Summary
Full Decision
ARBITRAL DECISION
Issued as a result of the Constitutional Court judgment of 4 October 2018, through which reform is determined to the arbitral decision issued on 18 April 2017
REPORT
A..., S.A., taxpayer no. ..., with registered office at ..., no. ..., ... - ... Porto, hereinafter referred to as the Claimant, submitted on 21/07/2016 a request for arbitral ruling in which it requests the declaration of illegality of the Stamp Tax assessments, in the amounts of €24,030.00 and €26,373.40 on grounds of unconstitutionality resulting from the violation of the principle of equality and of contributory capacity by item 28.1 of the General Table of Stamp Tax (TGIS).
His Excellency the President of the Deontological Council of the Centre for Administrative Arbitration (CAAD) appointed on 30/09/2016 Francisco Nicolau Domingos as arbitrator.
On 18/10/2016 the arbitral tribunal was constituted.
In compliance with the provision of article 17, paragraphs 1 and 2 of Decree-Law no. 10/2011, of 20 January (RJAT), the Respondent was notified on 19/10/2016 to, if it so wished, submit a response, request the production of additional evidence, and to submit the administrative file (PA).
On 16/11/2016 the Respondent submitted its response, in which it defends itself by exception, invoking the unsuitability of the tribunal to assess the Claimant's claim for a declaration of unconstitutionality (abstract review), impropriety of the procedural means used, and by way of substantive objection, arguing for the legality of the assessment act.
By order of 20/12/2016 the tribunal invited the Claimant to pronounce itself on the matter of the exception.
The Claimant on 29/12/2016 responded to such invitation, arguing for the lack of merit of the exception raised, sustaining that what is at issue is not the abstract review of the constitutionality of norms, but the legality of the assessments made based on a norm which it deems unconstitutional.
On 02/02/2017 the tribunal decided to dispense with holding the meeting to which article 18, paragraph 1 of RJAT refers, on the ground that the matter of the exception may be addressed in the final decision and in light of the principle of autonomy of the arbitral tribunal in conducting the proceedings and in determining the rules to be observed with a view to obtaining, within a reasonable timeframe, a substantive ruling on the claims made, cf. article 16, paragraph c) of RJAT, granted a timeframe for the parties, if they so wished, to submit written final arguments, and set 20/03/2017 as the date for issuing the arbitral decision.
By order dated 20/03/2017 and with the grounds described therein, the tribunal rescheduled such date to 18/04/2017.
POSITION OF THE PARTIES
The Claimant alleges, first and foremost, that the taxation provided for in items 28 and 28.1 of the TGIS violates the constitutional principle of equality and its corollary: the principle of contributory capacity, and consequently, the assessments should be declared illegal.
On the theoretical plane it observes that only choices made by the ordinary legislator in those circumstances where it is proven that they result in differences in treatment that find no justification in reasonable, perceptible or intelligible grounds, taking into account the constitutional objectives pursued by such measure of difference, constitute a violation of the principle of equality.
In concrete terms, it concludes that the principle of equality and of contributory capacity are frontally violated by item 28.1 of the TGIS, since land for construction has a tax patrimonial value (VPT) of €2,403,000.00 and €2,637,340.00, and is therefore subject to Stamp Tax, whereas a taxpayer owning 10 plots of land for construction, each with a VPT of €900,000.00, pays nothing on that basis. In its words, a contributory capacity of €5,040,340.00 (€2,403,000.00 + €2,637,340.00) generates tax and a contributory capacity of €9,000,000.00 does not determine any tax.
Secondly, it argues that, having the land for construction of which the Claimant is the owner, building permits for the construction of buildings intended for housing, there is subjection to Stamp Tax. However, if the Claimant were the owner of 10 plots of land for construction, each with a VPT of €1,000,000.00, but with permits for the construction of buildings intended for commerce, services or industry, it would pay no tax.
In summary, the principle of contributory capacity, translated into the payment of tax in function of the index of such capacity – the value of the real property assets of the tax subject – is violated, since taxpayers with different contributory capacities are taxed differently, with the taxpayer with lower contributory capacity being taxed more heavily. Therefore it concludes that the normative solution is arbitrary and devoid of any legal foundation.
Similarly, it argues that the configuration of the tax event that operates a distinction between various uses and purposes of the properties in question (residential/non-residential), is not justified in light of the fiscal measure adopted. That is, from such arbitrary distinction it follows that a greater burden is imposed on taxpayers who own properties with residential designation, to the detriment of other uses that are not so valuable in light of constitutional values and principles. Consequently, there is also a violation of the valorative prominence of the right to housing, provided for in article 65 of the Constitution of the Portuguese Republic (CRP).
In third place it argues that, if the legislator intended to exclude from taxation immovable property devoted to services, commerce or industry, to the extent that they are productive elements of enterprises, then another violation of the principle of equality occurs, to the extent that plots of land for construction, in the case of enterprises, are also productive instruments of these.
It concludes, arguing that the Stamp Tax assessments suffer from the material defect of violation of the CRP and, as such, should be declared illegal.
The Respondent begins by arguing that the arbitral tribunal cannot assess the dispute, since it may be considered that we are in the presence of the exception of material incompetence or even the dilatory exception of impropriety of the means, since the Claimant's claim consists of the declaration of illegality/unconstitutionality of the norm and the competence for abstract review is reserved to the Constitutional Court – article 281 of the CRP.
As regards the violation of the principle of equality in the strict sense and its manifestation of contributory capacity, it states that the legislator defined an economically valid presupposition, whose addressees have effectively a special contributory capacity in light of the criterion adopted for the payment of this tax. Specifically, with the provision of item 28.1 in the TGIS, the legislator intended to distribute among all the sacrifices imposed by austerity, permitting the discrimination of patrimony without this offending the constitutional principles under analysis, since they do not result in unjustified differences of treatment among taxpayers.
It further adds that it is a norm of a general and abstract character, applicable uniformly to all cases in which the respective factual and legal presuppositions are met. The fact that the legislator established a value of €1,000,000.00 as the criterion for delimiting the scope of the tax, below which the provision of the tax norm is not met, constitutes a legitimate choice regarding the fixing of the "scope of luxury residential properties" that is intended to be taxed more heavily.
Furthermore, the different valuation and taxation of a property with residential allocation as opposed to a property intended for commerce, industry or services results from the different aptitude of the properties in question, which supports the different treatment given by the legislator who, for economic and social reasons, decided, within its margin of discretion, to exclude from the scope of the tax properties intended for purposes other than residential.
It also states in this regard that, although it is not within AT's competence, in the exercise of its functions, to make comments about the alleged unconstitutionality of item 28.1 of the TGIS, it does not violate the principles of proportionality, legality, confidence of citizens and contributory capacity.
In this sequence, it asks that the Claimant: [declares] the illegality of the tax acts of Stamp Tax assessment sub judice, because based on an unconstitutional norm, the same being annulled.
PRELIMINARY QUESTION AND CASE MANAGEMENT
The Respondent, in its response, argues that the tribunal does not have competence to assess or declare the (un)constitutionality of item 28.1 of the TGIS, since abstract review of legality and constitutionality is reserved to the Constitutional Court.
Invited to pronounce itself on such exception and on the impropriety of the means, the Claimant stated that the exception of incompetence of the tribunal is based on an incorrect interpretation of the request for arbitral ruling, to the extent that what is reflected in that procedural document is the claim that the illegality of the assessments placed in issue be declared on the ground that they are based on the application of a norm that violates the CRP.
Is the Respondent correct?
In this regard it is commonly accepted that the application of a materially unconstitutional norm in the context of assessment of a tax determines its annulment, as it suffers from the defect of violation of law emerging from error regarding the legal presuppositions.
Now, what the Claimant places in question is the application of a norm which it deems unconstitutional, item 28.1 of the TGIS, and not the abstract review of legality and constitutionality.
Thus, the tribunal is materially competent, the exceptions raised by the Respondent being held to be without merit.
The proceedings do not suffer from nullities, the arbitral tribunal is regularly constituted and is materially competent to know and decide the claim, the conditions being consequently present for the final decision to be issued.
4. FACTS
4.1. Facts Considered Proven
4.1.1. The Claimant is the owner of the property registered in the urban property register under article ..., parish of ..., Vila Nova de Gaia, registered as "land for construction".
4.1.2. The property had a VPT of €2,637,340.00 on 31 December 2015.
4.1.3. The Claimant is the owner of the property registered in the urban property register under article ..., parish of ..., Vila Nova de Gaia, registered as "land for construction".
4.1.4. The property had a VPT of €2,403,000.00 on 31 December 2015.
4.1.5. The Claimant was notified of the Stamp Tax assessment for the property described in 4.1.1., relating to the year 2015, in the total amount of €26,373.40.
4.1.6. The Claimant was notified of the Stamp Tax assessment for the property described in 4.1.3., relating to the year 2015, in the total amount of €24,030.00.
4.1.7. The Claimant holds in its assets properties intended for residential construction.
4.2. Facts Not Considered Proven
There are no other facts with relevance for the arbitral decision that have not been deemed proven.
4.3. Substantiation of the Facts Considered Proven
The facts deemed proven derive from the documents used for each of the facts alleged and whose authenticity was not called into question.
5. LEGAL MATTERS
The first arbitral decision (dated 18 April 2017):
In the first place, it is necessary to ascertain whether there exists incompatibility of item 28.1 of the TGIS with the constitutional principle of equality, in the segment relating to "land for construction", due to negative discrimination against enterprises engaged in the habitual activity of buying and selling land for construction.
In this respect, the Claimant argues that enterprises dedicated to the construction of buildings for housing and thus holding "land for construction", that is, raw materials in inventory, would be discriminated against when compared with other enterprises possessing in inventory "land for construction" for buildings intended for commerce, services or industry. In its view, the taxation of item 28.1 of the TGIS of residential urban properties and "land for construction", whose construction is for housing, of value equal to or greater than €1,000,000.00 is unconstitutional, due to violation of the principle of equality. The principle of fiscal equality and its corollary of contributory capacity also are, in its judgment, violated, because the item of the TGIS in question treats taxpayers in identical situations differently, with taxpayers of lesser tax capacity being taxed more heavily.
The question of constitutionality that is the subject of these proceedings was judged by the Constitutional Court by judgment no. 378/2018, of 4 July, in the following terms: "….the tax provided for in Item 28.1, as is characteristic of taxes on property, delimits its scope of application by exclusive reference to the ownership of certain patrimonial values, "regardless of the function performed by such assets (productive capital, application of funds or savings or durable consumption)" (Summary Decision no. 214/2017). On the other hand, being a tax on property, it also does not individualize or distinguish the respective tax subjects by recourse to any criterion other than precisely the ownership of those patrimonial values. Thus, it applies uniformly to natural persons and legal persons and, within this category, to associations, foundations and commercial companies, regardless of the economic sector in which the latter operate and the specific commercial risks existing in their respective sectors of activity, which are, moreover, inherent to any and all commercial activity.
Now, as we have seen, the option for such a model of taxation is constitutionally legitimate, being virtually apt, with such configuration, to pursue the programme that the Constitution associates with it of contributing to equality among citizens, it not following from the argumentation expended in the decision under appeal to a well-founded demonstration that indeed there occurs "intolerable arbitrariness" in the normative option of extending the scope of application of the said tax to land for construction.
In fact, if it is true that the mere ownership of land for construction of housing of value equal to or greater than €1,000,000.00 does not permit, by itself alone, determining the concrete and complete economic-financial situation in which the tax subject finds itself – which, it is repeated, is not constitutionally required – it also does not authorize extrapolative judgments about the type of taxpayers affected by such norm of application, the sector of activity in which they operate and the contingent vicissitudes, in particular of the market, to which they may be subject.
As was stated, the norm in question starts from the weighing of concrete legal-patrimonial situations, delimited according to the tax patrimonial value of the immovable property and its normal social allocation, integrating in its subjective scope of application a set of indeterminate taxpayers according to a uniform criterion: the ownership of land for construction of buildings for housing of high tax patrimonial value. In relation to none of them is their concrete economic-financial situation (income or profits), their nature (individual or collective), organizational structure (business or non-business), concrete legal form assumed (commercial company or other) and, much less, the diverse sectors of activity in which the merchants covered might possibly operate and the specific risks inherent to each of those lines of activity, weighed.
The mere statistical probability of being affected by the norm in question of commercial companies dedicated to real estate promotion, associated with the weighing of economic variables of uncertain verification, such as the economic impact of the tax on that particular line of commercial activity – whose value, moreover, will not fail to be considered as a cost of the activity – does not constitute a sufficiently solid reason to support a judgment of unconstitutionality of the norm in question, in the specific hypothesis under consideration, taking into account, furthermore, the negative character of constitutional review dictated by the principle of equality.
As is highlighted in Judgment no. 711/2006, in a passage transcribed in Judgment no. 590/2015, "[t]o ascertain (…) the existence of a particularism sufficiently distinct to justify an inequality of legal regime, and to decide on the circumstances and factors to be regarded as relevant in such ascertainment, is a task that primarily falls to the legislator, which holds the primacy of the concretization of constitutional principles and the corresponding margin of discretion. Therefore, the principle of equality presents itself fundamentally to legal operators, in the context of constitutional review, as a negative principle (…) – as a prohibition on arbitrariness". 13. In any event, even if there were at issue – and there is not – a normative hypothesis circumscribed to commercial companies with such corporate purpose, it does not follow from the constitutional programme of tax equalization, through taxes on property, any requirement of positive discrimination of enterprises, as opposed to the remaining taxpayers subject to this type of taxes. There is, therefore, no reason to censure, on the constitutional plane, the legal option of also subjecting them to the payment of the tax based on the ownership of land for construction of tax patrimonial value equal to or greater than €1,000,000.00, whose construction, authorized or foreseen, is for housing. As the decision that most recently addressed the problem recalls, relying on the jurisprudence of Judgment no. 590/15 (Summary Decision no. 214/2017), "[t]he change to Stamp Tax corresponded to one of three pillars – changes in Personal Income Tax, Corporate Income Tax and Stamp Tax – of the effort to strengthen the equity of the tax system, ensuring that the distribution of sacrifices required of taxpayers in order to achieve budgetary equilibrium not be made only by those who live from labor income (cf. Law Proposal no. 96/XII). In that sense, and as was announced in parliamentary debate, the budgetary effort should affect all types of income, encompassing with special emphasis income from capital and property of high value".
Being that the teleology of the norm contained in Item 28.1, in the wording introduced by Law no. 83-C/2013, still in the context of the exceptional economic crisis determining the set of described legal changes, it does not appear that the provision of the ownership of land for construction of buildings intended for housing of tax patrimonial value equal to or greater than €1,000,000, as the constitutive fact of the tax obligation in question, deserves constitutional disapproval.
In such legal situation, as occurs with the ownership of houses for housing of such value, there is a constitutionally valid reason that justifies taxation: the ownership of assets whose tax patrimonial value and normal social allocation are susceptible of revealing a special capacity to support and participate in the effort of budgetary consolidation which the legislator, in the exercise of its margin of discretion, decided to extend to the holders of certain real property assets, for reasons of greater social equity, to which the Constitution is clearly sensitive.
It does not fall to the Constitutional Court to equate the possibility (abstract) of the existence of situations or hypotheses that, in view of the nature of the subject targeted or branch of activity conducted by it, could justify different tax solutions, and, on that basis, to decide for the unconstitutionality of the solution adopted by the legislator, when, as is the case, its inclusion in the scope of application of the tax norm, together with all other hypotheses covered, of variable factual configuration, does not constitute an arbitrary or rationally unfounded solution, as it rests on reliable, although not infallible, indices of special or increased contributory capacity, as was demonstrated.(…)".
In summary, the circumstance that commercial companies whose corporate purpose is real estate promotion are covered by the scope of application of the tax, or the economic impact on this sector of activity, are not sufficient to ground a judgment of unconstitutionality.
Similarly, the item of article 28.1 of the TGIS applies to all without exception (general); treats equally those in the same situation and differently those in different situations, to the extent of the difference, to be determined by contributory capacity (uniformity), and prohibits discriminations among taxpayers without rational foundation (non-arbitrary).
As also the taxation by item 28.1 of the TGIS is not manifestly excessive, for as the Constitutional Court argues, the legislator: "…intended, as was seen, to extend the taxable base to the wealth externalized in the ownership of urban properties intended for housing of high value and, from a perspective of promoting budgetary consolidation, as an instrument for obtaining more revenue and, correspondingly, for alleviating the burden that might come to bear on other sources of revenue or on the reduction of public expenditure, with a view to meeting the goals for the public deficit, there is no doubt that the items of Stamp Tax collected by way of the scope provided for in item no. 28, whatever their amount may be, are apt and suited to realize the purposes of extended distribution of the burden in a period of sacrifices of additional fiscal and financial character that the legislator sought to achieve. As, while a fiscal measure directed to affect more intensely the holders of real rights of enjoyment over urban properties of residential vocation and of higher value, within the reach only of those with high economic strength, there are not perceived reasons to conclude for disrespect of the dimensions of necessity or just measure, contained in the principle of proportionality"[1].
In this manner, the Stamp Tax assessments do not suffer from error regarding the legal presuppositions and, as such, remain in the legal order.
The reformed arbitral decision (dated 5 December 2018):
5.1. Historical Framework of Item 28.1 of the TGIS
In the first place, it is urgent to trace the chronology of the life of item 28.1 of the TGIS. In truth, in 2012, through Law no. 55-A/2012, of 29 October, the legislator decided to add a fact subject to Stamp Tax, with a view to taxing properties of high tax patrimonial value and with the objective of increasing State revenue in a context of absolute economic recession.
For this purpose the initial wording of the item described was as follows:
"28 – Ownership, usufruct or right of superficies of urban properties whose tax patrimonial value contained in the register, pursuant to the Code of Municipal Property Tax (CIMI), is equal to or greater than (euro) 1,000,000 – on the tax patrimonial value used for the purposes of IMI:
28.1 – For property with residential allocation…".
Thus, properties that: i) were urban and ii) had a VPT greater than €1,000,000.00 became subject to Stamp Tax.
It happens that, even during the application of such wording, the interpretation promoted by the Tax Administration pointed to the conclusion that properties constructed and devoted to housing would be subject to taxation, as well as land already classified as for construction in zones in which the type of construction provided is housing.
It occurs that this interpretation was repeatedly and systematically rejected by state and arbitral jurisprudence, as examples thereof are the judgments of the Supreme Administrative Court issued in case 1870/13, of 09/04/2014, in which Councilor ISABEL MARQUES DA SILVA served as rapporteur, case 46/14, of 14/05/2014, in which Councilor ASCENSÃO LOPES served as rapporteur, and case 0272/2014, of 23/04/2014, in which Councilor PEDRO DELGADO served as rapporteur.
The truth is that the legislator, through the State Budget Law of 2014 (Law no. 83-C/2013, of 31 December), altered the wording of the Stamp Tax item under analysis, broadening the scope of application to expressly include "land for construction" where construction for housing is foreseen or approved, always on the condition that such land has a VPT greater than €1,000,000.00. Therefore, today, "land for construction" whose authorized or foreseen construction is for housing is subject to the taxation provided for in item 28.1 of the TGIS[2], the norm of application requiring that it be proven that the right to construction is already determined by action of a public entity, since such a right only arises when that entity authorizes the owner to construct or subdivide[3].
In summary, the application of Stamp Tax to "land for construction" requires, not only mere ownership, but also the issuance of an administrative title that authorizes, in particular, such owner to construct or subdivide.
Still, the item determines that the tax applies to "…the tax patrimonial value used for the purposes of IMI…" and on such matter the rate of 1% "…for land for construction whose construction, authorized or foreseen, is for housing, pursuant to the provisions of the Code of IMI…" should apply, however even when the construction authorized or foreseen for the land is not exclusively for housing it is the VPT, the only one that exists prior to construction. That is, even if the construction authorized or foreseen for the land is in fractions susceptible of independent use, which are considered autonomously for the purposes of IMI, as provided by article 12, paragraph 3 of CIMI, and the VPT of the land computes the value of the authorized or foreseen constructions, it is the VPT that the norm of application marks that should be used to determine the scope of the tax.
Reason for which, item 28.1 of the TGIS determines that what should be taken into consideration, in the scope of application of the tax, is the VPT of the land.
Thus, it is now important to know the defect that protects the affected interests in a proper manner.
5.2. Question of the Divergence of Item 28.1 of the TGIS with the Constitutional Principle of Equality, in the Segment Relating to "Land for Construction", Due to Negative Fiscal Discrimination Against Enterprises Engaged in the Purchase of Land for Construction
In this regard there is, first and foremost, the need to ascertain whether there exists incompatibility of item 28.1 of the TGIS with the constitutional principle of equality, in the segment relating to "land for construction", due to negative discrimination against enterprises that habitually engage in the activity of buying and selling land for construction.
In this respect the Claimant argues that enterprises dedicated to the construction of buildings for housing and thus holding "land for construction", that is, raw materials in inventory, would be discriminated against when compared to those of other enterprises that possess in inventory "land for construction" for buildings intended for commerce, services or industry. In its view, the taxation of item 28.1 of the TGIS of residential urban properties and "land for construction", whose construction is for housing, of value equal to or greater than €1,000,000.00 is unconstitutional, due to violation of the principle of equality.
We advance already, rightly[4]. In truth, enterprises with this corporate purpose inexorably need to acquire the "land for construction" to carry out their corporate purpose, so that it is not possible to sustain that they reveal an additional contributory capacity. Furthermore, the taxation has no connection with the real income of the commercial activity of these enterprises and is maintained even in those fiscal years in which there are losses, increasing in intensity. In this manner, we find no reasons to impose this additional taxation on enterprises dedicated to the buying and selling of land for construction.
In this line, no foundations are found to differentiate between enterprises dedicated to the sale of land for construction of residential buildings and those that sell them for other purposes. Consequently, item 28.1 of the TGIS embodies an unjustified negative discrimination of enterprises dedicated to the buying and selling of land for construction, violating the principle of equality and, as such, materially unconstitutional.
Consequently, item 28.1 of the TGIS in the wording in force at the time of the tax event is materially unconstitutional, as it subjects to Stamp Tax the ownership of "land for construction" whose VPT is greater than €1,000,000.00, to the extent that it applies to cases in which "land for construction" belongs to enterprises engaged in the buying and selling of land for construction.
Thus, the assessments that are the subject of the present claim suffer from the defect of violation of law, as they manifest error regarding the legal presuppositions by applying a materially unconstitutional norm, which forms the basis for their annulment.
6. DECISION
On these grounds it is decided that the claim for arbitral ruling is upheld with regard to the annulment of the assessments in issue, with all legal consequences.
Further determination is made for notification to the Office of the Attorney General of the Republic, for the purposes described in article 280, paragraph 5 of the CRP.
7. VALUE OF THE PROCEEDINGS
The value of the proceedings is fixed at €50,403.40, pursuant to article 97-A of the Code of Procedures and of Tax Procedure (CPPT), applicable by virtue of the provision of article 29, paragraph 1, paragraph a) of RJAT and article 3, paragraph 2 of the Costs Regulation in Tax Arbitration Proceedings (RCPAT).
8. COSTS
Costs to be borne by the Respondent, in the amount of €2,142, cf. article 22, paragraph 4 of RJAT and Table I appended to RCPAT.
Notify.
Lisbon, 18 April 2017
The Arbitrator,
(Francisco Nicolau Domingos)
[1] Judgment no. 590/2015, of 11 November 2015.
[2] In this sense see arbitral decision no. 507/2015-T, of 17/03/2016 and in which Councilor JORGE LOPES DE SOUSA served as chairman.
[3] In this sense, see arbitral decision no. 467/2015-T, 04/02/2016 and in which Councilor FERNANDA MAÇÃS served as chairwoman.
[4] We shall follow closely the substantiation contained in arbitral decision no. 507/2015-T, of 17/03/2016 and in which Councilor JORGE LOPES DE SOUSA served as chairman.
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