Stamp Tax on Vertical Property: CAAD Ruling on Verba 28.1 TGIS (Process 260/2017-T)

ARBITRAL DECISION

The arbitrator João Taborda da Gama, appointed by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Tribunal, established on 27-06-2017, agrees as follows:

1. Report

A…, Tax Identification Number…, fiscally represented by B…, Tax Identification Number…, resident at Av. …, … –…, …-… Lisbon, (hereinafter referred to as "Claimant"), filed a request for the establishment of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to as LRAT), against the Tax and Customs Authority as Respondent.

The request for establishment of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 26-04-2017. Pursuant to the provision of point (a) of paragraph 2 of article 6 and point (b) of paragraph 1 of article 11 of the LRAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the undersigned as arbitrator of the arbitral tribunal, who notified acceptance of the appointment within the applicable period.

On 09-06-2017 the parties were duly notified of this appointment and did not manifest a desire to reject the appointment of the arbitrator, in accordance with the combined provisions of article 11, paragraph 1, points (a) and (b) of the LRAT and articles 6 and 7 of the Code of Ethics. Thus, in accordance with the provision of point (c) of paragraph 1 of article 11 of the LRAT, as amended by article 228 of Law No. 66-B/2012, of 31 December, the arbitral tribunal was established on 27-06-2017.

By order of 08-11-2017 a hearing was dispensed with and it was decided that the proceedings would continue with written submissions. The Parties submitted written submissions. The arbitral tribunal was duly established in accordance with the provisions of articles 2, paragraph 1, point (a), and 10, paragraph 1, of Decree-Law No. 10/2011, of 20 January, and is competent.

The parties are duly represented, have legal personality and capacity, are legitimate and are represented (articles 4 and 10, paragraph 2, of the same decree and article 1 of Order No. 112-A/2011, of 22 March). The proceedings are not affected by any nullities.

2. Factual Matters

2.1. Proven Facts

On the basis of the documents contained in the proceedings and the administrative file attached to the case, the following facts are considered proven:

A) On 31 December 2012, the Claimant was the sole owner of an urban property registered in the urban property register under number…, of the Parish of… and described in the Land Registry of… under number…, in full ownership with floors or units capable of independent use, with a total patrimonial value of €1,032,320.00;

B) Of the aforementioned floors or units capable of independent use, 15 units have residential use;

C) Of the fifteen units capable of independent use, all – units Ground Floor Right, Ground Floor Left, 1st Floor Right, 1st Floor Left, 2nd Floor Right, 2nd Floor Left, 3rd Floor Right, 3rd Floor Left, 4th Floor Right, 4th Floor Left, 5th Floor Right, 5th Floor Left, 6th Floor Right, 6th Floor Left and 7th Floor – are used for residential purposes;

D) The sum of the patrimonial tax values attributed to the floors or units capable of independent use and residential use is €1,032,320.00;

E) The patrimonial tax value attributed to each floor or unit capable of separate lease and residential use varies between €44,240.00 and €72,520.00:

F) The sum of the Stamp Duty assessments – item 28.1, for the year 2012, relating to the property identified in the case, is €10,323.20:

G) Although the Claimant did not accept the legality of the Stamp Duty assessments of the year 2012, the Claimant proceeded to voluntarily pay the amounts set out in the assessments, in the total amount of €10,323.20;

H) The Claimant submitted, on 19 August 2016, a request for official review concerning the Stamp Duty assessment acts nos. 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013…, 2013… and 2013…, relating to the 2012 tax year, in the amount of €10,323.20.

I) By Official Communication of 4 January 2017, no.…, the Claimant was notified of the Order issued by the Chief Financial Officer of… (as substitute) of the Finance Directorate of Lisbon, on 22 December 2016, which determined the rejection of the request for official review no. …2016….

2.2. Unproven Facts

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

2.3. Justification for the Establishment of Factual Matters

The proven facts are based on the documents submitted by the Claimant with the request for arbitral decision.

3. Legal Matters

3.1. Question of the Merits of the Request for Arbitral Decision

The question to be decided, in the terms and with the grounds set out here, has been the subject of numerous decisions by higher courts in the sense supported by the Claimant - by way of example, and because it is the most recent, see Administrative Supreme Court Decision No. 10090/17, of 22 November (Rapporteur: Counselor Dulce Neto) in which, moreover, it can be read that "the position held by the appellant [Tax Authority] directly contradicts the established doctrinal thesis, settled and reiterated, by the Administrative Supreme Court, particularly in the decision on which the appealed judgment was based, delivered by this Section on 9/09/2015, in case no. 0899/14. Moreover, beyond that decision, numerous other decisions were issued, e.g., those mentioned in conclusion 15 of the counter-submissions and, subsequently, the jurisprudence-unifying decision delivered by the Full Section on 29/03/2017, in case no. 0593/16". This is also the position of numerous decisions issued by arbitral tribunals established within the CAAD. We will follow here decision no. 93/2017-T, of 26 June 2017.

Item 28.1 of the General Scale of Taxes, on which the contested assessments were based, had the following wording in the year 2012, which is at issue:

"28 – Ownership, usufruct or surface rights of urban properties whose patrimonial tax value recorded in the register, in accordance with the Municipal Property Tax Code (CIMI), is equal to or greater than (euro) 1,000,000 – on the patrimonial tax value used for IMI purposes:

28.1. For property with residential use -------------------------1%;"

As results from the proven facts established, underlying the contested assessments is a property under vertical ownership which comprises several autonomous units intended for residential use, in addition to others.

All units intended for residential use have a patrimonial tax value lower than €1,000,000.00.

Item 28.1 of the General Scale of Taxes does not apply in such situations, as the Administrative Supreme Court has repeatedly understood, unanimously. Among several, one can see in this sense the decision of the Full Administrative Supreme Court of 29-03-2017, delivered in case no. 0593/16, issued unanimously, in which it states, moreover, the following:

In article 67, paragraph 2 of the Stamp Duty Code, it is established that "to matters not regulated in this code relating to item 28 of the General Scale, the Municipal Property Tax Code is applied subsidiarily". In this way it seems legitimate to state that the legislative choices in this regard must be found in the Municipal Property Tax Code. This means that the tax legislator does not intend that the concepts in question be developed through the use of other branches of law, namely the Civil Code where a long tradition precisely defines what are properties, rural and urban properties, as defines full ownership and horizontal (condominium) ownership, defining a detailed regime for each. The legislator made, clearly and expressly in the Municipal Property Tax Code, choice of concepts that, often homonymous with those of the Civil Code, deviate from it as to their content, so as to encompass more realities subject to taxation. The concept of property for IMI purposes, article 2, is so broad that it far exceeds, and sometimes even overrides, the nature of the thing over which real rights are exercised, approaching more closely the economic potential of assets to generate wealth intended to be taxed, than the real nature of the right that taxpayers may have over the thing. Thus, any solution to the present situation that might emerge from the concepts of the Civil Code, as to what are properties and as to the regulation of the right of property, proves to be inadequate. That for the Civil Code horizontal (condominium) ownership does not merge with ownership of a building in which its parts have distinct uses and are capable of independent economic use is evident, but which adds nothing to the solution we are seeking.

As stated in the founding decision it is the legislator in that article 67, paragraph 2 of the Stamp Duty Code who points the way that the judge must follow in terms of clarifying the objective scope of Stamp Duty – item 28 – without being able to deviate from it, precisely due to the constraints of legal typicality to which these taxes are constitutionally subject. To argue that the purpose of the registers is different, that the difference lies in the number of property notebooks issued, serves only to observe that in mere details of bureaucratic treatment slight differences are perceived between fractions of properties constituted under horizontal (condominium) ownership and parts of a property not constituted under horizontal ownership but which includes parts capable of independent use and with economic value. That they are different things no one doubts, but here the question is whether the legislator intended to give them different treatment for tax purposes. As expressed in the founding decision, for the reasons mentioned therein which we reaffirm here, we can only conclude, using the rules of interpretation contained in article 9 of the Civil Code, these yes applicable subsidiarily by virtue of the provision in article 2 of the Tax Code of Procedure and Process, that the solution to be applied, in this case to taxation under Stamp Duty, can only be what the legislator defined for tax purposes under IMI, because this was the clear and express choice of the legislator."

The reasoning of the founding decision to which this decision refers is as follows:

"(...) it is necessary to gather the conclusions that permit, without room for doubt, to decide on the subject under discussion (that is whether, for the purposes of applying Item No. 28 of the General Scale of Taxes, in cases where a property with several autonomous units capable of independent use is not constituted under horizontal (condominium) ownership, the relevant patrimonial tax value is determined by the sum of individual patrimonial tax values, or, alternatively, is individually considered).

In this sense, note, in the first place, that the present subject matter is, firstly by virtue of article 67, paragraph 2 of the Stamp Duty Code, subject to the rules of the Municipal Property Tax Code, "to matters not regulated in this code relating to item 28 of the General Scale, the Municipal Property Tax Code is applied subsidiarily".

As such, and as has been mentioned many times, in the understanding of this tribunal, the mechanism for determining the relevant patrimonial tax value for the purposes of the aforementioned item, is what is established in the Municipal Property Tax Code.

Now, article 12, paragraph 3 of the Municipal Property Tax Code establishes that "each floor or part of a property capable of independent use is considered separately in the property register, which also specifies the respective patrimonial tax value".

The legislator downplaying, in the terms previously mentioned, any prior constitution of horizontal or vertical ownership.

Indeed, for this (legislator), what matters is the material truth underlying its existence as an urban property and its use.

Note that the Tax Authority itself appears to agree with the criterion set out, which is why the assessments it itself issues are very clear in their essential elements, from which it results that the value of incidence is the corresponding patrimonial tax value of each of the floors and the individualized assessments.

Therefore, if the legal criterion requires the issuance of individualized assessments for the autonomous parts of properties under vertical ownership, in the same manner as it establishes for properties under horizontal (condominium) ownership, it has clearly established the criterion, which must be unique and unambiguous, for the definition of the rule of scope of the new tax.

Thus, there would only be incidence of Stamp Duty (within the scope of Item No. 28 of the General Scale of Taxes) if some of the parts, floors or units with independent use presented a patrimonial tax value exceeding €1,000,000.00.

The Tax Authority cannot consider, as reference value for the scope of the new tax, the total value of the property, when the legislator itself established a different rule for IMI purposes (and, as previously mentioned, this is the applicable code to matters not regulated as regards Item No. 28 of the General Scale of Taxes). In conclusion, the current legal regime does not impose the obligation to constitute horizontal (condominium) ownership, therefore the Tax Authority's action amounts to arbitrary and illegal discrimination.

In fact, the Tax Authority cannot distinguish where the legislator itself chose not to, at the risk of violating the coherence of the tax system, as well as the principle of tax legality provided in article 103 of the Constitution of the Portuguese Republic, and also the principles of justice, equality and tax proportionality.

In the case at hand, the property[ies] in question [was/were] constituted under full ownership and had[...] units with independent use, as results from the documents[...]. Given that none of these units has patrimonial value equal to or exceeding €1,000,000.00, as results from the documents attached to the case, it is concluded that the legal requirement for incidence is not met."

In line with this case law, the contested assessments are illegal due to a defect of violation of law, since properties under full or vertical ownership regime that include units intended for residential use capable of independent use, that do not have, any of them, a patrimonial tax value exceeding €1,000,000.00, do not fall within the scope of application of item 28.1 of the General Scale of Taxes.

This defect justifies the annulment of the assessments, pursuant to article 163, paragraph 1, of the Administrative Procedure Code, applicable subsidiarily by virtue of the provision in article 29, paragraph 1, point (e), of the LRAT.

3.2. Regarding Compensatory Interest and Reimbursement

Let us now address the request made by the Claimant for reimbursement of the amounts which here have been judged to have been unlawfully assessed and paid. The Claimant further requests compensatory interest for the unlawful payment of Stamp Duty.

In accordance with the provision of point (b) of article 24 of the LRAT, the arbitral decision on the merits of the claim from which there is no appeal or challenge binds the Tax Administration from the end of the period provided for appeal or challenge, this must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for voluntary execution of judgments of judicial tax tribunals, "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out, by adopting the necessary acts and operations for that purpose in accordance with the provision in article 100 of the General Tax Law [applicable by virtue of the provision in point (a) of paragraph 1 of article 29 of the LRAT] which establishes that 'the tax administration is obligated, in case of total or partial success of an administrative complaint, judicial challenge or appeal in favor of the taxpayer, to immediate and full restoration of legality of the act or situation subject to dispute, including the payment of compensatory interest, if applicable, from the end of the period for execution of the decision'."

Although article 2, paragraph 1, points (a) and (b), of the LRAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals that function in the CAAD, without making reference to condemnatory decisions, should be understood to be included in its jurisdiction the powers that, in judicial challenge proceedings, are attributed to tax tribunals, this being the interpretation that is in harmony with the sense of the legislative authorization on which the Government based itself to approve the LRAT, in which it proclaims, as a first guideline, that "tax arbitral proceedings must constitute an alternative procedural means to judicial challenge proceedings and to action for recognition of a right or legitimate interest in tax matters".

Now, it is settled that judicial challenge proceedings, despite being essentially proceedings for annulment of tax acts, admit condemnation of the Tax Administration to payment of compensatory interest, as results from article 43, paragraph 1, of the General Tax Law and article 61, paragraph 4 of the Tax Code of Procedure and Process.

Thus, paragraph 5 of article 24 of the LRAT, in saying that "interest is due, regardless of its nature, in the terms provided in the general tax law and in the Tax Code of Procedure and Process", should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings.

It is thus necessary to assess the request for reimbursement of the amount unlawfully paid, plus compensatory interest.

In the case at hand, it is manifest that, following the illegality of the assessment acts, there is a right to reimbursement of the tax paid, by virtue of the aforementioned articles 24, paragraph 1, point (b), of the LRAT and 100 of the General Tax Law, as this is essential to "restore the situation that would exist if the tax act subject to the arbitral decision had not been carried out".

As for interest, the substantive regime of the right to compensatory interest is regulated in article 43 of the General Tax Law, which establishes, as far as relevant here, that "1 - Compensatory interest is due when it is determined in administrative complaint or judicial challenge that there was an error attributable to the services resulting in payment of the tax debt in an amount exceeding what is legally due. 2 - An error attributable to the services is also considered to exist in cases where, despite the assessment being made on the basis of the taxpayer's declaration, this one having followed, in its completion, the general guidance of the tax administration, duly published."

Now, in the case at hand, the illegality of the assessments is entirely attributable to the Tax Authority, Respondent, given what was previously established as proven.

On the other hand, the maintenance of the illegal situation, i.e., the decision on official review, is also attributable to the Tax Administration, which rejected it on its own initiative. Thus, the Claimant is entitled to the compensatory interest requested, pursuant to article 43, paragraph 1, of the General Tax Law and 61 of the Tax Code of Procedure and Process, at the legal default rate, in accordance with articles 43, paragraphs 1, and 35, paragraph 10 of the General Tax Law, of article 24, paragraph 1, of the LRAT, of article 61, paragraphs 3 and 4, of the Tax Code of Procedure and Process, of article 559 of the Civil Code and Order No. 291/2003, of 8 April (or other order(s) that may change the legal rate), from the aforementioned date until full payment.

4. Decision

In these terms, this Arbitral Tribunal agrees as follows:

(i) To uphold the request for arbitral decision, with the consequent annulment of the contested assessments, with all legal consequences, including immediate reimbursement to the Claimant of the amounts paid by it in relation to the assessments now annulled;

(ii) To uphold the request for condemnation of the Respondent to payment to the Claimant of compensatory interest, at the legal rate, to be calculated from the date of the respective payment until its full reimbursement.

5. Value of the Proceedings

In accordance with the provision in article 306, paragraph 2, of the Code of Civil Procedure and 97-A, paragraph 1, point (a), of the Tax Code of Procedure and Process and 3, paragraph 2, of the Costs Regulation for Tax Arbitration Proceedings, the value of the proceedings is fixed at €10,323.20 (ten thousand, three hundred and twenty-three euros and twenty cents).

6. Costs

Pursuant to article 22, paragraph 4, of the LRAT, the amount of costs is fixed at €918.00, in accordance with Table I attached to the Costs Regulation for Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 15 December 2017.

The Arbitrator,

João Taborda da Gama