Stamp Tax on Construction Land Under Article 28 TGIS – CAAD Arbitral Decision 266/2014-T

ARBITRATION DECISION

I. REPORT

1. A, a public company, with the unique registration number and legal person number ..., with registered address at ..., which falls under the geographic competence of the Finance Service of Porto-2, hereinafter referred to as the Applicant, comes, pursuant to the provisions of articles 2, n. 1, subparagraph a), 5, n. 3, subparagraph a), 6, n. 2, subparagraph a), 10, n. 1, subparagraph a), all of the Legal Regime for Tax Arbitration (RJAT), to request the CONSTITUTION OF A COLLECTIVE ARBITRAL TRIBUNAL with a view to declaring the illegality of that tax act.

The applicant requests the annulment of the tax acts for the assessment of Stamp Tax (hereinafter, IS) identified below, under item 28.1 of the General Table of Stamp Tax (hereinafter, TGIS), annexed to Law 150/99, of 11 September, which approves the Stamp Tax Code (hereinafter, IS Code) with the consequent restitution of the amounts paid with compensatory interest.

The applicant briefly substantiates the request, alleging essentially:

• The present request for arbitral pronouncement aims at declaring the illegality of the IS assessment acts under item 28.1 of the TGIS annexed to the Stamp Tax Code on the land for construction with property registration number ..., set out in Collection Document no. 2013 ..., on the land for construction with property registration number ..., Collection Document no. 2013 ..., on the land for construction with property registration number ..., Collection Document no. 2013 ..., and on the land for construction with property registration number ..., Collection Document no. 2013 ..., all dated 17/07/2013, because the lands for construction in question do not fall within the scope of incidence intended by the applicable rule of incidence.

• In light of the principle of procedural economy and since the appraisal of the above tax acts essentially depends on the appraisal of the same circumstances of fact and the interpretation and application of the same legal principles and rules, in accordance with the provisions of number 1 of article 3 of the RJAT, the applicant requests the joint appraisal of the tax acts in question.

• The Applicant is a credit institution, subject to supervision by the Bank of Portugal, which heads Group A, a multi-specialized financial group, focused on banking activity, provided with a complete range of financial services and products for business, institutional and private clients.

• The Applicant is the sole owner of the land for construction registered in the urban property register of ... under property registration number ... of the Parish ..., Municipality and District of ... (current property registration number ... of the Parish ...), as per the Urban Property Certificate, which it attaches as Document no. 1.

• The Applicant is equally the sole owner of the land for construction registered in the urban property register of ... under property registration number ... of the Parish ..., Municipality and District of ... (current property registration number ... of the Parish ...), as per the Urban Property Certificate, which it attaches as Document no. 2.

• The Applicant is also the sole owner of the land for construction registered in the urban property register of ... under property registration number ... of the Parish ..., Municipality and District of ... (current property registration number ... of the Parish ...), as per the Urban Property Certificate, which it attaches as Document no. 3.

• Finally, the Applicant is also the sole owner of the land for construction registered in the urban property register of ... under property registration number ... of the Parish ... (current property registration number ... of the Parish ...), as per the Urban Property Certificate, which it attaches as Document no. 4.

• Through the collection documents identified, the Applicant was notified of the IS assessments under item 28.1 of the TGIS on the 4 lands for construction described above, totalling Stamp Tax assessed of € 132,993.90 (See Document no. 5).

• The Applicant does not agree with the terms of the said assessments since these aim at tax facts referring to the ownership of urban real properties with residential use, which cannot be considered verified in the case of lands for construction.

• Thus, the Applicant understands that the Tax Authority made an erroneous interpretation and application of item 28.1 of the TGIS which leads to the illegality of the IS assessment tax acts, for the reasons it substantiates:

• Indeed, Law no. 55-A/2012, of 29 October, which introduced item 28.1, introduced "special taxation on high-value properties intended for residential use" or in other words "special taxation that will apply to houses with a value equal to or greater than 1 million euros", as declared by the then Secretary of State for Tax Affairs in a statement on the said law in Parliament.

• It follows from the wording of item 28.1 of the TGIS that this includes only in its scope of taxation properties that satisfy cumulatively the following requirements:

   i) are urban real properties;
  
   ii) have a tax property value of more than € 1,000,000.00
  
   iii) have residential use
  

• Will be outside the said rule of incidence:

   i) rural real properties;
  
   ii) urban real properties with TPV below 1 million euros;
  
   iii) urban real properties intended for other purposes, namely commerce, services, industry or lands for construction
  

• especially because lands for construction, having been granted a license or authorization, admitted prior communication or issued favorable previous information of a subdivision or construction operation, have construction as their destination.

• there being thus, by definition, in lands for construction, no property intended for residential use, given that there is no construction whatsoever!

• Under the Municipal Real Estate Tax, the legal standard to which the IS Code refers for the regulation of other aspects related to the incidence, assessment and collection of this new property tax, real properties are divided into rural or urban properties.

• And urban real properties are divided into: i) residential; ii) commercial, industrial or for services; iii) lands for construction; iv) others.

• this terminology does not coincide with the "residential use" intended by the IS legislator.

• The qualification of an urban real property as residential, commercial, industrial for services or lands for construction depends, as a general rule, on a requirement of a formal nature, namely, licensing.

• But until the conclusion of the works, on a land for construction, it is not possible, by definition, residential use.

• Nor is licensing, in itself alone, a guarantee of the realization of the construction.

• It is further added that not even the use of the use coefficient referring to residential use, in the evaluation of lands for construction, is determinant, since this coefficient is only applicable for the evaluation of the property and determination of market value.

• This conclusion is reinforced by the fact that only with the amendment introduced by Law no. 83-C/2013, of 31 December, was "lands for construction" expressly included in the item in question, without that amendment being given any interpretative character.

• Finally, the Applicant cites arbitral tribunal jurisprudence that supports the illegality of the IS assessment under item 28.1 of the TGIS on real properties classified as "lands for construction", namely proceedings nos. 48/2013-T, 49/2013-T, 53-2013-T and 42/2013.

Request of the Applicant

• The urban real properties in question, and on which IS was assessed under item no. 28.1 of the TGIS, are qualified as lands for construction, and at the date to which the facts refer, there is no construction built on them.

• From which it follows that the assessment in question is illegal, necessitating, in consequence, its annulment.

• The Applicant made voluntary payment of the tax assessed in the assessment under judicial review.

• As a consequence of the said payments, the success of the present request should determine, according to law, the reimbursement to the Applicant of the amounts now assessed and unduly paid, plus the respective compensatory interest referred to in articles 43 of the LGT and 61 of the CPPT.

Response of the TA

The Tax Authority responded in defense of the maintenance of the questioned tax acts, requesting the dismissal of the request with reaffirmation, essentially, of the arguments that substantiated the decision to maintain those acts. In summary, the Respondent maintains the following arguments:

• The TA responded to the effect that the real properties subject to the IS assessments challenged, have the legal nature of real properties with residential use, whereby the assessment act subject of the present request for arbitral pronouncement should be maintained as it embodies correct interpretation of Item 28 of the General Table amended by Law 55-A/2012, of 29/12."

• After referring, in its essential lines, to the amendments introduced to the Code and General Table of Stamp Tax by the said Law, the respondent says that "In the absence of any definition on the concepts of urban real property, land for construction residential use without basis in IS, recourse must be made to the CIMI in search of a definition that permits assessment of the possible subjection to IS in accordance with the provisions of article 67, n. 2 of the CIS, as amended by Law no. 55-A/2012, of 29/10."

• According to this rule, matters not regulated in the CIS concerning Item 28 of the TGIS are subsidiarily subject to the provisions of the CIMI.

• The Respondent sustains that "The notion of use of an urban real property is grounded in the section relating to the evaluation of real properties, which is well understood since the evaluation of the real property (purpose) incorporates value to the property constituting a determining fact of distinction (coefficient) for evaluation purposes."

• Thus, the respondent understands that, "As it follows from the expression '... value of authorized buildings' contained in art. 45, n. 2, of the CIMI, the legislator chose to determine the application of the methodology of evaluation of real properties in general to the evaluation of lands for construction, whereby the use coefficient provided for in article 41 of the CIMI is applicable to them."

• Whereby, it continues alleging that: For purposes of determining the tax property value of lands for construction the application of the use coefficient in the context of evaluation is clear, whereby its consideration for purposes of application of item 28 of the TGIS cannot be ignored.

• Contrary to the understanding of the Applicant, "the TA understands that the concept of 'real properties with residential use' for purposes of the provisions of Item 28 of the TGIS, comprises both constructed real properties and lands for construction, immediately taking into account the literal element of the rule."

• On one hand, the Respondent defends, the legislator (of Item 28 of the TGIS) "does not refer to 'real properties intended for residential use', having opted for the notion 'residential use'. A different and broader expression whose meaning must be found in the need to integrate other realities beyond those identified in art. 6, n. 1, subparagraph a), of the CIMI."; on the other hand, "tax law considers as an integrating element for purposes of evaluation of lands for construction the value of the implantation area, which varies between 15% and 45% of the value of authorized or provided buildings based on the urbanization and construction project".

• Being that, according to the General Urbanism Regulation, the license certificate for the realization of urban planning operations should contain, among other elements, the number of plots and the indication of the location area, purpose, implantation area, construction area, number of floors of number of units of each of the plots, with specification of the plots intended for social housing.

• The Respondent concludes that long before the actual construction of the property, it is possible to determine and establish the use of the land for construction.

• As to unconstitutionality, the TA considers that the provision of item 28 of the TGIS does not embody any violation of the principle of constitutionality for being a general and abstract rule that applies indistinctly to all cases in which the presuppositions of fact and law are verified.

• The Respondent concludes that the assessments in question embody a correct interpretation and application of the law to the facts, not suffering from the vice of violation of law, whether of the CRP or of the CIS, and should, in consequence, be judged as unfounded in respect of the pretension adduced and absolve the Respondent Entity of the request.

PRELIMINARY RULING

This collective Arbitral Tribunal was regularly constituted on 23-05-2014, with the arbitrators appointed by the Deontological Council of CAAD, with the respective legal and regulatory formalities fulfilled (cf. articles 11-1/a) and b), of the RJAT and 6 and 7, of the Deontological Code of CAAD), and is competent ratione materiae, in accordance with article 2 of the RJAT.

By decision of the Tribunal of 14-07-2014, the meeting provided for in article 18 of the RJAT was dispensed with. The parties filed no further submissions.

The parties have legal personality and capacity, are legitimate and are regularly represented (cf. articles 4 and 10, n. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

No procedural defects were identified.

II GROUNDS

A. MATTERS OF FACT

A.1. Facts Found as Proven

1. The Applicant is the credit institution, subject to supervision by the Bank of Portugal, which heads Group A, a multi-specialized financial group, focused on banking activity, provided with a complete range of financial services and products for business, institutional and private clients.

2. The Applicant is the sole owner of the urban land for construction registered in the urban property register of ... under property registration number ... of the Parish ... (current property registration number ... of the Parish ...).

3. The Applicant is equally the sole owner of the urban land for construction registered in the urban property register of ... under property registration number ... of the Parish ... (current property registration number ... of the Parish ...).

4. The Applicant is also the sole owner of the urban land for construction registered in the urban property register of ... under property registration number ... of the Parish ... - (current property registration number ... of the Parish ...).

5. The Applicant is also the sole owner of the urban land for construction registered in the urban property register of ... under property registration number ... of the Parish ... (current property registration number ... of the Parish ...).

6. Through the following collection documents, the Applicant was notified of the IS assessments under item 28.1 of the TGIS on the 4 lands for construction mentioned above, totalling Stamp Tax assessed of €132,993.90:

7. The said collection documents had as final payment deadline DECEMBER/2013.

8. The Applicant timely paid the amounts of IS assessed.

9. The present arbitral action was filed with CAAD on 17 March 2014.

A.2. Facts Found as Not Proven

With relevance to the decision, there are no facts that should be considered as not proven.

A.3. Grounds for the Proven and Not Proven Matters of Fact

With regard to matters of fact, the Tribunal does not have to pronounce on all that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to discriminate the proven matter from the unproven (cf. art. 123, n. 2, of the CPPT and article 607, n. 3 of the CPC, applicable ex vi article 29, n. 1, subparagraphs a) and e), of the RJAT).

In this way, the relevant facts for the judgment of the case are chosen and delimited in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cf. former article 511, n. 1, of the CPC, corresponding to the current article 596, applicable ex vi article 29, n. 1, subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, the documentary evidence and the procedural act attached to the file, the facts listed above were considered proven, with relevance to the decision, otherwise consensually recognized and accepted by the parties.

B. OF THE LAW

Law no. 55-A/2012, of 29 October, added item 28 to the General Table of Stamp Tax (TGIS), with the following wording:

28 – Ownership, usufruct or right of surface of urban real properties whose tax property value contained in the register, in accordance with the Municipal Real Estate Tax Code (CIMI), is equal to or greater than € 1,000,000 – on the tax property value used for IMI purposes:

28.1 – For real property with residential use – 1% (…);

In the transitional provisions contained in article 6 of said Law no. 55-A/2012, the following rules were established:

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

f) The applicable rates are as follows:

i) Real properties with residential use evaluated in accordance with the IMI Code: 0.5%;

ii) Real properties with residential use not yet evaluated in accordance with the IMI Code: 0.8%;

Now, the provisions referred to above contain a concept that is not used in any other tax legislation, which is the concept of "real property with residential use".

In n. 2 of article 6 of the CIMI the expression "residential real properties" is used, defining them as comprising "buildings or constructions" licensed for residential purposes or which, in the absence of a license, have as their normal destination residential purposes.

However, the non-coincidence of the terms of the expression used in item no. 28.1 of the TGIS ("real property with residential use") with that extracted from n. 2 of article 6 of the CIMI ("residential real properties"), points to the sense that it was not intended to use the same concept.

Moreover, in the same article, a clear distinction is made between residential urban real properties and lands for construction.

Following closely other decisions of CAAD handed down on this same matter, we understand that the word "use", in this context of the use of a property, should mean "the action of destining something to a particular use". Thus, "real property with residential use", cannot be a property merely licensed for residential purposes or destined for that purpose (that is, it will not suffice that it be a "residential real property"), but must be a property that already has actual use for that purpose.

Thus, "it is to be concluded that the available interpretative elements, including the 'circumstances in which the law was elaborated and the specific conditions of the time in which it is applied', point clearly to the sense that it was not intended to encompass within the scope of incidence of item no. 28.1 the situations of properties that are not yet used for residential purposes, namely lands for construction held by companies".

Moreover, with the State Budget Law for 2014, item 28.1 TGIS was expressly amended, so as to include, from 01.01.2014, lands for construction, which reinforces our conviction that such properties were not encompassed by the wording in force until 31.12.2013.

Now, the applicant's properties are lands for construction, so we are not faced with properties with current residential use. That is, there is not thus, at the date, use for a residential purpose.

For this reason, we understand that the assessments whose declaration of illegality is requested suffer from the vice of violation of that item no. 28.1 TGIS, for error as to the legal presuppositions, which justifies the declaration of its illegality and consequent annulment (article 135 of the CPA).

In view of the above, it is determined:

(a) The declaration of illegality and annulment of the IS assessment acts subject to the present request, all with the due legal consequences;

(b) The return of the amount of tax paid by the Applicant in the global amount of €132,993.90; and

(c) The payment of compensatory interest by the Respondent, calculated on the amount of €132,993.90, at the legal rate, until full payment.

As regards compensatory interest, as already decided in the Arbitral Decision handed down in proceedings no. 14/2012-T, of 29 June 2012, within the competencies of tax arbitral tribunals are the condemnatory pronouncements that in proceedings of judicial challenge are admitted to state tax tribunals, and it is equally admissible the recognition of the right to compensatory interest in the arbitral proceedings.

As a consequence of the substantive illegality of the IS assessments subject to the present action, the Applicant paid tax that was not due, necessitating not only the respective reimbursement, in accordance with articles 24, n. 1, subparagraph b) of the RJAT and 100 of the LGT, but the payment of compensatory interest since the respective constitutive conditions are met, in accordance with the provisions of articles 43 of the LGT and 61 of the CPPT, calculated on the amount paid in excess and counted from the dates of the payments made until full restitution.

III DECISION

Whereby it is decided in this Arbitral Tribunal:

a) To judge the request for arbitral pronouncement as wholly founded and, in consequence, to annul the challenged tax act;

b) To condemn the TA to return the tax paid by the Applicant, plus compensatory interest, calculated in accordance with the legal terms.

c) To condemn the TA to pay the costs of the proceedings, in the amount of €3,060.00.

D. Value of the Proceedings

The value of the proceedings is fixed at €132,993.90, in accordance with article 97-A, n. 1, a), of the Tax Procedure and Process Code, applicable by force of subparagraphs a) and b) of n. 1 of article 29 of the RJAT and n. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the TA, since the request was wholly founded, in accordance with articles 12, n. 2, and 22, n. 4, both of the RJAT, and article 4, n. 4, of the cited Regulation.

Notify.

Lisbon

25 September 2014

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Ana Teixeira de Sousa)

The Arbitrator Member

(Maria Antónia Torres)