substantive Question: The Tax Treatment of Divisions or Storeys Capable of Independent Use in an Urban Property (Building) Under a Full Ownership Regime, Under Item 28.1 of the SGIT

The substantive question to be examined in this case is to determine in which legal situations item 28.1 of the SGIT should be applied, specifically how the TPV[6] should be determined for application of the combined provisions of Article 1(1) of the STC[7] and item 28.1 of the SGIT, in the version that was in force until 31-12-2013, resulting from Law No. 55-A/2012, of 29 October.

Specifically, it is necessary to determine whether the TPV of a property not subject to the condominium ownership regime and composed of divisions or storeys capable of independent use, not all with residential allocation, results from the sum of the taxable property values of those parts with residential allocation or whether the tax liability should be assessed for each division or storey capable of such independent use.

The applicable law is contained in particular in Article 1 of the STC and in item 28 of its SGIT, which in the wording that was in force from 30-10-2012 until 31-12-2013, resulting from Law No. 55-A/2012, of 29 October, provided as follows:

STC

Article 1 Scope of Application

1 - Stamp tax applies to all acts, contracts, documents, titles, papers and other facts or legal situations provided for in the General Table, including gratuitous transfers of assets.

SGIT

28 - Ownership, usufruct or surface right of urban properties whose taxable property value contained in the register, pursuant to the Municipal Property Tax Code (MPTC), is equal to or exceeding €1,000,000 - on the taxable property value used for purposes of municipal property tax:

28.1 - For property with residential allocation - 1%;

28.2 - For property, when the taxpayers that are not natural persons are residents of a country, territory or region subject to a clearly more favourable tax regime, contained in the list approved by ordinance of the Minister of Finance - 7.5%.

Notwithstanding the entry into force of the new item of the SGIT on 30-10-2012, pursuant to Article 7 of Law No. 55-A/2012, of 29 October, a transitional regime was established by the same diploma for the year 2012, in the following terms:

Article 6 - Transitional Provisions

1 - In 2012, the following rules must be observed by reference to the assessment of stamp tax provided for in item No. 28 of the respective General Table:

a) The taxable event occurs on 31 October 2012;

b) The taxpayer in relation to the tax is the one mentioned in No. 4 of Article 2 of the Stamp Tax Code on the date referred to in the previous paragraph;

c) The taxable property value to be used in the assessment of the tax corresponds to that resulting from the rules provided for in the Municipal Property Tax Code by reference to the year 2011;

d) The assessment of the tax by the Tax and Customs Authority must be carried out by the end of November 2012;

e) The tax must be paid, in a single payment, by the taxpayers by 20 December 2012;

f) The applicable rates are as follows:

i) Properties with residential allocation assessed pursuant to the Municipal Property Tax Code: 0.5%;

ii) Properties with residential allocation not yet assessed pursuant to the Municipal Property Tax Code: 0.8%;

iii) Urban properties when the taxpayers that are not natural persons are residents of a country, territory or region subject to a clearly more favourable tax regime, contained in the list approved by ordinance of the Minister of Finance: 7.5%.

2 - In 2013, the assessment of stamp tax provided for in item No. 28 of the respective General Table must apply to the same taxable property value used for the purposes of assessment of municipal property tax to be effected in that year.

3 - The non-payment, total or partial, within the indicated period, of the amounts assessed as stamp tax constitutes a tax violation, punished pursuant to law.

In addition to regulating the subsidiary application of the MPTC[8] to assessments relating to item 28 of the SGIT, appropriate adjustments were also made to this new taxation in the STC, in particular:

• The determination of subjective scope of application by reference to the MPTC, which as a general rule provides that the tax is paid by the property owner on 31 December of the year to which it relates (Article 2(4) of the STC and Article 8 of the MPTC);

• The moment of constitution of the tax obligation by reference to the MPTC (Article 5(u) of the STC);

• The possibility of applying the accumulation of tax rates in relation to item 28 of the SGIT (Article 22(4) of the STC);

• The annual character, the jurisdiction of the central services of the Tax Authority and the reference to the MPTC as to the other rules relating to assessment (Article 23(7) of the STC);

• The application to the issuance of collection documents and to payment of the tax, of the regime of periods, deadlines and conditions defined in Articles 119 and 120 of the MPTC (Articles 44(5) and 46(5) of the STC);

• The application of the regime of ex officio revision of assessment and annulment provided for in Article 115 of the MPTC (Article 49(3) of the STC).

Whereas the Applicant argues that item 28.1 of the SGIT should apply to the value of each division of the property, using that same value for each division to determine whether each of them should be subject to taxation because its respective TPV exceeds the lower limit defined, the Tax Authority maintains that tax liability results from the combination of two factors, namely (i) residential allocation and (ii) the taxable property value of the urban property registered in the property matrix being equal to or exceeding €1,000,000.00, with this TPV being that of the property as a whole, or rather, that which results from subtracting from the property's total TPV the value of divisions that do not have residential allocation[9].

Let us now examine what the solution to this dispute is.

Law No. 55-A/2012 of 29 October introduced a modification to the rule of Article 1 of the STC so that this provision now contemplates also "legal situations" in addition to "acts, contracts, documents, titles, papers and other facts" provided for in the SGIT. Furthermore, the same legislative modification added to the SGIT item 28, which provides for the taxation of the ownership of the right of property, usufruct or surface right of urban properties whose taxable property value contained in the property matrix, pursuant to the MPTC, is equal to or exceeding €1,000,000.00, with the tax being applied on the taxable property value used for purposes of municipal property tax. The tax is calculated at the rate of 1% when the property in question has residential allocation and at the rate of 7.5% if it is a legal entity resident in a country, territory or region subject to a clearly more favourable tax regime.

The STC does not directly answer the generality of interpretive questions that item 28 of the SGIT raises, and therefore the legislator wisely chose to immediately elect the regime of the MPTC to govern matters not regulated (Article 67(2) of the STC). It is natural that this should be so because it is precisely in the MPTC that the basic concepts are enshrined which tax law uses for taxation of property, as can be understood from Article 1(6) of the STC itself and Article 1(2) of the Property Transfer Tax Code.

Tax law has not integrally adopted the civil law conceptualization of property, adapting it to the needs of this branch of law. For purposes of taxation of real property, property is in fact any fraction of territory, including waters, plantations and constructions of any nature incorporated or based on it, with a permanent character, provided that it forms part of a person's patrimony and has economic value (Article 2 of the MPTC). In turn, properties can be rural or urban.

Rural properties are lands situated outside urban agglomerations that are not construction land, intended or capable of being intended for agricultural activities, including constructions directly affected to such activity, their waters and plantations (Article 3 of the MPTC).

Urban properties, which are all others, are divided into various categories, namely (i) residential properties; (ii) commercial, industrial or service properties; (iii) construction land; and (iv) other properties (Article 6(1) of the MPTC). The classification of urban properties is made according to their purpose, either because it is licensed for the purpose in question or because that is the purpose to which it is normally intended (Article 6(3) of the MPTC). Construction land is classified as (i) land for which construction license or authorization has been granted, admitted prior notification or issued favorable prior information of a subdivision or construction operation; (ii) land that has been declared as such in the title of acquisition (Article 6(3) of the MPTC).

In turn, they are classified as other urban properties (i) lands within the limits of urban agglomerations where competent entities or territorial planning instruments prohibit subdivision or construction (ii) lands within an urban agglomeration that cannot be subject to use generating any income and are not affected to use generating agricultural income; (iii) buildings and constructions licensed or, in the absence of license, which have as normal purpose ends other than residential, commercial, industrial or service purposes (Article 6(4) of the MPTC).

It is also possible to classify a property as mixed, when the same property has a rural part and an urban part and neither of them can be classified as principal in relation to the other (Articles 5(1) and (2) of the MPTC).

It is believed that the conceptual constructions of the MPTC should be understood as fundamental to the taxation of property, for several reasons. First, because the very provisions of the tax laws in this area of taxation express themselves in that sense, in particular Article 1(6) of the STC and Article 1(2) of the Property Transfer Tax Code. Second, because the MPTC is a true code in the legal sense, i.e., it contains the core regime of rules relating to a given matter; it contains the fundamental discipline, treating it in a systematic and scientific manner[10]. Third, the provisions of the MPTC in question were prepared within the scope of property tax reform, considered within the complex of norms in which they are integrated and have the function of "establishing the precise contours of the reality to be taxed" (preamble to the MPTC).

The entire system of organization of real property embodied in the MPTC, to which reference has been made, thus has the purpose of rigorous characterization of real property which is subject to taxation and for this purpose uses a criterion of multiple dimensions – the economic perspective. It is the economic perspective that permits the assertion that only fractions of territory susceptible to constituting the patrimony of persons and having economic value are properties (Article 2 of the MPTC); it is the characteristic of having economic autonomy that permits the concept of property to embrace waters, plantations, buildings and constructions (Article 2 of the MPTC); it is the use generating agricultural income that permits qualification of properties as rural (Article 3(1)(a) of the MPTC); it is believed to be the same perspective of economic individuality, much more than juridical, that mandates treating as a property each autonomous fraction of buildings in condominium ownership (Article 2(4) of the MPTC), although for civil law it is only an independent unit of an urban property (Article 1414 of the Civil Code); it also appears to be reasons of an economic nature that lead to each part of property susceptible to independent use being considered separately in property registration, so as to permit discrimination of its taxable property value (Article 12(3) of the MPTC).

The concern for individualization following criteria of an economic nature is well understood; it is intended to characterize each thing according to its suitability and tax it accordingly. For this reason there is a permanent concern to record the value of each part that could be subject to differentiated use (e.g. Article 12(3) of the MPTC). The concern for individualized description and registration of autonomous parts has actually the purpose of making taxation also individualized, for each part of real property; it is precisely this individualization that is enshrined in the provision of Article 119(1) of the MPTC, in requiring not only the discrimination of properties but also that of their parts capable of independent use and their taxable property value. For the MPTC it is therefore the value of parts capable of independent use that serves as the base of incidence for the tax and not any other value that on the basis thereof is calculated through arithmetic operation.

Since this is the criterion used for calculation of Municipal Property Tax and since the MPTC is of subsidiary application to the STC (Article 67(2) of Law No. 55-A/2012 of 29 October), there is no reason not to follow its guidance. Let us see what it leads to.

The rule of application – item 28-1 of the SGIT – only determines the application of the tax to properties with residential allocation with TPV equal to or exceeding €1,000,000.00. Two approaches could be explored:

(i) Consider that the €1,000,000.00 limit refers to each part of the property that is fiscally relevant, because it has its own tax significance;

(ii) Obtain a TPV corresponding to residential allocation, through the arithmetic operations necessary to purge the total TPV of individually identifiable divisions with different allocation.

In theory either of the solutions could be possible but it must be recognized that the ingenuity of the second approach has no legal support whatsoever and does nothing more than create a corrected TPV that the law does not enshrine and that seems even to be contrary to its spirit.

In fact and as has been seen, taxation of property is marked by rigorous characterization of the realities to be taxed. Now this rigor is not reconcilable with reasoning and arithmetic operations that have no clear legal support.

The teleological and historical elements of interpretation also lead to the same conclusion. On the occasion of the discussion of the law in the National Assembly it became clear that the intention was to tax properties of high value and that the tax would apply to houses with value equal to or exceeding €1,000,000.00[11]. Now the magnitude of the value of a "house" is a judgment that is assessed relative to each storey and not relative to a building, which may consist of multiple small divisions, possibly with total TPV amounting to a considerable sum but without this permitting the assertion that we are dealing with "houses of high value". A building with two houses of €1,000,000.00 each will have houses of high value; another with 100 fractions of €100,000.00 each would not merit the characterization of having houses of high value.

The prevailing case law has established solutions in the direction pointed out, and reference may be made to the review conducted on this matter, by reference to assessments for 2012 and 2013, by the Decision of 29-01-2015 of the Singular Arbitral Tribunal constituted at CAAD, in case 313/2014-T [Jaime Carvalho Esteves][12].

It thus appears that the best interpretation of the provision contained in item 28.1 of the SGIT requires that each part of the property that is fiscally relevant, because it is capable of autonomous use, be subject to taxation only if its TPV is equal to or exceeding €1,000,000.00.

Let us now examine to what extent this understanding is applicable to the factual circumstances brought by the Applicant.

It was established that the assessments for each of the years 2012 and 2013, totalling 38 assessments, applied to 19 divisions or storeys with "residential" allocation, each of which had a TPV below €1,000,000.00, the divisions of greatest value being the right side and the left side of the 8th storey, each with TPV of €130,800.00. From the legal matter discussed above, it clearly results that those divisions or storeys cannot be subject to application of the tax because their TPV falls below the taxation threshold.

It must therefore be concluded that the assessments are illegal and that the Applicant's claim should be upheld.

2. Decision

Considering the factual and legal elements collected and set forth, the Arbitral Tribunal decides to uphold the request for arbitral pronouncement and declare illegal the nineteen Stamp Tax assessments (item 28.1 of the SGIT) relating to the year 2012 and the nineteen Stamp Tax assessments relating to the year 2013, relating to the urban property registered in the property matrix under article … of the parish of …, municipality of Lisbon.

The Tax and Customs Authority is condemned to pay the costs, which shall be calculated in the proper manner.

2.1. Value of the Case

In accordance with the provisions of Article 306(2) of the CPC, by virtue of Article 29(1)(e) of the RJAT and Article 97-A, No. 1(a) of the CPPT by virtue of Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €44,504.40.

2.2. Costs

The costs are borne by the party that gave rise to them, it being understood that the losing party gives rise to them (Articles 527(1) and (2) of the CPC). In this case and considering the aforementioned rule, responsibility for the costs rests with the Tax Authority, as the losing party.

Pursuant to Article 22(4) of the RJAT and Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs borne by the Tax and Customs Authority is fixed at €1,836.00.

Lisbon, 6 March 2016

The Arbitrator,

(Nuno Maldonado Sousa)

[1] In this decision designated in abbreviated form of common usage as "RJAT" (Legal Framework for Arbitration in Tax Matters).

[2] In this decision designated in abbreviated form "Tax Authority" as is the generalized practice.

[3] It should be noted that in the address of the Initial Petition the Applicant refers only to stamp tax for 2012; this is an evident clerical error as it obviously intended to say stamp tax for the years 2012 and 2013, as becomes clear from the context itself. Indeed, the 38 documents to which reference is made when identifying the assessments relate to the years 2012 and 2013 and only all of them total €44,504.40. Furthermore, the Applicant stated in a petition filed on 11-01-2016 that "it has always intended to challenge the stamp tax assessments of item 28.1 of the General Table of Stamp Tax, for the years 2012 and 2013, as shown in and appears from the assessment notices it itself received (…)".

[4] In this pleading this submission of the Tax Authority is also designated as "R-AT".

[5] In this pleading the acronym SGIT is used to designate the General Table of Stamp Tax.

[6] In this pleading the acronym "TPV" is used to designate the taxable property value.

[7] In this pleading the acronym STC is used to designate the Stamp Tax Code.

[8] In this pleading the acronym MPTC is used to designate the Municipal Property Tax Code.

[9] This method of application can be seen in Article 10 of the R-AT.

[10] Cf. José de Oliveira Ascensão – O Direito – Introdução e Teoria Geral. 3rd ed., Lisbon, Calouste Gulbenkian Foundation, 1983, pp. 282-283.

[11] Parliamentary Journal, I Series, No. 9/XII-2, 11 October, p. 32.

[12] Accessible at http://www.caad.org.pt/