Stamp Tax on Building Land Over €1M: CAAD Ruling 384/2016-T Annuls Assessment Under Verba 28.1 TGIS

ARBITRATION DECISION

I. REPORT

1.1 Initial Proceedings

On 30-08-2016, the company A…, S.A., (hereinafter only "A…" or "Claimant") with the collective identification number…, came, pursuant to the provisions of article 10.°, no. 1, para. a) of Decree-Law no. 10/2011, of 20 January (hereinafter "Tax Arbitration Regime" or "RJAT") and of Ordinance no. 112-A/2011, of 22 March, to request the constitution of a Single Arbitral Tribunal against the Defendant Tax and Customs Authority (hereinafter designated as "Defendant" or "AT").

The request for constitution of the arbitral tribunal was accepted by the Distinguished President of CAAD and automatically notified to the Tax and Customs Authority. Pursuant to the provisions of para. a) of no. 2 of article 6.° and para. b) of no. 1 of article 11.° of Decree-Law no. 10/2011, of 20 January, as amended by article 228.° of Law no. 66-B/2012, of 31 December, the Deontological Council designated the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit, and notified the parties of this designation on 23-09-2016.

Thus, in accordance with the provision of para. c) of no. 1 of article 11.° of Decree-Law no. 10/2011, of 20 January, as amended by article 228.° of Law no. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 11-10-2016, followed by the pertinent legal proceedings.

1.2 Request and Object

The claimant requests the declaration of illegality of the Stamp Tax (IS) assessment act collected through collection notes nos. 2015 …, 2015 … and 2015 …, relating to the year 2014, by application of item 28.1 of the General Table of Stamp Tax (hereinafter "TGIS") in the total amount of € 13,796.49 (thirteen thousand, seven hundred and ninety-six thousand and forty-nine cents), with reference to the urban property with the registration article … of the Union of Civil Parishes of …, …, …, …, … and …, municipality and district of Porto, as well as of the act of dismissal of the request for ex officio review lodged against the said stamp tax assessment.

The Claimant requests the annulment of the IS assessment act, the restitution of the tax unduly paid and the payment of the respective compensatory interest, all on the following grounds:

• The taxation of construction land began with the wording given by Law no. 83-C/2013 of 31 December to item 28.1 of the TGIS, whereby in the initial normative concept of urban property with residential use, construction land was not included;

• The subjection of construction land with a tax property value exceeding one million euros is expressly established when there exists a building, authorized or envisaged, for residential purposes, but not for construction land without any authorized or envisaged building, which cannot be subject to item 28.1 of the TGIS;

• The mere existence of legal expectation that, in a "construction land", an urban property with residential use will be built can never constitute a taxable fact subsumed in the norm under analysis;

• Without that building forecast or expectation for residential use being validly verified, the norm in question cannot be considered applicable;

• With respect to the property analyzed in the present proceeding, at the date of the taxable event there was no "building, authorized or envisaged" for "residential" purposes, thus not existing a valid and effective potentiality of building for residential use;

• The Claimant further adds that the legislator's choice in subjecting to stamp tax only construction land with building authorized or envisaged for residential purposes further calls into question the principles of tax equality and contributory capacity, constitutionally established, and does not comply with the requirements provided in the General Tax Law (LGT) as in the Constitution of the Portuguese Republic (CRP) regarding its respective objective scope.

• In this sequence, the Claimant requests:

a) the declaration of illegality and consequent annulment of the Stamp Tax assessments impugned;

b) the restitution of the tax unduly paid; and

c) the condemnation of the AT to the payment of compensatory interest, pursuant to article 43.° of the LGT, from the date of payment of the tax until its effective reimbursement.

Notified for this purpose, the AT presented a Response defending the maintenance of the tax acts in dispute, requesting the dismissal of the request, and alleging that the Claimant's property has the characteristics contained in the definition of construction land for purposes of application of item 28.1 of the TGIS, in the wording given by Law no. 83-C/2013, that is, construction land whose building, envisaged, is for residential purposes, pursuant to the provisions of the Real Estate Tax Code (CIMI).

• It further states that item 28.1 does not violate the principles of tax equality and contributory capacity because it is a general and abstract norm, applicable indiscriminately to all cases where the factual and legal presuppositions are met, in accordance with the Constitution and the Law.

II. SANITATION

The proceeding does not suffer from nullities, no questions were raised that impede the examination of the merits of the case, the arbitral tribunal is regularly constituted and is materially competent to hear and decide the request, consequently verifying the conditions for the final decision to be rendered.

III. FACTUAL MATTERS

III.1 Facts Deemed Proven

• The Claimant is the owner of the urban property with the registration article … of the Union of Civil Parishes of …, …, …, …, … and …, municipality and district of Porto.

• In that capacity, it was notified of the act of assessment of stamp tax pursuant to item 28.1 of the TGIS, relating to the year 2014, through collection notes nos. 2015 …, nos. 2015 … and nos. 2015 ….

• The property in question is described in the respective property register as construction land.

• The Claimant presented a request for ex officio review of the tax act in question.

• Which was subject to dismissal that was notified to it on 12.04.2016.

• The stamp tax in question, in the amount of € 13,796.49, is entirely paid.

III.2 Facts Deemed Not Proven

There are no other facts with relevance to the arbitral decision that have not been deemed proven.

III.3 Grounds of the Decision as to Factual Matters

The decision on the determination of factual matters is based on the elements submitted to the file by the Parties, as well as on the facts articulated that did not raise controversy.

IV. LAW

The Stamp Tax Code, approved by Law no. 150/99, of 11 September, entered into force in March 2000, being significantly amended by Decree-Law no. 287/2003, of 12 November, which republished it. With the reform of property taxation carried out in 2003, Stamp Tax came to be configured mainly as a tax on operations that, regardless of their materialization, reveal income and wealth, applying to a "heterogeneous multiplicity of facts or acts", without "a common feature that gives them identity" (JOSÉ MARIA FERNANDES PIRES, Lessons in Taxes on Patrimony and Stamp Tax, p. 453). This capacity to accommodate within itself taxation of different nature created the path for the tax legislator to assign it a complementary role in other taxes.

As noted by J. SILVÉRIO DIAS MATEUS and L. CORVELO DE FREITAS (Taxes on Real Estate Property – Stamp Tax, p 251, Lisbon 2005) "stamp tax is configured as a means of reaching manifestations of contributory capacity not covered by the incidence of any other taxes. Not having the nature of overlapping taxation, this tax tends to assume a residual function filling spaces left open by taxation of income and consumption".

Law no. 55-A/2012, of 29 October, introduced a set of amendments to the coding instruments of three taxes – IRS, IRC and Stamp Tax – as well as to the LGT, among which the norm now under analysis, all guided towards the supplementary attainment of fiscal revenue and, in general, to counter budgetary imbalance. Thus, invoking the principles of social equity and fiscal justice, the taxation of capital income and securities capital gains was increased, measures were introduced to strengthen the fight against tax fraud and evasion, through strengthening the regime applicable to manifestations of wealth of taxpayers and transfers to and from tax havens, to which was added the introduction, within the scope of Stamp Tax, of the taxation of legal situations (expression added to no. 1 of article 1 of the Stamp Tax Code), which was understood to be capable of bearing increased fiscal effort, thereby distributing more equitably the burden to achieve the budgetary consolidation required from taxpayers.

Thus, with the addition of item no. 28 to the General Table of Stamp Tax by article 4.° of Law no. 55-A/2012, a legal situation was subjected to this tax, embodied in the ownership, usufruct or surface right of urban property with residential use, whose tax property value contained in the assessment roll, pursuant to the CIMI, is equal to or greater than €1,000,000.00, with the rate of 1% levied on such value.

The wording of item 28.1 underwent subsequent amendment, via Law no. 83-C/2013, of 31 December, going on to broaden the incidence of Stamp Tax, at the rate of 1%, to "(…) urban property or construction land whose building, authorized or envisaged, is for residential purposes, pursuant to the provisions of the Real Estate Tax Code".

The incidence of stamp tax refers, with respect to essential elements of the assessment of the tax, namely as regards the normative criteria defining the tax property value to be considered, to the regulation contained in the Real Estate Tax Code, ensuring, or at least, promoting, a certain degree of harmony between the various legislative bodies within the scope of property taxation. Doctrine even attributes to it the condition of "additional rate of the real estate tax", directed to "discriminate properties of higher tax property value and subject them to a more burdensome tax regime than others" (JOSÉ MARIA FERNANDES PIRES, op. cit., p. 504), explaining the creation of a new taxable event subject to Stamp Tax, in addition to the heterogeneity that this tax possesses, by the need to increase the State's fiscal revenue, since real estate tax revenue reverts in favor of municipalities and Stamp Tax is State revenue (op. cit., p. 506).

The taxation arising from the rule of incidence housed in item no. 28 assumes the nature of a partial tax (JOSÉ MARIA FERNANDES PIRES, op. cit., p. 507), taking as tax base the urban property devoted to residential use, calculating the respective tax property value per relevant legal and economic unit. It does not constitute a general tax on patrimony, or even a tax on all real property, in terms of founding a comparison based on a personalization perspective of the tax and on a basis that considers all the patrimony of the taxpayer.

From the joint application of no. 4 of art. 2.° of the Stamp Tax Code and no. 1 of art. 8.° of the CIMI, it is concluded that the taxable event to which item 28.1 of the TGIS refers occurs on 31 December of each year. To that extent, the tax legal relationship will be fixed according to the legislation in force on that same date, independently of subsequent amendments that may be in force on the date of the assessment. Therefore, the stamp tax of item 28.1 of the TGIS relating to the year 2014, assessed in 2015, should be calculated and fixed according to the wording of the norm, introduced by Law no. 55-A/2012, of 29 October, with the wording given to it by the State Budget Law/2014 (Law no. 83-C/2013).

It should be recalled that the original wording of the norm in question was the subject of various disputes that opposed the AT and taxpayers, owners of construction land, and the Supreme Administrative Court understood, for example, in the Decision rendered in case no. 048/14, of 09.04.2014, that "(...)having the legislator not defined the concept of "urban properties with residential use", and resulting from article 6 of the Real Estate Tax Code (subsidiarily applicable to Stamp Tax provided for in the new item no. 28 of the General Table) a clear distinction between "residential urban properties" and "construction land", these cannot be considered, for purposes of the incidence of Stamp Tax (Item 28.1 of the TGIS, in the wording of Law no. 55-A/2012, of 29 October), as urban properties with residential use( (...)".

In fact, the concept of "urban property with residential use" was not defined by the legislator. Neither in Law no. 55-A/2012, which introduced it, nor in the Real Estate Tax Code, to which no. 2 of article 67.° of the Stamp Tax Code (equally introduced by that Law), refers on a subsidiary basis. With the entry into force of the State Budget Law for 2014 (Law no. 83-C/2013, of 31 December), the concept was abandoned, the objective scope of item 28.1 of the TGIS now being defined through the use of concepts that are legally defined in article 6.° of the Real Estate Tax Code. This amendment provides that construction land whose building, authorized or envisaged, is for residential purposes are encompassed within the scope of item 28.1 of the General Table of Stamp Tax (provided that its respective tax property value is of value equal to or greater than 1 million euros).

When presenting and discussing in the Assembly of the Republic the said amendment, the State Secretary for Tax Affairs stated (see Assembly of the Republic Journal, I Series no. 9/XII – 2, of 11 October, p. 32) that: «The Government proposes the creation of a special rate on residential urban properties of higher value. It is the first time that Portugal has created special taxation on high-value properties intended for residential purposes. This rate will be 0.5% to 0.8% in 2012 and 1% in 2013, and will apply to houses with value equal to or greater than 1 million euros" from which it is gathered that the reality to be taxed in mind are, after all, and despite the terminological imprecision of the law, "residential urban properties", in common language "houses", and not other realities. The fact that it may be considered that in the determination of the tax property value of urban properties classified as construction land should be taken into account the use that will have the building authorized or envisaged for determination of the respective value of the installation area (see nos. 1 and 2 of article 45.° of the CIMI), does not determine that construction land can be classified as "properties with residential use", since "residential use" always appears in the Real Estate Tax Code referred to "buildings" or "constructions", existing, authorized or envisaged, because only these can be inhabited, which is not the case with construction land, which does not, in itself, have conditions for such, not being susceptible to being used for residential purposes except if and when the building authorized and envisaged for it is erected thereon (but in that case they would no longer be "construction land" but another species of urban property – "residential", "commercial, industrial or for services" or "others" – article 6.° of the CIMI). It would be strange, moreover, if the determination of the scope of the tax incidence rule housed in item no. 28 of the General Table of Stamp Tax were found, in the end, in the rules for determination of the tax property value of the Real Estate Tax Code, and that the terminological imprecision of the legislator in the wording of that rule were, after all, clarified and finally explained via an indirect and equivocal referral to the use coefficient established by the legislator in relation to built properties (article 41.° of the Real Estate Tax Code). Thus, given that construction land – whatever the type and purpose of the building that will or could be erected on it – does not, by itself, satisfy any condition to be licensed as such or to be defined as having residential use as its normal destination, and referring the incidence rule of stamp tax to urban properties with "residential use", without any specific concept being established for that purpose, cannot from it be extracted that the same contains a future potentiality, inherent in a distinct property that might possibly be built on the land.

In fact, referring to urban properties, no. 1 of article 6.° of the CIMI distinguishes several species, dividing them into residential, commercial, industrial or for services, construction land and others, according to the following criteria: «residential, commercial, industrial or for services» – buildings or constructions licensed for such or, in the absence of a license, which have as their normal destination each of those purposes (see article 6.°, no. 2 of the CIMI); «construction land», lands situated within or outside an urban agglomeration, for which a license or authorization has been granted, prior communication admitted or favorable prior information issued for land subdivision or construction operations, and also those that have been declared as such in the acquisition deed, excepting lands where competent entities prohibit any of those operations, namely those located in green zones, protected areas or which, in accordance with municipal land-use planning, are devoted to spaces, infrastructures or public equipment» (see article 6.°, no. 3 of the CIMI, in the wording of Law no. 64-A/2008, of 31/12); «Others», are so considered lands situated within an urban agglomeration that are neither construction land nor classified as rustic property, in accordance with its legal concept, and also buildings and constructions licensed, or in the absence of a license, which have as their normal destination other purposes than those referred to above (see article 6.°, no. 4 of the CIMI).

By making taxation incur on urban properties «with residential use», the legislator does not establish, in fact, in the Stamp Tax Code, any specific concept that should be considered for that purpose, but rather refers the application of the taxation regime of the properties referred to in that Item 28 to the rules of the CIMI, which establishes a clear distinction between residential properties and construction land, the former being so classified according to their municipal license, or, if this does not exist, as a result of normal use and the latter are defined according to their legal potentiality.

In this light, construction land - whatever the type and purpose of the building that will or could be erected on it, including that intended for residential use - does not, by itself, fulfill the requirement provided in items 28 and 28.1 of the TGIS (wording of Decree-Law no. 7/2015), that is, that "(...) the building "authorized or envisaged, is for residential purposes (...)". In fact, referring the incidence rule of stamp tax to urban properties with residential use, without any specific concept being established for that purpose, cannot from it be extracted, as seen previously, that the same contains a future potentiality, together with others, inherent in a distinct property that might possibly be built on the land.

On the other hand, the understanding cannot be accepted that the concept of "residential use" arises from the rule of article 45.° of the CIMI, because this refers to the rules applicable in the determination of the tax property value of construction land establishing that this is what results from the value of the building installation area to be constructed added to the land adjacent to the installation. In fixing the value of that area, a percentage is considered, varying between 15% and 45%, of the value of the buildings authorized or envisaged.

On the other hand still, nothing in the law permits the conclusion that the legislator of stamp tax intended to broaden, for purposes of the incidence of this tax, to the species provided in no. 1 of article 6.° of the CIMI, and the application of a use coefficient relates to one of the elements to be considered in the assessment of the land, that is, in the determination of the value of the buildings authorized or envisaged.

Regardless of whether, in the determination of the value of buildings authorized or envisaged for construction land, a use coefficient should or should not be considered, it is admitted, for being obvious and of general knowledge, that the value of land is decisively influenced by the type and characteristics of those buildings. However, this is a matter that goes beyond the question on which the present request for arbitral pronouncement is based.

Under the stated conditions, the circumstance that, for a given construction land, the building of a property intended for residential purposes, or for any other purpose, is authorized, even though it should be considered in its assessment, does not determine any change in the classification of the land which, for tax purposes, continues to be considered as such.

As such, resulting from article 6.° of the CIMI a clear distinction between, on the one hand, residential urban properties and, on the other hand, construction land, the latter cannot be considered, for purposes of the incidence of stamp tax, as «properties with residential use».

Thus, in light of the evidence produced, it is not possible to say that on the land in question, at the date on which the taxable event occurred, there were authorized or envisaged constructions of buildings devoted exclusively to residential purposes. Such circumstance thus necessarily implies the exclusion of taxation of the property in question in light of item 28 of the TGIS (moreover, currently repealed by Law no. 42/2016 – State Budget Law for 2017 – article 210°-2).

In this essential line of guidance are, as stated, among others the decisions rendered by Arbitral Tribunals constituted within the scope of CAAD, in cases nos. 522/2015-T, 532/2015-T, 467/2015-T (citing various decisions of the Supreme Administrative Court), 578/2015-T, 642/2015-T, 551/2015-T, 2016/2016-T and 412/2016-T, almost all published on the CAAD website (www.caad.org.pt).

V. ISSUES OF IMPEDED COGNITION

In the sentence, the judge must pronounce on all issues that he must examine, refraining from pronouncing on issues of which he must not have knowledge (final segment of no. 1 of article 125.°, of the Tax Code of Administrative Procedure - CPPT), and the issues on which the tribunal's powers of cognition fall are, in accordance with no. 2 of article 608.° of the Code of Civil Procedure (CPC), applicable subsidiarily to the tax arbitration proceeding, by referral of article 29.°, no. 1, para. e), of the RJAT, "the issues that the parties have submitted for its examination, excepting those whose decision is impeded by the solution given to others (...)".

Resulting from the foregoing the declaration of illegality of the assessment object of the present proceeding – main request -, by reason of breach of law that prevents the renewal of the acts, the knowledge of the defects imputed by the Claimant is impeded.

In fact, article 124.° of the CPPT, applicable on a subsidiary basis by force of the provision of article 29.°, no. 1, of the RJAT, by establishing an order of knowledge of defects, presupposes that, judged as well-founded a defect that ensures the effective protection of the rights of the impugners, it is not necessary to examine the rest, because if it were always necessary to examine all defects imputed to the act impugned, it would be indifferent the order of their knowledge. Thus, no knowledge is taken of the other defects imputed by the Claimant to the acts whose declaration of illegality it requested, namely concerning the constitutional questions raised in the request for constitution of the arbitral tribunal.

VI. COMPENSATORY INTEREST

In accordance with the provision of para. b) of article 24.° of the RJAT, the arbitral decision on the merits of the claim for which no appeal or impugnation lies binds the tax administration from the end of the period provided for appeal or impugnation, and this must, in the exact terms of the admissibility of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax judicial courts, "restore the situation that would exist if the tax act object of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose", which is in harmony with the provision of article 100.° of the LGT [applicable by force of the provision of para. a) of no. 1 of article 29.° of the RJAT] which establishes that "the Tax Administration is obliged, in case of total or partial admissibility of claims, judicial impugnation or appeal in favor of the taxpayer, to the immediate and full reconstitution of the legality of the act or situation object of the dispute, including the payment of compensatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2.°, no. 1, paras. a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals functioning in CAAD, making no reference to condemnatory decisions, it should be understood that the powers are included in its competences that in judicial impugnation proceedings are attributed to tax tribunals, and that is the interpretation that harmonizes with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which is proclaimed, as the first guideline, that "the tax arbitration proceeding should constitute an alternative procedural means to the judicial impugnation proceeding and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial impugnation proceeding, despite being essentially a proceeding for annulment of tax acts, admits the condemnation of the Tax Administration to the payment of compensatory interest, as is apparent from article 43.°, no. 1, of the LGT, in which it is established that "compensatory interest is due when it is determined, in gracious claim or judicial impugnation, that there was error attributable to the services from which results payment of the tax debt in amount superior to that legally due" and from article 61.°, no. 4 of the CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), which «if the decision that recognized the right to compensatory interest is judicial, the payment period is counted from the beginning of the period of its voluntary execution».

Thus, no. 5 of article 24.° of the RJAT in saying that "payment of interest is due, regardless of its nature, as provided in the general tax law and in the Code of Tax Procedure and Process" must be understood as permitting the recognition of the right to compensatory interest in the arbitration proceeding.

This is the situation of the case at hand, whereby the AT must return the tax paid and effect the payment of compensatory interest at the supplementary legal rate of civil debts, pursuant to articles 35.°, no. 10, and 43.°, nos. 1 and 5, of the LGT, 61.° of the CPPT, 559.° of the Civil Code and Ordinance no. 291/2003, of 8 April (or instrument or instruments succeeding it), with the compensatory interest due from the dates of the payments now judged undue until that of the processing of the credit note, in which they are included (cf. article 61.°, no. 5, of the CPPT).

VII. DECISION

In these terms this Arbitral Tribunal decides:

• To wholly uphold the request;

• To declare, in consequence, the illegality of the stamp tax assessment object of the request and to annul the collection notes corresponding to it;

• To condemn the Tax and Customs Authority to the restitution of the amounts paid with respect to the aforesaid assessments and collection notes, with compensatory interest in the terms set out above;

• To further condemn the Tax and Customs Authority to the costs of this proceeding.

Value of the Proceeding

The value of the proceeding is fixed at € 13,796.49, pursuant to the provision of article 97.°-A, no. 1, a), of the CPPT, applicable by force of paras. a) and b) of no. 1 of article 29.° of the RJAT and of no. 2 of article 3.° of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The value of the arbitration fee is fixed at € 918.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Defendant, since the request was wholly upheld, pursuant to articles 12.°, no. 2, and 22.°, no. 4, both of the RJAT, and article 4.°, no. 4, of the aforesaid Regulation.

• Register and notify.

Lisbon, 09 April 2017

The Arbitrator,