CAAD Ruling 427/2018-T: Stamp Tax on Construction Land Under Verba 28.1 TGIS

ARBITRAL AWARD

I – Report

A..., LDA – IN LIQUIDATION (hereinafter, "Claimant"), with NIPC ..., with registered office at Rua ... no. ..., ..., room ..., ...-... Lisbon, here represented by its Insolvency Administrator, filed a request for constitution of a Collective Arbitral Tribunal, in accordance with the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "LFATM"), in which the Tax and Customs Authority (hereinafter "TCA" or "Respondent") is the Respondent.

The Claimant hereby seeks, in cumulation of claims, an arbitral pronouncement on the illegality of the act of rejection of the administrative complaint no. ...2017..., and consequent annulment, of the assessment acts under Stamp Duty (hereinafter "SD") pursuant to article 1, 1 of the Stamp Duty Code (hereinafter "SDC") and to Item 28.1 of the General Table of Stamp Duty (hereinafter "GTSD"), relating to properties with articles ..., ..., ..., located in the parish of ... (...), municipality of ..., of which the Claimant was then owner, and formalized in assessments no. 2016..., no. 2016 ... and no. 2016 ... (U-...), no. 2016..., no. 2016 ... and no. 2016 ... (U-...), no. 2016 ..., no. 2016 ... and no. 2016 ... (U-...), in the total amount of €78,886.73.

In accordance with the provisions of article 6(2)(a) and article 11(1)(b) of the LFATM, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the office within the applicable time period, and notified the parties of such appointment on 24-10-2018.

The Collective Arbitral Tribunal was constituted on 14-11-2018; it was constituted regularly and is materially competent, in accordance with the provisions of articles 2(1)(a), 5, 6(1), and 11(1) of the LFATM (as amended by article 228 of Law no. 66-B/2012, of 31 December).

In accordance with articles 17(1) and (2) of the LFATM, the TCA was notified on 15-11-2018 to submit its response.

The TCA submitted its Response on 13-12-2018.

In that response, the TCA argues, in summary, for the complete dismissal of the Claimant's claim.

The Arbitral Order of 02-01-2018 dispensed with the holding of the meeting referred to in article 18 of the LFATM, and granted the parties the opportunity to submit written submissions, which they did, commenting on the evidence produced and reiterating and developing their respective legal positions.

The case does not suffer from any nullities and there remain no further preliminary or subsequent questions, either prejudicial or exceptional, that would prevent the decision on the merits of the case, the conditions being met for a final decision to be rendered.

The TCA proceeded to appoint its representatives in the proceedings and the Claimant submitted a power of attorney, with the Parties thus being properly represented.

The Parties have legal personality and capacity and have standing, in accordance with articles 4 and 10(2) of the LFATM and article 1 of Order no. 112-A/2011, of 22 March.

II – Grounds: Factual Matters

II.A. Facts Considered Proven and Relevant to the Decision

The Claimant is a commercial company constituted in the form of a limited liability company, whose corporate purpose included, among others, the trading of real estate, buying and selling and resale of properties acquired for that purpose.

The Claimant was declared insolvent by judgment rendered in the context of case no. .../12...TYLSB, on 15-07-2014, by the Commercial Court of Lisbon, ... Court of Lisbon.

At the date of the declaration of insolvency, and in 2015, the Claimant held the following urban properties:

Urban property ("land for construction") with matrix article ..., of the parish of ... (...), municipality of ...;

Urban property ("land for construction") with matrix article ..., of the parish of ... (...), municipality of ...;

Urban property ("land for construction") with matrix article ..., of the parish of ... (...), municipality of ...;

In 2015, the aforementioned urban properties were registered in the matrix as "land for construction".

The aforementioned urban properties correspond to plots nos. 1, 2, and 3 resulting from a subdivision operation whose Permit no. .../2007 was issued by the Municipal Council of ..., on 15-11-2007.

Upon conversion to urban properties, the intended use/allocation for the aforementioned land for construction was "Housing".

Following the issuance on 20-08-2009, by the Municipal Council of ... of the Amendment to the Subdivision Permit no. .../2007, the intended use of the land for construction was changed to "Tourism".

Following the issuance of the aforementioned Amendment, the Claimant submitted on 01-09-2009, three Model 1 Declarations of the Municipal Property Tax (IMI), which were duly validated by the Tax Office of ....

The aforementioned Model 1 Declarations of the IMI were submitted on the basis of the change in the intended use of the land for construction – "change in the property's allocation".

The Model 1 Declarations of the IMI were supplemented with location maps/sketches and the constructability feasibility project.

The change in the intended use of the land for construction was registered at the Land Registry through filing no. ..., of 8 September 2009, appearing in the land registry certificates of the land for construction with the following specification "Alter the use/intended allocation for all plots covered by the permit, changing the use from housing to tourism and maintaining the other urban planning parameters initially provided for".

The Tax Office of ... did not record the change in use/allocation of the land plots for construction in their respective urban matrix registers.

From the evaluation sheets prepared following the submission of the Model 1 Declarations of the IMI submitted by the Claimant on 01-09-2009, the intended use/allocation of the land appears as "Housing".

In 2015, the respective land registry records of the urban properties in question contained, in the item "Type of location coefficient: Housing".

The property matrices were updated by the TCA in 2016, following a request submitted by the new owner of the urban properties for that purpose, now containing the reference "Services", in the field "Type of location coefficient".

In 2016, the Claimant was notified of the following Stamp Duty assessments relating to the year 2015 (and corresponding to the apportionment of SD in three installments):

The assessments resulted from the application of article 1, 1 of the SDC, combined with item 28.1 of the GTSD and article 6 of Law no. 55-A/2012, of 29 October.

The Claimant proceeded with the payment of the third installments of Stamp Duty at the end of November 2016, having paid the first and second installments on 20-12-2016, in the context of its adhesion to the Special Program for Reduction of Indebtedness to the State (PERES).

On 30-03-2017, the Claimant submitted an administrative complaint regarding the aforementioned Stamp Duty assessments.

The Claimant was notified of the draft decision rejecting the administrative complaint through Official Letter no. ..., of 11 April to, if it so wished, exercise the right to prior hearing.

On 30-04-2018, the Claimant, represented by the Insolvency Administrator, exercised in writing the right to prior hearing.

The Claimant was notified through Official Letter no. ... dated 21 May 2018, of the decision rejecting the administrative complaint.

II.B. Facts Considered Not Proven

None.

II.C – Grounds for the Proven and Not Proven Facts

With regard to factual matters, the Tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven facts from those not proven (cf. article 123(2) of the Code of Tax Procedure and article 607(3) of the Civil Procedure Code, applicable pursuant to article 29(1)(a) and (e) of the LFATM).

Thus, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the legal question(s) (cf. former article 511(1) of the Civil Procedure Code, corresponding to the current article 596, applicable pursuant to article 29(1)(e) of the LFATM).

Thus, taking into account the positions assumed by the parties, in light of article 110/7 of the Code of Tax Procedure, the documentary evidence and the administrative file joined to the case, the facts listed above were considered proven, with relevance to the decision.

III – Grounds: Legal Matters

III.A. Position of the Claimant

The Claimant begins by alleging that the objective scope of item 28.1 of the GTSD cannot encompass properties that, while registered in the matrix as "land for construction", cannot be subsumed under the concept of "properties with housing allocation", that concept which is part of the legal provision.

Analyzing the context of the introduction of item 28 of the GTSD, the Claimant emphasizes that, even after the amendments introduced by Law no. 83-C/2013, of 31 December, which entered into force on 1 January 2014, taxation continues to be confined to situations in which actual construction on the land has been authorized or provided for, and such construction is intended for "housing".

Thus, it argues, it will not be sufficient that the mere matrix registration of a property identifies it as "land for construction", being necessary additionally that, case by case and concretely, it be determined whether its use for "housing" is provided for or authorized, which will require that the entire administrative process associated with construction has been successfully promoted and that there exists a valid construction license/authorization and an approved project.

The Claimant alleges that the assessments now challenged suffer from illegality due to error as to the factual presuppositions, since they are based on the erroneous presupposition that the urban properties had, in 2015, an authorized or provided building for "Housing", when, in its understanding, since 2009, those properties had as their allocation/intended use "Services".

The Claimant maintains that, regardless of the incorrectness of the property matrices, there is no doubt that the buildings provided for or authorized are, since 2009, for "Services" and not for "Housing".

Thus, it argues that the fact that the property matrices show that the same have allocation/intended use "Housing" does not prevent it from demonstrating that the information contained in the matrix does not correspond to reality.

The Claimant supports its understanding on the CAAD decision in case no. 205/2013-T, in which it was understood that, having proven a substantive reality different from that contained in the urban property matrix, material truth could not fail to prevail.

The Claimant thus understands that the three cumulative legal presuppositions on which the incidence of item 28.1 of the GTSD depends are not fulfilled.

It further states that from the available interpretive elements, including the circumstances in which the law was enacted and the specific conditions of the time in which it is applied, clearly point to the fact that it was not intended to encompass within the scope of item 28.1 of the GTSD non-residential properties and land for construction as to which construction is authorized or provided for purposes other than housing.

The Claimant further alleges that the contested assessments suffer from the defect of lack of grounds, in accordance with article 152(2) of the Administrative Procedure Code, applicable pursuant to article 29(1)(d) of the LFATM, since the TCA failed to demonstrate the existence of the taxable fact on which the assessments depend.

The Claimant alleges that it has paid in full the amounts assessed, asking therefore to be reimbursed and to be awarded indemnifying interest, for having made this undue payment and for an error imputable to the services being identifiable, in accordance with article 24(1)(b) and (5) of the LFATM, articles 43 and 100 of the Tax General Law and article 61 of the Code of Tax Procedure.

III.B. Position of the Respondent

In its Response, the Respondent alleges that the contested assessments are legal, and no error on the part of the services occurred in subjecting the property in question to the norm of Item 28.1 of the GTSD.

The Respondent considers that the evidence it submitted to the arbitral proceedings, specifically the land registry records prove that the properties in question had, in 2015, housing allocation.

The Respondent recalls that the Claimant cannot be unaware that the land registry record is very clear in defining for the plots of land for construction in question their respective building implantation area and construction area, such that the housing allocation of the building is patent.

III.C. Questions to be Decided

III.C.1 – On the Merits of the Case

The sole question to be resolved in the present tax arbitration proceedings concerns the application of item 28.1 of the table appended to the SDC (General Table of Stamp Duty) to the urban properties ("land for construction") with matrix article ..., ... and ..., all of the parish of ... (...), municipality of ...

At issue is thus the definition of the scope of item no. 28.1 of the GTSD, in the wording given by Law no. 83-C/2013, of 31 December, more specifically to determine whether the land for construction in question in the present case can be subsumed under the concept of "land for construction whose construction, authorized or provided, is for housing, in accordance with the provisions of the Code of the IMI" to which the aforementioned item refers, taking into account that the property value is greater than €1,000,000.00.

The question arises due to the taxation under Stamp Duty of the ownership, usufruct or right of superficies of urban properties whose taxable property value, recorded in the matrix, is equal to or greater than €1,000,000, in which case stamp duty is due, at the rate of 1%, on the taxable property value used for purposes of the Municipal Property Tax, per property with housing allocation.

This question is not new, having been the subject of consideration both in arbitral jurisdiction and in the jurisprudence of the Supreme Administrative Court; and, within the framework of the wording of the SDC given by Law no. 55-A/2012, of 29 October, the decisions rendered were always in a sense contrary to what the Tax Administration sought[1].

The situation sub iudice, however, takes place within a differentiated legal framework, insofar as the facts should be appreciated in light of the wording of the SDC introduced by the State Budget for 2014, Law no. 83-C/2013, of 31 December (article 194, under the heading - Amendment to the General Table of Stamp Duty), in accordance with which item 28.1 of the General Table of Stamp Duty, appended to the Stamp Duty Code, approved by Law no. 150/99, of 11 September, now has the following wording:

"28.1 — Per residential property or per land for construction whose construction, authorized or provided, is for housing, in accordance with the provisions of the Code of the IMI — 1%".

Within this new legal framework, decisions have already been rendered in arbitral proceedings, also in a sense unfavorable to what the TCA sustained[2].

The aforementioned jurisprudence is based on the understanding that item 28.1 of the GTSD should be considered as fulfilled when:

"regarding land for construction, whether or not located within an urban agglomeration, as defined in article 3(4) of this Act [IMI Code], should be considered as such the land for which there has been granted: - permit for subdivision operation; - permit for construction; - authorization for subdivision operation; - authorization for construction; - favorable prior notice of subdivision operation or construction admitted; favorable prior notice issued for subdivision operation or construction, as well as; - those that have been so declared in the acquisition title, it being necessary to take into account that, for that purpose as well, only the acquisition title with the form prescribed by civil law should be relevant, that is, the deed or the authenticated private document referred to in article 875 CC." [see ANTÓNIO SANTOS ROCHA / EDUARDO JOSÉ MARTINS BRÁS – Taxation of Assets. IMI-IMT and Stamp Duty (Annotated and Commented). Coimbra, Almedina, 2015, p. 44]."[3]

Also in the award rendered in arbitral case 142/2016T, already cited, which also concluded for the granting of the claim filed there, the following can be read:

"There is no indication in these norms of the GTSD and the IMI Code of what should be understood by 'provided construction', but, taking into account the documents required to carry out the evaluation of land for construction, indicated in article 37(3) of the IMI Code, it can be concluded that one can only speak of authorized or provided construction when the 'building to be constructed', to which article 45(1) refers, is defined in a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior notice or document evidencing constructability viability".

The understanding of the aforementioned awards is fully subscribed here, as to what, in light of the new wording of the SDC, should be understood as "land for construction whose construction, authorized or provided, is for housing, in accordance with the provisions of the Code of the IMI".

In effect, in accordance with the IMI Code, land for construction, which, in accordance with article 6(1)(c) of that Code, constitutes a type of urban property, may have housing as its allocation, as follows from article 41, also of the IMI Code, allocation which, as follows, moreover, expressly from article 45(5) of the IMI Code, shall be determined on the basis of the elements referred to in article 37 of the same Code, the provision of number 3 of which states:

"With regard to land for construction, a photocopy of the subdivision permit should be presented, which should be replaced, in case there is no subdivision, by a photocopy of the building license permit, approved project, prior notice, favorable prior notice or document evidencing constructability viability".

The mention in item 28.1 of the GTSD under analysis should thus be read as referring to the material content of what, in light of the IMI Code, constitutes "land for construction whose construction, authorized or provided, is for housing", not being satisfied with the mere formality of the TCA – rightly or wrongly – having qualified, in application of the norms of that Code (IMI Code), for purposes of matrix registration a certain property as having that allocation, since, if that were the intention of the legislator, within the presumption of reasonableness that underlies it, it would surely have used the expression "land whose location coefficient type used for purposes of determination of the Taxable Property Value is housing", or another, analogous.

It is not at issue, contrary to what is stated in the decision of the administrative complaint, any defect in the procedure for evaluating the properties, since such procedure is intended exclusively to fix their property value, which is not contested, but solely the verification of the presuppositions of item 28.1 of the GTSD, and among these is manifestly not found the "Type of location coefficient" contained in the property matrices.

It is thus concluded here, as in the aforementioned jurisprudence, that should be considered as "land for construction whose construction, authorized or provided, is for housing, in accordance with the provisions of the Code of the IMI", those lands in which the 'building to be constructed' is defined as intended for housing in a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior notice or document evidencing constructability viability.

This same understanding was recently ratified by the Supreme Administrative Court, in its Award of 28-11-2018, rendered in case 0829/15.5BELLE 01065/16, where the following can be read, among other things:

"Thus, regarding land for construction, whether or not located within an urban agglomeration, must, in accordance with article 6(3) of the IMI Code, be considered as such the land for which there has been granted: - permit for subdivision operation; - permit for construction; - authorization for subdivision operation; - authorization for construction; - favorable prior notice of subdivision operation or construction admitted; favorable prior notice issued for subdivision operation or construction, as well as those that have been so declared in the acquisition title."

Now, in the case, there was proven the existence, as of the date of the taxable event, of a municipal subdivision permit no. .../2007 from the Municipal Council of ..., from which resulted 3 plots, corresponding to 204 housing units for collective housing, with a maximum number of 4 floors, and the creation of 436 parking spaces, of which 130 public spaces and 306 private. The aforementioned permit was the subject of an amendment that changed the allocation of the properties from "Housing" to "Tourism", maintaining the other urban planning parameters initially provided for.

Thus, no doubt persists that the 'building to be constructed' on the land in question is defined in the amendment to the subdivision permit, as being intended for tourism, which falls under the allocation to "Services" (cf. article 6 of the IMI Code).

Recall the wording of Item 28.1 of the GTSD in force as of the date of the facts, which determined the following: "28.1 — Per residential property or per land for construction whose construction, authorized or provided, is for housing, in accordance with the provisions of the Code of the IMI — 1%". From this, immediately, it follows that, given that the land in question, corresponding to matrix articles ..., ... and ..., have a Taxable Property Value of respectively €3,077,992.75, €2,068,660.88 and €2,742,019.13, the objective scope of application is fulfilled.

However, it was demonstrated through the evidence submitted to the proceedings, namely through the amendment to the subdivision permit, that as of the date of the facts, the properties did not have housing allocation, since the construction provided for on the same had the use/intended purpose of "Services".

It should be noted that, even if that intended purpose of the planned construction were not exclusive, and the possibility of housing construction were concurrently provided for, the Supreme Administrative Court has already clarified, in case 080/18, by award of 06-06-2018, that:

"I - In the present situation where a subdivision permit was granted in accordance with which the properties are intended 'for collective housing and commerce/services', this is not a matter of a property whose intended purpose is only housing.

II - Item 28 under analysis does not establish any criterion or need for consideration regarding the percentage in which the property is intended for housing or commerce/services so that we can consider that the legislator took into account such reality and, nothing having been said about it, conclude that it wishes to dissolve it in housing allocation.

III - Law 83-C/2013, of 31 December clarified that the properties previously denominated by it as having housing allocation were, in fact, urban properties or land for construction whose construction, authorized or provided, is for housing.

IV - For the present properties to be encompassed in this normative, it was absolutely necessary that there be an indication that they are also taxed in this respect if the properties are urban or land for construction whose construction, authorized or provided, is, predominantly, for housing."

It is further stated in the aforementioned judgment that:

"In the present situation we know that a subdivision permit was granted by Subdivision Permit no. 5/2006, in accordance with which the properties are intended 'for collective housing and commerce/services', which is different from being intended for housing. Item 28 under analysis does not establish any criterion or need for consideration regarding the percentage in which the property is intended for housing or commerce/services(...)

Nor is it known what the frequency and specific weight in the constructed volume for the real estate market is of the allocation of certain parts of buildings, notably their ground floor, to purposes other than housing, in particular commerce and services, precisely due to economic reasons, financial strategy, relating to profitability and enjoyment of all available spaces, to which the norm in question gives no note or importance. It exists, but we do not know if it is significant and we cannot consider that the legislator took into account such reality and, nothing having been said about it, conclude that it wishes to dissolve it in housing allocation.

On the contrary, we believe that this is a reality that was not taken into account by the legislator, just as it had not properly considered that the law establishes a clear distinction between urban properties that are "residential" and "land for construction", which with Law 83-C/2013, of 31 December clarified that the properties previously denominated by it as having housing allocation were, in fact, urban properties or land for construction whose construction, authorized or provided, is for housing. For the present properties to be encompassed in this normative, it was absolutely necessary that there be an indication that they are also taxed in this respect if the properties are urban or land for construction whose construction, authorized or provided, is, predominantly, for housing under penalty of lacking an extensive interpretation of the scope norm entirely at odds with articles 103(2) and (3) of the Constitution of the Portuguese Republic."

Also in this sense the Award 305/2017-T of 18 January 2018 of the CAAD (available at www.caad.org.pt)

Now, referring the scope norm of item 28.1 of the GTSD to 'residential property or land for construction whose construction, authorized or provided, is for housing', and given that the land in question has provided and authorized construction of properties intended for "Services" (tourism), then, in light of the aforementioned jurisprudence and its grounds, which are accepted, it cannot be considered that they are subject to Stamp Duty, in the terms in which it was assessed.

Having been demonstrated that the allocation of the contested properties is "Services", and that the scope norm does not provide for such a situation, the assessments that are the subject of the present arbitral action should, considering the legal error verified, be annulled.

With regard to the request for indemnifying interest filed by the Claimant, article 43(1) of the Tax General Law establishes that indemnifying interest is due when it is determined that there was an error imputable to the services resulting in payment of the tax debt in an amount greater than that legally due.

In the case, the error affecting the annulled assessments is imputable to the Tax and Customs Authority, which performed the assessment acts on its own initiative, without the necessary factual and legal support.

The Claimant thus has the right to be reimbursed for the amounts it paid (in accordance with the provisions of articles 100 of the Tax General Law and 24(1) of the LFATM) by virtue of the annulled acts and, further, to be indemnified for the undue payment through the payment of indemnifying interest by the Respondent, from the date of payment of the amounts until reimbursement, at the legal supplementary rate, in accordance with articles 43(1) and (4) and 35(10) of the Tax General Law, article 559 of the Civil Code and Order no. 291/2003, of 8 April.

IV. Decision

In light of all the foregoing, it is decided to judge the arbitral claim filed in the present proceedings as well-founded and, consequently:

a) To annul assessments no. 2016..., no. 2016 ... and no. 2016..., no. 2016..., no. 2016 ... and no. 2016..., no. 2016..., no. 2016 ... and no. 2016..., as well as the decision of the administrative complaint that had those as its object;

b) To condemn the Respondent to restitution of the amounts unduly paid by virtue of the annulled assessments, as well as to the payment of the corresponding indemnifying interest, from the date of undue payment of the amounts until their reimbursement, in the terms determined above.

c) To condemn the Respondent in the costs of the proceedings as fixed below.

V. Value of the Proceedings

The value of the proceedings is fixed at €78,886.73 in accordance with the provisions of article 97-A of the Code of Tax Procedure, applicable pursuant to article 29(1)(a) of the LFATM and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

The value of the arbitration fee is fixed at €2,448.00, in accordance with Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely well-founded, in accordance with articles 12(2) and 22(4), both of the LFATM, and article 4(4) of the aforementioned Regulation.

Lisbon, 4 March 2019

The Arbitrators

José Pedro Carvalho
(President)

Pedro Miguel Bastos Rosado
(Member)

Suzana Fernandes da Costa
(Member)

[1] See, for example, Awards 49/2013-T of 18 September 2013, 53/2013-T of 2 October, 231/2013-T of 3 February 2014, Case no. 7/2014-T, of 3 July, 56/2014-T of 31 July, 210/2014-T of 30 July, Case no. 125/2015-T, of 12 October, all of the CAAD (available at www.caad.org.pt) and the STA Award of 9 April 2014, P1870/2013, followed by several others of similar tenor, available at http://www.dgsi.pt/jsta.

[2] See, for example, the decisions of arbitral cases 156/2016T, 142/2016T, 524/2015T, 578/2015T, 467/2015T, 290/2016T and 410/2017T, all available at www.caad.org.pt.

[3] See in this sense, the award rendered in case 156/2016T, already cited.