Stamp Tax on Independent Building Units: CAAD Rules on Verba 28.1 Property Valuation Threshold

ARBITRAL DECISION

I – Report

1. On 22-07-2016, the taxpayers A…, Tax Number … resident at street …, no. …, …, Lisbon and B…, Tax Number …, resident at street …, no. …, …, Lisbon, requested from CAAD the constitution of an arbitral tribunal, under the terms of article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "LRAT"), in which the Tax Authority and Customs Authority is respondent, with a view to annulling the acts of assessment of stamp duty relating to the year 2015 (item no. 28.1 of the General Table of Stamp Duty), in the total amount of €10,115.30, effected by the respondent regarding the urban property registered in article U -…, of the parish of …, municipality of Lisbon, situated in this city, at …, nos. … to … .

The applicants, alleging that they had already paid the amounts of the first installment relating to the contested assessments, further petitioned for the restitution of these sums which they consider wrongfully paid as well as others that might be paid relating to the assessments in question and also indemnification interest from the date of payment until the date of execution of the arbitral decision.

1. The request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and notified to the Tax Authority and Customs Authority.

Under the terms and for the purposes of the provision in paragraph 1 of article 6 of the LRAT, by decision of the Lord President of the Ethics Council, duly communicated to the parties within the legally applicable deadlines, the undersigned was appointed arbitrator, who communicated to the Ethics Council and to the Administrative Arbitration Center the acceptance of the appointment within the regularly applicable deadline.

The Arbitral Tribunal was constituted on 18-10-2016.

1. The grounds presented by the applicant in support of their claim were, synthetically, the following:

• The applicants are co-owners in equal shares of an urban property registered in article U -…, of the parish of …, municipality of Lisbon, situated in this city, at …, nos. … to … .

• The aforementioned property was valued considering the respective floors or independent divisions, having been attributed to each of such parts an autonomous tax property value, in the following terms:

• Shop 97 - with a tax property value of €190,880.00;

• Shop 98 – with a tax property value of €239,880.00;

• 1st independent floor – with a tax property value of €357,670.00;

• 2nd independent floor – with a tax property value of €357,670.00;

• Independent attic – with a tax property value of €296,190.00.

• The applicants were notified by the Tax Authority and Customs Authority (TA) of the assessments of Stamp Duty, provided for in item 28 of the general table of this duty, which affected some floors or independent divisions of that urban property, relating to the year 2015.

• The assessments of Stamp Duty now contested affected only the fractions assigned to housing.

• Regarding urban properties not constituted in the regime of horizontal property ownership, composed of various floors or divisions with independent use and housing assignment, the subjection to Stamp Duty contained in Item 28.1 of the GTSD is determined by the Tax Property Value ("TPV") attributed to each of its floors or divisions and not by the TPV resulting from the sum thereof, in accordance with the norms of the CMRI and with a teleological interpretation of the norm;

• However, the respondent treated each of the fractions as independent economic units according to the rules provided in the Municipal Property Tax Code ("CMRI"), by reference in Item 28.1 of the GTSD;

• In the understanding of the applicants, these acts of assessment of stamp duty (item 28.1 of the GTSD), are illegal due to errors in their respective factual and legal presuppositions, in that none of the floors or independent divisions of this property of the applicants that the TA taxed in respect of stamp duty, Item 28.1 GTSD, has a TPV exceeding €1,000,000.00 (one million euros) if individually considered.

• The assessments of stamp duty further violate the principle of tax equality, since, if the property in question had been constituted in the regime of horizontal property ownership there would be no place for stamp duty taxation, given that the TPV attributed to each of its fractions intended for housing does not exceed €1,000,000.00.

• The applicants have already made payment of the first installment of Stamp Duty relating to the assessments object of the present proceedings and which in their understanding is illegal due to the defects pointed out.

1. The ATA – Tax and Customs Administration, called upon to pronounce itself, contested the applicant's claim, defending itself through objection, in summary, with the following grounds:

a. The concept of property is defined in article 2, paragraph 1 of the CMRI, being established in its paragraph 4 that in the regime of horizontal property ownership, each autonomous fraction is deemed to constitute a property.

b. It follows from the analysis of the normative provision that a "property in full ownership with floors or divisions susceptible to independent use" is unequivocally different from a property in the regime of horizontal property ownership constituted by autonomous fractions, that is, several properties.

c. As for the assessment of municipal property tax, when dealing with properties in full ownership, the PV that serves as the basis for its calculation, will be the total TPV of the property.

d. For purposes of stamp duty, the property in its entirety is relevant, since divisions susceptible to independent use are not deemed to be a property, but only autonomous fractions in the regime of horizontal property ownership, in accordance with paragraph 4 of article 2 of the CMRI.

e. What expressly results from the letter of the law is that the legislator wished to tax with item 28.1 under discussion the properties as a single legal-tax reality, as mentioned below.

f. The subjection to stamp duty of item 28.1 of the General Table attached to the Tax Code results from the combination of two facts: the housing assignment and the tax property value of the urban property registered in the matrix being equal to or exceeding €1,000,000.00.

g. Properties being in the regime of full ownership, not having autonomous fractions, to which the tax law attributes the qualification of property, because from the notion of property of article 2 of the CMRI only autonomous fractions of property in the regime of horizontal property ownership are deemed to be properties – paragraph 4 of the cited article 2 of the CMRI, the defect of violation of law due to error as to legal presuppositions should be judged without merit.

1. It being verified that there is no situation provided for in article 18, paragraph 1 of the LRAT that would make necessary the arbitral meeting provided for therein, its holding was dispensed with on the grounds of prohibition of performance of useless acts and also on the principles of speed, simplification and procedural informality.

The holding of arguments was also dispensed with, under the terms of article 18, paragraph 2 of the LRAT, "a contrario".

1. The tribunal is materially competent and is regularly constituted under the terms of the LRAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate it.

1. It is necessary to solve the following issues:

a) Whether the assessments object of the present proceedings are illegal and, in consequence, should be annulled.

b) Whether the respondent should be condemned to reimburse to the applicant the amounts paid with indemnification interest at the legal rate.

II – Relevant Facts

1. The following facts are considered proven:

2. The applicants are co-owners in equal shares of an urban property situated at …, nos. … to …, in Lisbon, registered in the urban property matrix under article U -…, of the parish of …, Lisbon.

3. The aforementioned property was valued considering the respective floors or independent divisions, having been attributed to each of such parts an autonomous tax property value, in the following terms:

Shop 97 - with a tax property value of €190,880.00;

Shop 98 – with a tax property value of €239,880.00;

1st independent floor intended for housing – with a tax property value of €357,670.00;

2nd independent floor intended for housing – with a tax property value of €357,670.00;

Independent attic intended for housing – with a tax property value of €296,190.00.

1. The Tax Authority and Customs Authority effected the assessments of Stamp Duty provided for in item 28 of the general table of stamp duty which affected some floors or independent divisions of that urban property relating to the year 2015.

2. Each assessment effected by the respondent respects one floor or independent division, in the following terms:

1st independent floor – with a tax property value of €357,670.00: Assessment in the amount of €1,788.55, to each of the applicants.

2nd independent floor – with a tax property value of €357,670.00: Assessment in the amount of €1,788.55, to each of the applicants.

Independent attic – with a tax property value of €296,190.00: Assessment in the amount of €1,480.95 to each of the applicants.

1. The applicants paid the amount of the first installment of Stamp Duty in the amounts of €596.13, €596.13 and €493.65 each.

Regarding facts alleged by the respondent with interest for the decision of the case, there are no unproven facts.

1. The conviction of the tribunal as to the decision of factual matters was based on the documents in the proceedings, as well as the arguments presented, it being noted that the parties agree regarding the factual matters, with disagreement being confined to the law.

III – Applicable Law

1. Item 28 of the General Table of Stamp Duty provides that the following is subject to stamp duty: ownership of properties with housing assignment with tax property value equal to or exceeding €1,000,000, as follows:

"Ownership, usufruct or right of superficies of urban properties whose tax property value contained in the matrix, in accordance with the Municipal Property Tax Code (CMRI), is equal to or exceeding (euro) 1,000,000 - on the tax property value used for purposes of municipal property tax:

28.1 For each residential property or land for construction whose authorized or foreseen building shall be for housing, in accordance with the provisions of the Municipal Property Tax Code: 1%.

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

1. Article 67, paragraph 2 of the Tax Code establishes that "To matters not regulated in this Code regarding item no. 28 of the General Table, the provisions of the CMRI apply, subsidiarily".

Article 2, paragraph 4 of the Municipal Property Tax Code (hereinafter CMRI) provides that "For purposes of this tax, each autonomous fraction, in the regime of horizontal property ownership, is deemed to constitute a property".

Article 92 of the same code further establishes:

"1 - To each building in the regime of horizontal property ownership corresponds only one registration in the matrix.

2 - In the generic description of the building, the fact that it is in the regime of horizontal property ownership must be mentioned.

3 - Each of the autonomous fractions is described in detail and individualized by the capital letter that corresponds to it according to alphabetical order."

In turn, article 12, paragraph 3 of this code establishes that "Each floor or part of property susceptible to independent use is considered separately in the matrix registration, which also discriminates the respective tax property value".[1]

Writing on this norm, J. Silvério Mateus and L. Corvelo de Freitas tell us: "An example that can illustrate this situation is the case of an urban property, not constituted in horizontal property ownership and which is composed of several floors. Legally this property constitutes a single unit (…).

However, since each of these units can be the object of rental or any other use by its respective owner, the matrix must evidence these units and a tax property value must be attributed to each of them".[2]

It appears, thus, that article 12, paragraph 3, of the CMRI, is applicable to situations of properties in conditions to satisfy the objective requirements for submission to the regime of horizontal property ownership, provided for in article 1415 of the Civil Code, but in which the existence of a constitutive deed does not verify.

1. Regarding urban properties in conditions to satisfy the objective requirements for submission to the regime of horizontal property ownership, in substance, the economic reality object of taxation is not altered by the fact that the act of constitution of horizontal property ownership has, or has not, occurred. From the perspective of the taxation of these realities, there is no substantive difference in treatment in the CMRI of a property based on the constitution of horizontal property ownership.

In fact, in the regime of articles 38 et seq. of the CMRI which regulate the determination of the tax property value of properties, no substantive differentiation is detected between properties constituted in horizontal property ownership and properties with objective conditions for such, but in which submission to such regime did not occur[3], namely, such circumstances are not contained in the majorative or minorative elements provided for in the tables of articles 43, paragraph 2 of the code.

1. The essential question to be solved in the present proceedings relates to whether in properties with parts or floors susceptible to independent use, but not submitted to the regime of horizontal property ownership, the property will be considered as a unit for purposes of application of item 28 of the GTSD or whether its independent parts will be considered individually.

In the first case, the value relevant for purposes of subsumption to item 28 will be that resulting from consideration of the totality of its parts and, in coherence, only one assessment should be effected, only regarding the property, and not as many assessments as there are parts or floors susceptible to independent use.

In the second case, the value to be considered for this purpose will be that of each of the parts susceptible to independent use similarly to what occurs with autonomous fractions of properties submitted to the regime of horizontal property ownership, and as many assessments should be effected as there are parts susceptible to independent use but, only and solely, regarding parts susceptible to independent use whose value is equal to or exceeding €1,000,000.

The TA effected as many assessments as there are parts susceptible to independent use, a procedure which in our view does not harmonize with its own thesis that, in these cases, the reality targeted by Item 28 of the GTSD is the property in its entirety and not each of its autonomous parts.

1. The question has already been addressed in several arbitral decisions[4], which were, in the majority, to the effect that the value to be considered for this purpose will be that of each of the parts susceptible to independent use similarly to what occurs with autonomous fractions of properties submitted to the regime of horizontal property ownership, a solution which we consider correct.

In a first interpretive moment of item 28 of the GTSD, the expression "urban properties", in conjunction with article 2, paragraph 4 of the CMRI, which attributes the quality of urban property to autonomous fractions in the regime of horizontal property ownership and, apparently, does not attribute it to parts susceptible to independent use, could point to consideration of the property as a whole.

But, even within the scope of the literal element, the item points in a different direction by referring to "residential property", in that, in cases of properties susceptible to independent use, the assignment can only be determined fraction by fraction[5] and not globally, in that it can happen, and frequently does happen in this type of property, that there are parts assigned to housing and others assigned to other purposes.

Thus, the legislator in referring to "residential property", with respect to properties with floors or parts of property susceptible to independent use, could only have had in mind each of these independent parts and not the property in its entirety.

1. This reading of the literal element is in complete harmony with the norms of the CMRI mentioned above, as well as the other interpretive elements, as demonstrated in several CAAD decisions on this matter to whose jurisprudence we adhere without reservation.

As was written in the decision rendered in process 50/2013-T:

"the ratio legis underlying the rule of item 28 of the GTSD, introduced by Law no. 55-A/2012 of 29 October, and in obedience to the provision of article 9 of the Civil Code, according to which the interpretation of the legal norm should not be confined to the letter of the law, but reconstruct from the texts and other interpretive elements the legislative thought, taking into account the unity of the legal system, the circumstances in which it was drafted and the specific conditions of the time in which it is applied.

The legislator in introducing this legislative innovation considered the determining element of contributory capacity urban properties, with housing assignment, of high value (luxury), more precisely, of value equal to or exceeding €1,000,000.00, upon which a special rate of stamp duty began to be imposed, intending to introduce a principle of taxation on wealth externalized in the ownership, usufruct or right of superficies of urban properties of luxury with housing assignment. For this reason, the criterion was the application of the new rate to urban properties with housing assignment, whose TPV is equal to or exceeding €1,000,000.00.

This same conclusion results from the analysis of the discussion of bill no. 96/XII in the National Assembly, available for consultation in the Journal of the National Assembly, Series I, no. 9/XII/2, of 11 October 2012.

The grounds for the measure designated "special rate on urban residential properties of highest value" is based on the invocation of the principles of social equity and tax justice, calling to contribute in a more intense way the holders of properties of high value intended for housing, bringing to bear the new special rate on "houses of value equal to or exceeding 1 million euros."

Clearly the legislator understood that this value, when attributed to a housing unit (house, autonomous fraction or floor with independent use) reflects an above-average contributory capacity and, as such, capable of determining a special contribution to ensure just distribution of tax burden."

1. Based on the foregoing, it is considered that in the case of urban properties with parts or floors susceptible to independent use, the value to be considered for purposes of application of item 28 of the GTSD is the tax property value of each of these independent parts, only those parts susceptible to independent use whose own tax property value exceeds €1,000,000 being subject to this duty.

2. In the case at hand, given that the tax property value of each of the parts susceptible to independent use is lower than that value, they do not come within the scope of the tax provision, and therefore the assessments sub judice suffer from the defect of violation of law and cannot but be annulled.

3. The applicant further asked for the condemnation of the respondent to reimburse the amounts paid corresponding to the assessment object of the present proceedings, as well as the respective indemnification interest.

Let us see.

In accordance with the provision in subparagraph b) of article 24 of the LRAT, the arbitral decision on the merits of the claim of which no appeal or objection lies binds the tax administration from the end of the deadline provided for appeal or objection, and this, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous 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 this purpose", which is in keeping with what is provided for in article 100 of the LGT [applicable by force of the provision in subparagraph a) of paragraph 1 of article 29 of the LRAT] which establishes that "the Tax Administration is obliged, in case of total or partial merit of a claim, judicial objection or appeal in favor of the taxpayer, to the immediate and full restoration of the legality of the act or situation object of the dispute, including the payment of indemnification interest, if applicable, from the end of the deadline for execution of the decision".

Although article 2, paragraph 1, subparagraphs a) and b) of the LRAT uses the expression "declaration of illegality" to define the jurisdiction of arbitral tribunals functioning at CAAD, making no reference to condemnatory decisions, it should be understood that its jurisdiction includes the powers which in judicial objection proceedings are attributed to tax tribunals, and this is the interpretation that is in keeping with the sense of the legislative authorization on which the Government based itself for approving the LRAT, in which it is proclaimed, as a first guideline, that "the tax arbitration process must constitute an alternative procedural means to the judicial objection process and to the action for recognition of a right or legitimate interest in tax matters".[6]

The judicial objection process, although essentially a process of annulment of tax acts, admits condemnation of the Tax Administration in the payment of indemnification interest, as is apparent from article 43, paragraph 1 of the LGT, in which it is established that "indemnification interest is owed when it is determined, in a gracious claim or judicial objection, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due" and from article 61, paragraph 4 of the CPPT (in the version given by Law no. 55-A/2010, of 31 December, to which corresponds paragraph 2 in the original version), which "if the decision recognizing the right to indemnification interest is judicial, the period for payment is counted from the beginning of the period of its spontaneous execution".

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

In the case at hand, it is clear that, following the declaration of illegality of the assessment acts, there is a place for reimbursement of the tax paid (first installment relating to the assessment object of the proceedings), by force of the aforementioned articles 24, paragraph 1, subparagraph b) of the LRAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act object of the arbitral decision had not been performed".

1. As regards indemnification interest, it is appropriate to also appraise this claim in light of article 43 of the General Tax Law.

Paragraph 1 of that article provides that "Indemnification interest is owed when it is determined, in a gracious claim or judicial objection, that there was error attributable to the services from which results payment of the tax debt in an amount greater than legally due".

We adopt the understanding of Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa who sustain that "The error attributable to the services that operated the assessment is demonstrated when a gracious claim or judicial objection of that same assessment is conducted and the error is not attributable to the taxpayer" (GENERAL TAX LAW, Annotated and Commented, writing meetings, 4th Edition, 2012, page 342).

In the case "sub judice", given that the error that gave rise to the assessments now annulled is not attributable to the applicant, the request for condemnation of the respondent regarding indemnification interest cannot but proceed.

1. Thus, the Tax Authority and Customs Authority should give execution to the present decision, in the terms of article 24, paragraph 1 of the LRAT, reimbursing the amounts paid by the applicant relating to the annulled assessments, with indemnification interest at the legal rate.

Indemnification interest is owed from the date of payment until the date of processing of the credit note in which it is included (article 61, paragraph 5 of the CPPT).

IV – Decision

Therefore, the arbitral tribunal decides, judging the claim for arbitral pronouncement to be entirely meritorious:

a) Decree the annulment of the assessments object of the present proceedings.

b) Condemn the respondent to reimburse to the applicant the amounts paid with indemnification interest at the legal rate, counted from the date of payment by the applicant until the date of processing of the credit note.

Value of the action: €10,115.30 (ten thousand one hundred and fifteen euros and thirty cents) in accordance with the provision in article 306, paragraph 2 of the CPC and 97-A, paragraph 1, subparagraph a) of the CPPT and 3, paragraph 2 of the Costs Regulation in Arbitration Proceedings.

Costs payable by the respondent in the amount of €918.00 (nine hundred and eighteen euros) in accordance with paragraph 4 of article 22 of the LRAT.

Let it be notified.

Lisbon, CAAD, 2.03.2017

The Arbitrator

Marcolino Pisão Pedreiro

[1] Also in the sense of the separate consideration of these parts susceptible to independent use, article 119, paragraph 1 of the CMRI determines that the document for collection of the tax will contain the "discrimination of properties, their parts susceptible to independent use, respective tax property value".

Pointing also in the same sense, article 15-O of Decree-Law no. 287/2003, of 20 November, added by Law 60-A/2011 of 30/11, referring to the collection of municipal property tax for purposes of the safeguard regime, mentions "property or part of urban property object of general assessment".

[2] THE TAXES ON REAL PROPERTY, THE STAMP DUTY, Annotated and Commented, Engifisco, 1st Edition, 2005, pages 159-160.

[3] This was already the case under the Code of Real Property Contribution and the Tax on Industry and Agriculture and the Code of Municipal Contribution.

The circulars nos. 40012, of 23.12.1999 and 40.025, of 11.08.2000 (which can be consulted in MUNICIPAL PROPERTY TAX CODE, Commented and annotated, by Martins Alfaro, Áreas Editora, 2004, 589-592 and in the cited work of Silvério Mateus and Corvelo de Freitas, pages 294-295 and 259-261, and the second can still be consulted at the website http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/oficios_circulados_contribuicao_autarquica.htm) even clarified the understanding that unless in cases of reconstruction, modification or improvement of the property that implies some variation of the taxable value, the transition to the regime of horizontal property ownership does not give rise to new assessment.

[4] Among others, those rendered in processes 50/2013-T, 132-2013-T, 181/2013-T, 183/2013-T, 185/2013-T, 248/13, 177/2014-T, 396/2014-T, 461/2015-T and 474/2015-T, which can be consulted at https://caad.org.pt/.

In the same sense the judgment of the Supreme Administrative Court of 9.09.2015, rendered in proc. 047/15, in whose summary can be read:

"I - Regarding properties in vertical ownership, for purposes of incidence of Stamp Duty (Item 28.1 of the GTSD, in the version of Law no. 55-A/2012, of 29 October), subjection is determined by the combination of two factors: the housing assignment and the TPV contained in the matrix equal to or exceeding €1,000,000.

II - In the case of a property constituted in vertical ownership, the incidence of stamp duty should be determined, not by the TPV resulting from the sum of the TPV of all divisions or floors susceptible to independent use (individualized in the matrix article), but by the TPV attributed to each of these floors or divisions intended for housing."

[5] We use the expression here in the sense of part or floor susceptible to independent use.

[6] On this question see Jorge Lopes de Sousa, Commentary on the Legal Regime of Tax Arbitration, in GUIDE TO TAX ARBITRATION, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, pages 110-116).