Stamp Tax on Construction Land Under Verba 28.1 TGIS: CAAD Arbitration 38/2016-T

ARBITRAL DECISION

CLAIMANT: A… SA

RESPONDENT: PORTUGUESE TAX AND CUSTOMS AUTHORITY

I. Report

A…, SA, legal entity no. …, with registered office at Street …, no. … – …, office …, … – … …, hereinafter referred to as the Claimant, filed on 27/01/2016, an application for the constitution of a single arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011 of 20 January, which establishes the Legal Regime for Arbitration in Tax Matters (hereinafter referred to as LRAT), in which the Portuguese Tax and Customs Authority (hereinafter AT) is named as Respondent, for the purpose of challenging the acts of dismissal of the administrative appeal and the underlying stamp tax assessment.

The application for constitution of the arbitral tribunal was accepted by the President of CAAD on 28/01/2016 and notified to the Portuguese Tax and Customs Authority on 12-02-2016.

In accordance with the provisions of paragraph (a) of item 2 of Article 6 and paragraph (b) of item 1 of Article 11 of the LRAT, the Ethics Council appointed the undersigned as arbitrator of the single arbitral tribunal on 29-03-2016. Upon communication of acceptance of the appointment within the applicable period, the parties were notified of this appointment. They accepted the appointment of the designated arbitrator, and accordingly, in compliance with the provisions of paragraph (c) of item 1 of Article 11 of the LRAT, the arbitral tribunal was constituted on 14-04-2016.

On 15-04-2016 an arbitral order was issued in accordance with Article 17 of the LRAT and the Respondent was notified to present its Response, which was presented in the case file on 17-05-2016, which is hereby fully reproduced herein. The respective administrative file was also attached.

By arbitral order issued on 19-05-2016, the parties were invited to express their views on the possibility of waiving the holding of the meeting provided for in Article 18 of the LRAT. The parties expressed their views, as evidenced by applications attached to the case file on 25-05-2016 and 30-05-2016, in favour of the waiver, and accordingly, on 14-06-2016 an arbitral order was issued waiving the holding of the meeting provided for in Article 18 of the LRAT, in which a period of 10 days, equal and consecutive, was set for the parties to present, should they wish to do so, their written submissions. In the same order, a date was set for the rendering of the arbitral decision up to 15-07-2016.

The parties did not present submissions.

The Claimant filed the present arbitral application with a view to obtaining a declaration of illegality of the Stamp Tax (IS) assessment issued by the Portuguese Tax and Customs Authority, under the provisions of item 28.1 of the Standard General Table of Stamp Tax (SGST), on the urban property described as a building plot under article U - … of the urban property register of the parish of …, for the year of 2013, as evidenced by the collection notes no. 2014…, attached to the case file as document no. 1 in the annex to the arbitral application, in the total amount of €12,052.70, with indication of the amount of €4,017.58, corresponding to the 1st instalment, payable during the month of April 2014.

The Claimant filed the present arbitral application after being notified of the dismissal of the administrative appeal filed for the annulment of the stamp tax assessment relating to the property described and for the year 2013.

The Claimant submits, in summary, in light of the version of IS in force in 2013 (State Budget Law for 2012), that the characterization of the building plot as "properties with residential designation", for the purposes of item 28 of the SGST is illegal, for violation of the provisions of Articles 6, 41 and 45 of the Municipal Property Tax Code. Wherefore it requests the declaration of illegality of the acts of dismissal of the administrative appeal and the stamp tax assessment being challenged, for error in the legal characterization of the facts and in the interpretation of the law.

The Portuguese Tax and Customs Authority (AT) responded, arguing for the legality of the challenged acts, alleging that the acts were performed in conformity with the superior instructions of the Tax Service (DSIMT of 13-12-2012), on the understanding that in the concrete case there is IS incidence, items 28 and 28.1 of the SGST, arguing that the arbitral application should be dismissed as unfounded.

The arbitral tribunal was regularly constituted and is materially competent, in light of the provisions of Articles 2, item 1, paragraph (a), and 30, item 1, of the LRAT.

The parties possess legal personality and judicial capacity, are legitimate (Articles 4 and 10, item 2, of the same statute and Article 1 of Administrative Order No. 112-A/2011 of 22 March), are duly represented and the proceedings do not suffer from any nullities.

II. Factual Matters

1. Facts Found to be Proven

a) The Claimant company, A…, SA, is the owner of the urban property with urban property register article no. …, of the parish of … - …, which consists of a building plot, with construction viability recognized for residential designation, with a tax valuation of €1,205,270.00.

b) The Claimant was notified in March 2014 of the stamp tax assessment, effected under item 28.1 of the Standard General Table of Stamp Tax, corresponding to the collection note attached in the annex to the arbitral application with no. 2014…, in the total amount of €12,052.70, for the year 2013;

c) On the same date and by the same collection document, was also notified to pay the 1st instalment, payable during the month of April 2014, in the amount of €4,017.58;

d) The Claimant filed an Administrative Appeal on 27-07-2014, with a view to obtaining the annulment of the assessment contained in the collection note identified above, which was dismissed;

e) On 17-11-2015 the Claimant was notified, by Letter no. … / … – …, of the dismissal of the Administrative Appeal;

f) On 27-01-2016, the Claimant filed the present application for the constitution of the arbitral tribunal.

1. Facts Found Not to be Proven

There are no facts relevant to the decision that were not proven.

1. Justification of the Facts Found to be Proven

The facts found to be proven are based on the documents attached to the case file by the Claimant and on what is contained in the administrative file attached by AT, whose authenticity and correspondence to reality were not questioned.

III. Legal Matters

The question at issue in the present arbitral application is whether a building plot with construction viability approved for residential designation falls within the scope of application of item 28.1 of the Standard General Table of Stamp Tax (SGST), in its original version as introduced by Law No. 55-A/2012 of 29 October.

We are thus dealing with a concrete case whose decision must be analyzed and weighed in light of the version of the law then in force, which was subsequently amended by the State Budget Law (LOE) for 2014.

Let us see, therefore, whether the Claimant's arguments have merit.

1. The Regime of Law No. 55-A/2012 of 29 October

Law No. 55-A/2012 of 29 October made several amendments to the Stamp Tax Code and added item 28 to the SGST, with the following wording:

"28 – Ownership, usufruct or surface rights of urban properties whose tax valuation contained in the register, in accordance with the Municipal Property Tax Code (CPTC), is equal to or exceeds €1,000,000 – on the tax valuation used for Municipal Property Tax purposes:

28.1 – For a property with residential designation – 1%;

28.2 – For a property, where the taxpayers who are not natural persons are resident in a country, territory or region subject to a clearly more favourable tax regime, contained in the list approved by an order of the Minister of Finance – 7.5%."

In the transitional provisions contained in Article 6 of Law No. 55-A/2012, the following rules were established concerning the assessment of the tax provided for in that item:

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

a) The tax event occurs on 31 October 2012;

b) The taxpayer is the one mentioned in item 4 of Article 2 of the Stamp Tax Code on the date referred to in the preceding paragraph;

c) The tax valuation to be used in the assessment of the tax corresponds to what results 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 Portuguese Tax and Customs Authority must be effected by the end of the month of November 2012;

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

f) The applicable rates are as follows:

i) Properties with residential designation assessed in accordance with the Municipal Property Tax Code: 0.5%;

ii) Properties with residential designation not yet assessed in accordance with the Municipal Property Tax Code: 0.8%;

iii) Urban properties where the taxpayers who are not natural persons are resident in a country, territory or region subject to a clearly more favourable tax regime, contained in the list approved by an order of the Minister of Finance: 7.5%.

2 – In 2013, the stamp tax assessment provided for in item no. 28 of the respective General Table must apply on the same tax valuation used for the purposes of assessment of municipal property tax to be effected in that year.

3 – The failure to remit, in whole or in part, within the stated period of the amounts assessed as stamp tax constitutes a tax violation, punished in accordance with the law."

The term was used in the aforementioned item 28.1 and in sub-paragraphs i) and ii) of paragraph f) of item 1 of Article 6 of Law No. 55-A/2012, a concept that is not used in any other tax legislation in these precise terms, which is "property with residential designation".

Specifically in the Municipal Property Tax Code (CPTC), which in several provisions of the Stamp Tax Code introduced by that Law is indicated as a statute of subsidiary application regarding the tax provided for in the aforementioned item no. 28 [Articles 2, item 4, 3, item 3, paragraph u), 5, paragraph u), 23, item 7, and 46 and 67 of the Stamp Tax Code], a concept with that designation is not used.

Law No. 83-C/2013 of 31 December (State Budget Law 2014) amended that item no. 28.1, giving it the following wording:

"28.1 - For a residential property or for a building plot whose construction, authorized or planned, is for residential purposes, in accordance with the provisions of the Municipal Property Tax Code – 1%"

It is already evident that between the initial 2012 version and the one introduced in 2014 there is a substantial difference, since in the first version the legislator deliberately left out of the legal provision building plots, subsequently introducing this type of property into the norm of incidence in 2014. This is a conclusion that is extracted directly and objectively from the letter of the law, which leaves no doubt as to the legislative intent embodied in the aforementioned Law 55-A/2012.

Nevertheless, let us see what conclusions can be drawn from the analysis of the reference concepts for the treatment of this concrete case.

1. Concepts of Properties Used in the Municipal Property Tax Code

In the Municipal Property Tax, the types of properties are enumerated in Articles 3 to 6 as follows:

"Article 2

Concept of Property

1 – For the purposes of this Code, property is any portion of territory encompassing water, plantations, buildings and structures of any kind incorporated or situated therein with a character of permanence, provided that it forms part of the patrimony of a natural or legal person and, in normal circumstances, has economic value, as well as water, plantations, buildings or structures under the aforementioned circumstances endowed with economic autonomy in relation to the land where they are situated, even though situated in a portion of territory that forms an integral part of another patrimony or do not have patrimonial nature.

2 – Buildings or structures, even if movable by nature, are considered as having a character of permanence when devoted to non-transitory purposes.

3 – A character of permanence is presumed when buildings or structures have been situated in the same place for a period exceeding one year.

4 – For the purposes of this tax, each separate unit under the horizontal property regime is deemed to constitute a property."

"Article 3

Rural Properties

1 – Rural properties are plots of land situated outside an urban agglomeration which are not to be classified as building plots in accordance with item 3 of Article 6, provided that:

a) They are devoted or, in the absence of concrete devotion, have as normal destination a use generating agricultural income, such as are considered for the purposes of the tax on the income of natural persons (IRS);

b) Not having the devotion indicated in the preceding paragraph, are not built upon or have only ancillary buildings or structures without economic autonomy and of reduced value.

2 – Rural properties also include plots of land situated within an urban agglomeration, provided that, by force of legally approved provision, cannot be used to generate any income or can only be used to generate agricultural income, and are, in fact, devoted to this use.

3 – Rural properties also include:

a) Buildings and structures directly devoted to the production of agricultural income, when situated on the plots referred to in the preceding items;

b) Water and plantations in the situations referred to in item 1 of Article 2.

4 – For the purposes of this Code, urban agglomerations are considered to include, in addition to those situated within legally established perimeters, nuclei with a minimum of 10 dwellings served by roads of public use, with their perimeter delimited by points at a distance of 50 m from the axis of the roads, in the transverse sense, and 20 m from the last building, in the direction of the roads."

"Article 4

Urban Properties

Urban properties are all those that should not be classified as rural properties, without prejudice to the provisions of the following article."

"Article 5

Mixed Properties

1 – Whenever a property has rural and urban portions, it is classified, in its entirety, according to the main portion.

2 – If neither portion can be classified as the main portion, the property is deemed to be mixed."

"Article 6

Types of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Building plots;

d) Other.

2 – Residential, commercial, industrial or for services are buildings or structures licensed for such purposes or, in the absence of a license, which have as their normal purpose each of these uses.

3 – Building plots are considered to be plots of land situated within or outside an urban agglomeration for which a license or authorization has been granted, prior notification has been admitted or favorable prior information has been issued regarding a subdivision or construction operation, and those that have been so declared in the acquisition title, except for plots where the competent entities prohibit any of those operations, specifically those located in green areas, protected areas or which, in accordance with municipal land-use plans, are devoted to public spaces, infrastructure or public facilities. (As amended by Law No. 64-A/08 of 31-12)

4 – Falls within the provision of paragraph d) of item 1 plots of land situated within an urban agglomeration which are not building plots nor are covered by the provisions of item 2 of Article 3, and also buildings and structures licensed or, in the absence of a license, which have as their normal purpose purposes other than those referred to in item 2, and also those covered by the exception in item 3."

Given this, correct interpretation is required of the legal provision contained in item 28.1 of the SGST in light of the aforementioned legal provisions and the principles governing the interpretive task of the legal norm.

1. Rules on the Interpretation of Laws

Article 11 of the General Tax Law establishes the essential rules for the interpretation of tax laws as follows:

"Article 11

Interpretation

1. In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever, in tax norms, terms specific to other branches of law are used, they must be interpreted in the same sense as they have there, unless otherwise provided directly by law.

3. If doubt persists as to the meaning of the applicable tax norms, account must be taken of the economic substance of the tax facts.

4. Gaps resulting from tax norms covered by the reserve of law of the Assembly of the Republic cannot be filled by analogy."

The general principles of the interpretation of laws to which item 1 of Article 11 of the General Tax Law refers are established in Article 9 of the Civil Code, which provides as follows:

"Article 9

Interpretation of Law

1. Interpretation should not be limited to the letter of the law, but should reconstruct the legislative intent from the texts, having particular regard for the unity of the legal system, the circumstances in which the law was drafted, and the specific conditions of the time in which it is applied.

2. However, the interpreter cannot consider the legislative intent that does not have a minimum of verbal correspondence in the letter of the law, even if imperfectly expressed.

3. In determining the meaning and scope of the law, the interpreter shall presume that the legislator established the most appropriate solutions and knew how to express his intention in adequate terms."

4. The Concept of "Property with Residential Designation"

As can be seen from the Municipal Property Tax Code provisions transcribed above, the concept of "property with residential designation" is not used in the classification of properties. This concept is also not found, with this terminology, in any other statute.

The starting point for the interpretation of that expression is naturally, the text of the law, and on the basis of it the "legislative intent" must be reconstructed as required by item 1 of Article 9 of the Civil Code, applicable by force of the provisions of Article 11, item 1, of the General Tax Law.

The concept closest to the literal meaning of this expression used is manifestly that of "residential properties" defined in item 2 of Article 6 of the Municipal Property Tax Code as encompassing "buildings or structures" licensed for residential purposes or, in the absence of a license, which have as their normal purpose residential purposes.

If it is understood that the expression "property with residential designation" coincides with that of "residential property", it is manifest that the assessments will be defective with error as to the factual and legal assumptions, inasmuch as the property for which Stamp Tax was assessed under the aforementioned item no. 28.1 is a building plot without any building or structure, which are required by that item 2 of Article 6 to satisfy that concept of "residential properties".

Therefore, if one adopts the interpretation that "property with residential designation" means "residential property", the assessments whose declaration of illegality is requested are illegal.

However, the non-coincidence of the terms of the expression used in item no. 28.1 of the SGST with that derived from item 2 of Article 6 of the Municipal Property Tax Code points to the fact that it was not intended to use the same concept. It appears, therefore, that these are distinct concepts, as is well stated in the Arbitral Decision rendered in case no. 559/2014 –T, which is transcribed:

"The word "devotion", in this context of the use of a property has the meaning of "the act of assigning something to a particular use". ([1])

"When, as is customary, legal norms (legislative formulas) allow more than one meaning, then the positive function of the text translates into giving stronger support to or more strongly suggesting one of the possible meanings. It is that, among the possible meanings, some will correspond to the most natural and direct meaning of the expressions used, while others will only fit within the verbal framework of the norm in a forced, artificial manner. Now, in the absence of other elements that would lead to the choice of the less immediate sense of the text, the interpreter should opt in principle for that meaning which best and most immediately corresponds to the natural meaning of the verbal expressions used, and specifically to its technical-legal meaning, in the assumption (not always accurate) that the legislator knew how to express correctly his intention". ([2])

The relevance of the text of the law is particularly emphasized in the matter of interpreting the norms governing the incidence of Stamp Tax, which are reduced to an amalgamation under a common denomination of an incongruous set of taxes of completely distinct natures (on income, expenditure, property, acts, etc.), which leaves no appreciable margin for the application of the primary interpretive criterion, which is the unity of the legal system, which demands its overall coherence.

The acknowledged lack of coherence of Stamp Tax is particularly exuberant in the case of this item no. 28.1, hastily included on the margins of the General State Budget by a fiscal legislator without perceptible overall fiscal orientation who is successively implementing tax aggravation norms according to the constraints imposed by the difficulties of budget execution, by the impositions of international institutional creditors (represented by the "troika") and by the oversight of the Constitutional Court.

In fact, although in the "Statement of Reasons" of Bill No. 96/XII/2. ([3]) on which Law No. 55-A/2012 was based, reference is made to the laudable concern of the Government to "strengthen the principle of social equity in austerity, ensuring an effective sharing of the necessary sacrifices for the fulfillment of the adjustment program" and to its commitment "to ensure that the sharing of these sacrifices will be made by everyone and not only by those who live from the income of their work", it is manifest, on the one hand, that those reasons of equity, certainly existing, did not start to apply in mid-2012, already existing at the beginning of the year when the General State Budget came into force, and, on the other hand, that the scope of item no. 28.1, by additionally taxing properties with residential designation and not also those properties that do not have it, suggests that the concerns of social equity and the proclaimed intention of sharing sacrifices by all affects far more some than properly all.

In this context, lacking reliable interpretive elements which would allow detecting legislative coherence in the solution adopted in the aforementioned item no. 28.1 or the rightness or wrongness of the adopted solution (relevant for interpretive purposes under item 3 of Article 9 of the Civil Code), the content of the legal text must be the primary element of interpretation, in accordance with the presumption imposed by the same item 3 of Article 9, that the legislator knew how to express his intention in adequate terms.

In light of those meanings of the words "devotion" and "to devote" which are "to assign purpose" or "to apply", the formula used in that item no. 28.1 of the SGST manifestly encompasses properties that have already been assigned for residential purposes, properties that are already devoted to residential purposes, therefore it is important to inquire whether it will also encompass properties that, although not yet devoted to residential purposes, are destined for these purposes."

The relevant question for the decision of the present case is, therefore, whether we can understand that a property is devoted to residential purposes, namely when that purpose is fixed for it in a subdivision permit or licensing act or the like, or only when the actual assignment of that purpose is realized.

Now, the comparison of item no. 28.1 of the SGST with item 2 of Article 6 of the Municipal Property Tax Code, which defines the concept of residential properties, points to the need for actual devotion, since a building or structure licensed for residential purposes or, even without a license but which has residential purposes as its normal purpose, is, under item 2 of that Article 6, a residential property, for in it such classification is given to "buildings or structures licensed for that purpose or, in the absence of a license, which have as their normal purpose each of these uses".

Therefore, on the assumption that the legislator of Law No. 55-A/2012 knew how to express his intention in adequate terms (as Article 9, item 3, of the Civil Code requires to be presumed), if it intended to refer to those properties already licensed for residential purposes or which have residential purposes as their normal purpose, it would certainly have used the concept of "residential properties", which would perfectly and clearly express his intention in light of the definition given by that item 2 of Article 6 of the Municipal Property Tax Code.

Consequently, it must be presumed that the use of a different expression aims at a distinct reality, therefore, "property with residential designation", cannot be a property merely licensed for residential purposes or intended for that purpose (that is, it will not be sufficient that it is a "residential property"), it must be a property that already has actual devotion to that purpose.

Finally, the text of the law by adopting the formula "property with residential designation" instead of "urban properties with residential designation", which appears in the aforementioned "Statement of Reasons", points strongly to the fact that it is required, in light of the version applicable to the year 2012, that the residential designation has already been realized, for only thus will the property have that designation.

In the case at hand, we are dealing with a mere building plot, that is, something that naturally cannot have, at all, residential designation since there is no building or structure built upon it.

On the other hand, the legislative intent not to extend the scope of application to building plots was expressly stated by the Government in 2012 when presenting to the Plenary of the Assembly of the Republic Bill 96-XII, in the words of the State Secretary for Tax Affairs:

"First, the Government proposes the creation of a special rate to tax urban residential properties of higher value. It is the first time in Portugal that special taxation has been created on high-value properties intended for residence. This rate will be 0.5% to 0.8% in 2012, and 1% in 2013, and will apply to houses valued at or above 1 million euros. With the creation of this additional rate, the tax burden required of these owners will be significantly increased in 2012 and 2013".

The express reference to "houses" as the target of the new tax leaves no room for doubt as to the legislative intent, and furthermore, in the discussion of the aforementioned bill there is no reference to "building plots".

As for the allegation that AT extracts from the provisions of Article 45 of the Municipal Property Tax Code, it has no relation whatever to the classification of properties, only indicating the factors to be considered in the assessment of building plots.

Finally, it must be taken into account that Law No. 83-C/2013 of 31 December (State Budget Law 2014), contrary to what the Portuguese Tax and Customs Authority contends, did not aim to clarify the underlying logical element of the initial wording of item no. 28.1, rather came to confirm, indirectly, the interpretation that it did not encompass building plots. If in the original wording of that item no. 28.1, in speaking of "property with residential designation", the legislator already intended to encompass the buildings and structures that constituted "residential properties" (in accordance with Article 6, item 2, of the Municipal Property Tax Code) and building plots for which residential construction was authorized or envisioned, it would be natural that an interpretative character be given to the new wording, which did not happen. This is all the more so as, as is known, the same Law No. 83-C/2013 took that position in other provisions [Article 177, item 7, as to paragraphs a) and b) of item 3 of Article 17-A of the Personal Income Tax Code, and Article 185, item 1, as to Article 3-A of the Value Added Tax Code].

Finally, it is customary in budget laws, when it is intended that the new wordings apply to situations potentially covered by the previous wordings, to give them an interpretative character. Therefore, if the legislator did not do so in this matter, it was because he understood that he should not do so, and it is not for the tribunal to go beyond what the law allows.

Therefore, the fact that an interpretative character was not given to the new wording points to the fact that it was intended to alter the scope of application of the aforementioned item no. 28.1 of the SGST and not to maintain it, clarifying it.

For all the foregoing, the dismissal of the administrative appeal and the assessment challenged suffer from the defect of error as to the legal assumptions embodied in a violation of item no. 28.1 of the SGST, which justifies its annulment (Article 135 of the Administrative Procedure Code). ([4])

IV - Decision

On these grounds, this Arbitral Tribunal decides:

a) To allow the arbitral application;

b) To annul the act of dismissal of the administrative appeal and the underlying Stamp Tax assessment for the year 2013, with the consequent refund of any amounts that may have been paid by the Claimant in accordance with the legally provided terms.

c) To condemn the Respondent to payment of the arbitration costs.

Value of the Case

In accordance with the provisions of Article 315, item 2, of the Code of Civil Procedure and Article 97-A, item 1, paragraph (a), of the Code of Tax Procedure and Article 3, item 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €12,052.70.

Costs

In accordance with Article 22, item 4, of the LRAT, the amount of costs is fixed at €918.00, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let notice be given.

Lisbon, 15 July 2016

The Arbitrating Judge,

(Maria do Rosário Anjos)

([1]) Contemporary Portuguese Language Dictionary of the Academy of Sciences of Lisbon, Volume I, page 102.

([2]) BAPTISTA MACHADO, Introduction to Law and Legitimating Discourse, page 182.

([3]) See Bill No. 96/XII/2. available at: http://www.parlamento.pt/ActividadeParlamentar/Paginas/DetalheIniciativa.aspx?BID=37245.

([4]) To this effect, the Supreme Administrative Court has decided, as can be seen from the decisions of 09-04-2014, rendered in cases nos. 01870/13 and 048/14, and of 23-04-2014, rendered in cases nos. 0271/14, 0270/14 and 0272/14, available at http://www.dgsi.pt.