ARBITRAL DECISION

Process no. 447/14-T

Claimant: A…

Respondent: Tax and Customs Authority

The arbitrator Ricardo Reigada Pereira, appointed by the Ethics Council of the Center for Administrative Arbitration ("CAAD") to constitute the present Arbitral Tribunal, constituted on 1 September 2014, decides as follows:

I. Report

A. Summary of the Proceedings

1. A…, single…, resident in …, taxpayer no. … (the "Claimant") came, pursuant to Article 10, numbers 1 and 2 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters – "LRAT"), to submit a request for the constitution of an arbitral tribunal and for an arbitral decision on 26 June 2014.

2. The Claimant seeks an arbitral decision for the purpose of annulling the Stamp Duty assessment issued by the Tax and Customs Authority ("TA") – the "Respondent" – in the total amount of €7,535.65 (seven thousand, five hundred and thirty-five euros and sixty-five cents). The assessment is based on item 28.1 of the General Table of Stamp Duty ("GTSD"), concerning an urban property composed of land intended for construction.

3. The Claimant also seeks to annul the express decision to reject the gracious complaint submitted by it and notified to it on 9 April 2014, following the Stamp Duty assessment in question. For this purpose, the Claimant lists this second request as subsidiary to the first.

4. In summary, the Claimant considers that:

(a) item 28.1 of the GTSD is inapplicable to the case in question, since land intended for construction is not within the scope of the tax base of the rule;

(b) the decision to expressly reject the gracious complaint submitted by it is illegal due to violation of the principles of participation and reasoning, insofar as that decision omitted any reference to the constitutionality challenged by the Claimant in the gracious complaint ("ex vi" of the alleged violation of the principles of equality and proportionality); and

(c) the decision to expressly reject the gracious complaint submitted by it is also illegal for having omitted any reference to the non-application of Article 41 of the Code of Municipal Property Tax ("CMPT"), argument raised by the Claimant in its right to a hearing on the draft rejection of the gracious complaint.

1. The TA replied on 2 October 2014, stating that the concept of "property with residential use" should comprise, in its view, both constructed properties and land intended for construction, taking into account the literal meaning of the rule. In the opinion of the TA, the assessment in question constitutes a correct interpretation and application of the law to the facts, suffering from no vice of violation of law, either of the Stamp Duty Code or of the Constitution of the Portuguese Republic. On those grounds, the Claimant's claim should be considered unfounded and the TA absolved of the request.

2. The TA requested, simultaneously with the presentation of its reply, that the meeting referred to in Article 18 of the LRAT be dispensed with, since no exception had been raised capable of hindering the examination of the merits of the disputed question, nor had the Claimant requested the production of any additional evidence.

3. The Arbitral Tribunal decided not to accede to that request from the TA since the Claimant had not attached to the proceedings the access code to the certificate of property registration of the property in question, contrary to what it had stated in the request for constitution of an arbitral tribunal and in the request for an arbitral decision. At the same time, the signature of the judicial representative was also missing from the request for constitution of an arbitral tribunal and the request for an arbitral decision, and the respective power of attorney was not on file. Although these were situations for which responsibility could not naturally be imputed to the TA, the meeting referred to in Article 18 served, primarily, to remedy such gaps in the elements presented by the Claimant and, at the same time, to request the TA to attach to the proceedings the appointment order of the legal adviser of the Legal Advisory and Contentious Services Division who had intervened in the arbitral proceedings.

4. At the aforementioned meeting – held on 22 October 2014 and to which the TA did not object, despite not having been present – it was agreed that no written pleadings would be submitted.

B. The Claimant's Claim and Arguments

1. Following the Stamp Duty assessment no. 2013 …, relating to the year 2012, the Claimant decided to submit the respective gracious complaint thereof. It did so on 29 November 2013.

2. The gracious complaint contained two requests, pursuant to which:

"a) The assessment note complained of should be annulled, by virtue of the Stamp Duty Code [SDC] not taxing the ownership of land intended for construction, but of constructed properties with residential use;

b) The present assessment note should be annulled, on grounds of unconstitutionality, due to violation of the principle of equality and of tax proportionality."

1. On 20 January 2014, the Tax Authority would notify the Claimant of its draft decision.

2. In view of the same, the Claimant decided to exercise on 29 January 2014 the right to a prior hearing pursuant to Article 60 of the General Tax Law. The reasoning thereof was based on two distinct points. On the one hand, it pointed out that the draft decision addressed only one of the requests of the gracious complaint, saying nothing about the request for annulment of the assessment "ex vi" of the alleged unconstitutionality resulting from the violation of the principle of equality and the principle of tax proportionality. On the other hand, it argued that the allocation coefficient set out in Article no. 41 of the CMPT – argument raised by the TA – presupposed the existence of constructed properties and that such rule cannot be used as a tax base rule, especially since the CMPT has a rule on what should be understood as property.

3. Despite the exercise of the right to a hearing, the gracious complaint would be rejected on 9 April. This rejection led to the request for constitution of an arbitral tribunal and for an arbitral decision. Requests that were filed with the CAAD on 26 June 2014.

C. The Respondent's Arguments

1. In the context of the pending gracious complaint, the TA would notify the Claimant on 20 January 2014 of its draft decision, in which it argues that "from the reading of item 28.1 of the General Table of Stamp Duty where it is stated that urban properties with residential use and with a value equal to or greater than one million euros are subject to taxation, and contrary to what the complainant understands, it is the opinion of the Tax Administration that properties that are land intended for construction and to which residential use has been attributed within the scope of their respective assessments (such use appearing in the respective matrices and property cards) are subject to Stamp Duty, and that the fact that in the tax base rule (item 28.1 of the GTSD) property with residential use has been emphasized in preference to residential property makes an appeal to the allocation coefficient (Article 41 of the CMPT) that applies equally to all urban properties and because it appears in the property matrix and property card attached to the file that the allocation coefficient used as the basis for the assessment is 1, which corresponds, pursuant to the aforementioned Article 41 of the CMPT, to residential use, it is proposed that the REQUEST BE REJECTED." (document no. 3-A of the request for an arbitral decision).

2. Despite the exercise of the right to a hearing by the Claimant, the gracious complaint would be rejected on 9 April. It was determined that nothing more had been added by the Claimant with regard to the alleged need not to apply item 28.1 of the GTSD to the facts in question. In that regard, the TA maintained everything it had already said. As for the unconstitutionality raised by the Claimant, the TA came to argue that "that matter was not addressed", adding immediately thereafter that "that allegation could not be accepted since it is not in a gracious complaint procedure that the unconstitutionality of legal rules can be addressed, and such assessment is the responsibility of the courts or more precisely the Constitutional Court".

3. By virtue of the request for constitution of an arbitral tribunal and for an arbitral decision that the rejection of the gracious complaint triggered, the TA came to present on 2 October 2014 its respective reply to those requests.

4. The reasoning advanced by the TA to justify the assessment in question is grounded, from a legal standpoint, in Articles 2, number 1; 6, number 1 and 45, number 2, all of the CMPT, applicable "ex vi" of Article 67, number 2 of the Stamp Duty Code. This would equally result, in the opinion of the TA, from the applicable rules of interpretation. In summary, the concept of "property with residential use" should comprise, in its view, "both constructed properties and land intended for construction, not least having regard to the literal meaning of the rule". Indeed, the TA even attempts to derive useful effect from the fact that the legislator referred not to "properties intended for residential use" but instead to "properties with residential use", a different expression and allegedly broader, the purpose of which would be to encompass other realities beyond those identified in Article 6, number 1, paragraph a) of the CMPT.

5. The position of the TA also seeks support, for its part, in the fact that the establishment of a potential right to construction has an immediate impact on the value of the property in question. A circumstance to which is added the fact that, in its view, long before the construction of the property became possible, it was possible to determine and establish the use of the land intended for construction, both through an appeal to the Legal Regime for Urban Development and Building and to the Municipal Master Plans.

6. Finally, the TA considers that the unconstitutionality raised by the Claimant should not be taken into account insofar as the provision of item 28.1 of the GTSD would not constitute the violation of any constitutional provision: the rule is general and abstract; it is based on a different assessment of realities that are essentially different and, therefore, no discrimination could be found here; and the legal criterion is adequate and proportionate since it affects all the wealth embodied and manifested in the value of properties whose taxable property value is greater than €1,000,000.00.

7. In short, in the opinion of the TA, the assessment in question constitutes a correct interpretation and application of the law to the facts, suffering from no vice of violation of law, either of the Stamp Duty Code or of the Constitution of the Portuguese Republic. On those grounds, the Claimant's claim should be considered unfounded and the TA absolved of the request.

II. Preliminary Matters

1. This Arbitral Tribunal was regularly constituted on 1 September 2014, the arbitrator having been appointed by the Ethics Council of the CAAD in accordance with the respective legal and regulatory formalities.

2. Recall that the Claimant seeks an arbitral decision to the effect that it annul the Stamp Duty assessment issued by the TA in the total amount of €7,535.65 (seven thousand, five hundred and thirty-five euros and sixty-five cents). At the same time, the Claimant also seeks to annul the express decision to reject the gracious complaint submitted by it, following the Stamp Duty assessment in question. The Claimant lists this second request as subsidiary to the first. The subject matter of the requests for constitution of an arbitral tribunal and for an arbitral decision that arise following a decision to expressly reject that maintains the assessment that was the subject of a gracious complaint cannot fail to be, for that purpose, the act of rejection itself. The subject matter of the arbitral proceedings in these cases is, accordingly, formal and directly, the act of rejection that maintained the assessment that was the subject of the complaint.

3. In short, the request for constitution of an arbitral tribunal and for an arbitral decision has here, necessarily, as its immediate subject matter the decision of the gracious complaint – i.e., the respective express rejection – and as its mediate subject matter the vices imputed to the underlying assessment act. Both are comprised, in any case, within the scope of the cognitive powers of the Arbitral Tribunal, which must examine both aspects relating to vices inherent to the rejection of the gracious complaint and the illegalities imputed to the assessment act which it considered not to exist. The present Tribunal will therefore necessarily have to decide in one of two ways: a) either it confirms the rejection, maintaining the tax assessment act, or, conversely, b) it annuls that rejection, examining the vices imputed to the assessment act, since the request for an arbitral decision must necessarily have as its subject matter both the decision of the complaint and the vices of the assessment act itself.

4. The Arbitral Tribunal is materially competent in accordance with the provision of Article 2, number 1, paragraph a) and Article 30, number 1 of the LRAT.

5. On 22 October 2014, the meeting provided for in Article 18 of the LRAT was held.

6. The parties enjoy legal personality and capacity, are legitimate and are represented (Article 4 and Article 10, number 2 of the LRAT and Article 1 of Order no. 112-A/2011, of 22 March).

7. No procedural defects were identified in the proceedings.

III. Reasoning

A. Established Facts

1. The Claimant enjoys the right to own an urban property located …, current parish of …, identified by the registration entry …, corresponding to land intended for construction. It is, in concrete terms, an urban property composed of land intended for construction with 7,200 m², as stated in the property card attached to the request for an arbitral decision as document no. 1 ("Property").

2. The taxable property value of the Property amounted, at the time, to €1,507,130.00 (one million, five hundred and seven thousand, one hundred and thirty euros). A value that was determined in the year 2012, as evidenced by the respective property card.

3. The Claimant was notified on 30 October 2013 of the Stamp Duty assessment no. 2013 …, relating to the year 2012, in the amount of €7,535.65 (seven thousand, five hundred and thirty-five euros and sixty-five cents) – assessment that appears in document no. 6 attached to the request for an arbitral decision.

4. Following the same, the Claimant came to submit on 29 November 2013 a gracious complaint of the aforementioned assessment.

5. On 20 January 2014, the Tax Authority would notify the Claimant of its draft decision.

6. The Claimant decided, in view of that, to exercise on 29 January 2014 the right to a prior hearing pursuant to Article 60 of the General Tax Law.

7. Despite the exercise of the right to a hearing, the gracious complaint would be rejected on 9 April.

8. The rejection of the gracious complaint led to the request for constitution of an arbitral tribunal and for an arbitral decision. Requests that were filed with the CAAD on 26 June 2014.

9. Such requests triggered the TA's reply of 2 October 2014.

B. Unproven Facts

1. There are no facts relevant to the examination of the merits of the case that should be considered unproven.

C. On the Law

1. The assessment in question is based on item 28.1 of the General Table of Stamp Duty ("GTSD"), which, in accordance with the law then in force, provided that Stamp Duty would be levied in the following situations:

"28 – Ownership, usufruct or right of superficies of urban properties whose taxable property value appearing in the matrix, in accordance with the Code of Municipal Property Tax (CMPT), is equal to or greater than (euro) 1,000,000 - on the taxable property value used for the purpose of Municipal Urban Tax:

28.1 - For property with residential use - 1%;"

1. The wording in question had been introduced by Law no. 55-A/2012, of 29 October 2012, with entry into force on 30 October 2012.

2. For its part, in accordance with Article 6 of Law no. 55-A/2012, of 29 October 2012, it was determined that:

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

a) The taxable event occurs on 31 October 2012;

b) The passive subject of the tax is the one mentioned in number 4 of Article 2 of the Stamp Duty Code on the date referred to in the previous subparagraph;

c) The taxable property value to be used in the assessment of the tax corresponds to what results from the rules provided for in the Code of Municipal Property Tax by reference to the year 2011;

d) The assessment of the tax by the Tax and Customs Authority must be carried out by the end of November 2012;

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

f) The rates applicable are as follows:

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

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

iii) Urban properties when the passive subjects who are not natural persons are resident in a country, territory or region subject to a clearly more favorable tax regime, included in the list approved by order of the Minister of Finance: 7.5%.

2 – In 2013, the assessment of stamp duty provided for in item no. 28 of the respective General Table must apply to the same taxable property value used for the purposes of municipal property tax assessment to be carried out that year.

3 – Failure to deliver, in whole or in part, within the indicated period, the amounts assessed as stamp duty constitutes a tax infringement, punished in accordance with the law."

1. It is in this legislative amendment – which came to impose Stamp Duty on ownership, usufruct or right of superficies over properties – that the origin of the present dispute resides. In concrete terms, it is disputed whether the notion of "property with residential use" is capable of including within its objective scope land intended for construction. The Claimant considers it is not. The TA thinks it is.

2. The question has already been extensively discussed in national case law, including at the level of the Supreme Administrative Court. The position taken by this court has been unanimous.

3. In summary, the case law considers that land intended for construction cannot be subsumed under the concept of "urban property with residential use". That is, the objective scope of the tax base determined by the legislator could not, for that purpose, comprise land intended for construction. The Supreme Administrative Court could hardly have been more eloquent in the terms it used to support its position:

"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 Code of Municipal Property Tax, to which number 2 of Article 67 of the Stamp Duty Code (also introduced by that Law), refers as a secondary measure. And it is a concept which, probably due to its imprecision – a fact all the more serious insofar as it is on the basis of it that the objective scope of the new taxation is determined –, had a short life, since it was abandoned upon the entry into force of the State Budget Law for 2014 (Law no. 83-C/2013, of 31 December), which gave new wording to that item no. 28 of the General Table, and which now determines its objective scope of taxation through the use of concepts that are legally defined in Article 6 of the Code of Municipal Property Tax.

This amendment – to which the legislator did not attribute an interpretive character, nor does it appear to us that it did –, merely makes it unequivocal for the future that land intended for construction, the erection of which, authorized or planned, is for residential purposes is covered by the scope of item 28.1 of the General Table of Stamp Duty (provided that the respective taxable property value is equal to or greater than 1 million euros), clarifying nothing, however, with regard to past situations (assessments for 2012 and 2013), such as the one at issue in the present proceedings." (Decision no. 01870/13 of the Supreme Administrative Court, of 9-4-2014).

1. It was further added, in that same decision, that:

"(...) it does not result unequivocally either from the letter or from the spirit of the law that the intention thereof was, ab initio, to encompass within its objective scope land intended for construction for which the construction of residential buildings had been authorized or planned, as results today unequivocally from item 28.1 of the General Table of Stamp Duty.

From the letter of the law nothing unequivocal emerges, indeed, for it itself, by using a concept which it did not define and which was not even defined in the statute to which it referred as a secondary measure, lent itself, unnecessarily, to ambiguities, in a matter – of tax scope – in which certainty and legal security should also be paramount concerns of the legislator.

And from its 'spirit', discernible in the explanatory statement of the bill that gave rise to Law no. 55-A/2012 (Bill no. 96/XII – 2nd, Parliamentary Gazette, series A, no. 3, 21/09/2012, p. 44, available at www.parlamento.pt), nothing more emerges than the concern to raise new tax revenues from sources of wealth 'less affected' in the past by the tax burden than income from work, in particular capital income, movable capital gains and property ownership, reasons which bring no relevant contribution to the clarification of the concept of 'urban properties with residential use', since they take it for granted, with no concern whatsoever to clarify it. Such clarification came, however – as reported in the Arbitral Decision issued on 12 December 2013, in case no. 144/2013-T, available in the CAAD database –, when presenting and discussing in Parliament that bill, in the words of the State Secretary for Tax Affairs, who is reported to have expressly stated, as appears from the Parliamentary Gazette (Parliamentary Gazette I Series no. 9/XII – 2, of 11 October, p. 32) that: 'The Government proposes the creation of a special levy on high-value residential urban properties. It is the first time in Portugal that a special tax has been created on high-value properties intended for residential use. This levy will be 0.5% to 0.8% in 2012 and 1% in 2013, and will apply to homes valued at equal to or greater than 1 million euros' (emphasis ours), from which it is clear that the reality to be taxed in view is, after all, and despite the terminological imprecision of the law, 'urban residential properties', in common language 'homes', and not other realities" (Decision no. 01870/13 of the Supreme Administrative Court, of 9-4-2014).

1. As for the argument, presented by the TA, that in determining the taxable property value of urban properties classified as land intended for construction, account should be taken of the use that the construction authorized or planned for it would have, the Supreme Administrative Court, for its part, said the following:

"The fact that it can be considered that in determining the taxable property value of urban properties classified as land intended for construction account should be taken of the use that construction authorized or planned for it will have for determining the respective value of the implementation area (see numbers 1 and 2 of Article 45 of the CMPT), does not determine that land intended for construction can be classified as 'property with residential use', since 'residential use' always appears in the Code of Municipal Property Tax as referred to 'buildings' or 'constructions', existing, authorized or planned, since only these can be inhabited, which is not the case with land intended for construction, which does not, in itself, have conditions for such use, not being capable of being used for residential purposes except if and when the construction authorized and planned for it is erected thereon (but in that case it will no longer be 'land intended for construction' but another class of urban properties – 'residential', 'commercial, industrial or for services' or 'other' – Article 6 of the CMPT).

It would be strange, indeed, if the determination of the scope of the objective tax base of item no. 28 of the General Table of Stamp Duty were, in the end, found in the rules for determining the taxable property value of the Code of Municipal Property Tax, and if the terminological imprecision of the legislator in drafting that rule were, after all, elucidated and finally clarified by means of an indirect and ambiguous reference to the allocation coefficient established by the legislator in relation to constructed properties (Article 41 of the Code of Municipal Property Tax).

Thus, given that a parcel of land intended for construction – whatever the type and purpose of the building that will be, or may be, erected on it – does not, by itself alone, satisfy any condition for being licensed as such or for defining as its normal destination residential use, and given that the tax base rule of the Stamp Duty relates to urban properties with 'residential use', without any specific concept being established therefor, no potential future use inherent in a different property which may perhaps be erected on the land can be extracted therefrom."

1. In light of the foregoing, the Supreme Administrative Court could not have decided in any other way than as follows:

"It is concluded therefore, in accordance with what was decided in the judgment under appeal, that, resulting from Article 6 of the Code of Municipal Property Tax a clear distinction between 'residential' urban properties and 'land intended for construction', the latter cannot be considered as 'property with residential use' for the purposes of the provision of item no. 28.1 of the General Table of Stamp Duty, in its original wording, as was conferred upon it by Law no. 55-A/2012, of 29 October."

1. This understanding would be uniformly taken by the Supreme Administrative Court in several other decisions: Decision no. 048/14, of 9-4-2014; Decision no. 0270/14, of 23-4-2014; Decision no. 0271/14, of 23-4-2014; Decision no. 0272/14, of 23-4-2014; Decision no. 046/14, of 14-5-2014; Decision no. 055/14, of 14-5-2014; Decision no. 01871/13, of 14-5-2014; Decision no. 0274/14, of 14-5-2014; Decision no. 0317/14, of 14-5-2014; Decision no. 0395/14, of 28-5-2014; Decision no. 0425/14, of 28-5-2014; Decision no. 0467/14, of 2-7-2014; Decision no. 0676/14, of 9-7-2014; Decision no. 0503/14, of 10-9-2014; Decision no. 0707/14, of 10-9-2014; Decision no. 0708/14, of 10-9-2014; Decision no. 0740/14, of 10-9-2014; Decision no. 0825/14, of 24-9-2014; Decision no. 01533/13, of 24-9-2014; Decision no. 0739/14, of 24-9-2014; Decision no. 0505/14, of 29-9-2014; Decision no. 0864/14, of 29-9-2014; Decision no. 0530/14, of 5-11-2014.

2. An identical position was taken in the abundant arbitral case law on the subject.

3. Now, the Arbitral Tribunal sees no reason, quite to the contrary, not to align itself with the same understanding that has been adopted in the existing case law on the subject. It is, essentially, the only interpretation consistent with the principle of tax legality enshrined in the Constitution of the Portuguese Republic. A principle that requires that the essential regulation of each tax – which naturally includes its objective scope – be contained in the law or authorized decree-law that creates it. In the view of the Arbitral Tribunal, item 28.1 of the GTSD proves to be manifestly incapable of encompassing within the scope of its normative provision land intended for construction in light of the wording that was in force at the time of the facts. The State Budget Law for 2014 came, for its part, to make that fact even more unequivocal.

IV. Decision

1. On the foregoing grounds, the Arbitral Tribunal decides to find the request for an arbitral decision to be well-founded, with the consequent annulment of the Stamp Duty assessment in question, with all the legal consequences that follow.

2. The value of the proceedings is set at €7,535.65 (seven thousand, five hundred and thirty-five euros and sixty-five cents), taking into account the economic value of the proceedings determined by the value of the tax assessment in question.

3. Furthermore, the amount of the costs is set at €612.00 (six hundred and twelve euros), to be borne by the Respondent in accordance with Article 12, number 1 of the LRAT, Article 4 of the Regulations on Costs for Tax Arbitration Proceedings and Table I attached to the latter.

Lisbon, 29 November 2014

The Arbitrator

Ricardo Reigada Pereira