Stamp Tax on Construction Land Under Verba 28.1: Constitutional Challenge on Equality and Taxable Capacity

ARBITRAL DECISION

I – Report

1. On 28-07-2016, A… ("A…), autonomous patrimony with the fiscal identification number …, hereinafter referred to as "Claimant", represented by its Company B…, S.A., with registered office at Rua…, n.º…, …, …-… Lisbon, requested from CAAD the constitution of an arbitral tribunal, pursuant to article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as "LRAT"), in which the Tax and Customs Authority is the Respondent, with a view to the annulment of the stamp tax assessment act, in the amount of €39,949.30, made on 5.04.2016, relating to the year 2015, pursuant to item 28.1 of the General Stamp Tax Table annexed to Law no. 150/99, of 11 September, which approves the Stamp Tax Code, on the land for construction registered in the urban property matrix of the parish of … and …, municipality of Vila Nova de Gaia, under article … .

The Claimant, alleging that it paid the first and second installment of the assessed tax, further petitions for the restitution of the respective amounts, increased by compensatory interest at the legal rate.

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

Pursuant to and for the purposes of the provision in no. 1, art. 6, of LRAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties, within the legally applicable deadlines, the undersigned was appointed arbitrator, who communicated the acceptance of the appointment to the Deontological Council and the Administrative Arbitration Center within the regularly applicable deadline.

The Arbitral Tribunal was constituted on 19-10-2016.

1. The grounds presented by the Claimant, in support of its claim, were, summarily, as follows:

a. The Claimant considers that the tax incidence norm provided in item 28.1 of TGST is unconstitutional, by violation of the constitutional principles of equality, taxpaying capacity and taxation of companies with incidence fundamentally on their real income, provided for in articles 13, 103 and 104, nos. 1 and 2 of the Constitution of the Portuguese Republic, since the selection of residential allocation as the trigger element of the concrete taxation of urban properties and land for construction is arbitrary and discriminatory.

b. Being true that the holding of real estate property is unquestionably indicative of taxpaying capacity, such capacity is not specially revealed depending on the type of allocation of the property to the point of justifying its individualization for tax purposes, so there is no evidence of special taxpaying capacity in the consideration of some types of properties and not others.

c. Properties with identical tax patrimonial values reveal identical taxpaying capacities, regardless of the use that those properties have, there being no reason that objectively justifies the exclusion of the other types of urban properties.

d. In the same way that the legislator excluded urban properties and land for construction intended for the exercise of economic activities because, given the economic assumption selected, the holding of this type of property, in itself is not considered as indicative of high levels of wealth, rather being associated with the development of economic activities intrinsic to the purposes for which they are intended, for the same reasons it was necessary that it exclude urban properties and land for construction held within the scope of the exercise of the activity of investment in the area of residential building, because the holding by the Claimant of urban properties or land for residential construction does not fulfill that economic assumption.

e. There is no special taxpaying capacity or higher level of wealth of the Claimant revealed by the holding of that type of properties since the holding of properties is inserted exclusively within the scope of the realization of pension plans, always taking into account the type of liabilities financed in order to guarantee the security, income, quality and liquidity of the respective investments, ensuring a prudent diversification and dispersion of such applications, always in the best interest of participants and beneficiaries, and the respective stamp tax is assessed individually in relation to each of the fractions, parts or divisions susceptible to independent use that present residential allocation.

f. There exists manifest inequality and disproportionality in the taxation of land for construction with residential allocation since, in this case, the total tax patrimonial value (hereinafter "TPV") of the land is considered for taxation purposes and not the TPV attributable to each fraction, part or division susceptible to independent use, whose authorized or projected construction is for housing.

g. Until the land for construction is built, and passes to integrate a property (in full or vertical ownership) the taxpayer is taxed on the totality of the TPV of the land, but, in turn, after the completion of the respective building, if none of the fractions, parts or divisions susceptible to independent use has a TPV exceeding €1,000,000.00, the same taxpayer will not be burdened with any incidence of stamp tax.

h. Now, when the authorized or projected construction comprises only fractions, parts or divisions susceptible to independent use with individual value lower than €1,000,000.00 it cannot be considered in this case verified the economic assumption that justifies its taxation since the same, after the respective construction, would not be subject to the said tax.

i. And as may be verified by the documentation in the municipal licensing proceeding file relating to the land for construction at issue here, none of the properties, autonomous fractions or spaces susceptible to independent use whose construction is approved therein will have individual TPV exceeding €1,000,000.00, given their respective characteristics relevant for determining that value.

j. For all the foregoing, the application of the tax incidence norm provided in item 28.1 of TGST should be refused given its unconstitutionality by violation of the principles of equality, taxpaying capacity, and taxation of companies with incidence fundamentally on their real income, provided for in articles 13, 103 and 104, nos. 1 and 2 of the CRP.

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

BY WAY OF EXCEPTION

Lack of material jurisdiction of the arbitral tribunal

Impropriety of the remedy

a. Although the claim ultimately formulated by the Claimant concludes with the "declaration of illegality of the stamp tax assessment sub judice", it is important to emphasize that the Claimant seeks the non-application of the norm based on its alleged illegality/unconstitutionality and not for any illegality occurring in its application to the concrete facts.

b. The basis of its request for arbitral pronouncement is in its entirety founded on the unconstitutionality in the abstract of the said norm, and not on any illegality occurring in its application to the concrete facts.

c. Thus, for the claim made by the Claimant to succeed it would be necessary that the norm contained in item 28.1 of TGST be considered illegal or unconstitutional.

d. Whence it is concluded that the claim adduced by the Respondent collides with the powers of the Respondent and with its binding to the law and the Constitution, insofar as the appraisal by the now Challenged party concerning the illegality or unconstitutionality invoked would imply clear and objective violation of legal provisions and violation of the Constitution itself.

e. The same occurs in relation to the decision of the present arbitral action by the Arbitral Tribunal because the Constitutional Court is the competent forum to know both the illegality and the unconstitutionality of legal norms (arts. 280, no. 2, als. a) and d) and 281, no. 1, als. a) and b) and no. 3 of CRP and arts. 6 and 66 of the Constitutional Court Law).

f. Not having the Arbitral Tribunal jurisdiction for abstract review of the constitutionality of norms (a matter constitutionally reserved to the Constitutional Court - subsection a) of article 281 of CRP), nor, in the situation sub judice, to proceed with the declaration of illegality or unconstitutionality of item 28.1 of TGST, as such is forbidden to it (excluded from its jurisdiction) cfr. article 2 of LRAT, in articulation with no. 2 of the Binding Order to CAAD and 4, no. 2, al. a), of STAF ex vi article 29 of LRAT.

g. Thus, it should be concluded that it is impossible for the present arbitral tribunal to decide the present dispute, whether it is considered that we are before the exception of lack of material jurisdiction of the arbitral tribunal or before the dilatory exception of impropriety of the remedy.

h. Hence, the absolution from the instance of the Respondent follows, pursuant to the combined provisions of article 278 of CPC, article 2 of LRAT, 2 of the Binding Order to CAAD and 4, no. 2, al. a), of STAF ex vi article 29 of LRAT.

By way of defense on the merits,

i. The principle of equality is one of the structuring principles of the Portuguese constitutional system, finding general consecration in art. 13 of CRP and in turn, the binding of administrative authorities to the principle of equality finds consecration in art. 266, no. 2, of the fundamental diploma.

j. However, with respect to no. 3 of art. 104 of CRP, doctrine warns that the principle of equality, insofar as it concerns property, must be interpreted with some parsimony, in the sense that it does not involve a particular and autonomous legal content of the principle of equality within the scope of taxation of property.

k. The most recent decisions of the Constitutional Court, in the aspect that interests us here, correctly indicate that the principle of equality requires that what is necessarily equal be treated equally and what is essentially different be treated as different, not preventing differentiation of treatment, but only arbitrary, unreasonable discriminations, that is, distinctions of treatment that do not have justification and sufficient material grounds.

l. In the present dispute the Arbitral Tribunal should not assess or discuss the goodness of the legislative measure and its scope, but should confine itself to its appraisal in the aspect of its conformity (manifest, it must be said) with the constitutional text.

m. That is, this Tribunal should, in the perspective of prohibition of arbitrariness that flows from the principle of equality, "solely verify whether the legislative solution presents itself as absolutely intolerable or inadmissible, from a constitutional-legal perspective, because no intelligible grounds can be found for it", verifying whether, in the case at hand, "discriminatory distinctions were established, that is, inequalities of treatment materially unfounded, without any reasonable basis or without any objective and rational justification" (in Constitutional Court Decision no. 528/2012, of 7 November) which, as is all too evident, axiomatic even, has not occurred, that is, item 28 is a norm in conformity with the Constitution of the Portuguese Republic.

n. Suffice it to see: item 28.1 of TGST applies to the ownership, usufruct or right of superficies of urban properties with residential allocation, whose tax patrimonial value recorded in the matrix, pursuant to MPIT, is equal to or greater than €1,000,000.00, that is, it applies to the value of the property.

o. The different valuation and taxation of a property with residential allocation compared to a property intended for commerce, industry or services, or even a rural property, results from the different aptitude of the properties in question, which supports the different treatment given by the legislator which, for economic and social reasons, decided, within the scope of its legislative discretion, to remove from the incidence of the tax properties intended for purposes other than residential.

p. With respect to the legislative option of not including in the incidence of item 28.1 of TGST urban properties intended for purposes other than residential, rectius, without residential allocation (as well as, moreover, not covering rural properties) it is noted that here there is at stake a differentiation with grounds materially widely recognized by the legislator.

q. We are, therefore, before a legitimate criterion of rational and logical differentiation, in no way violating the constitutional requirements, which imposes the limitation of incidence of the taxation in question to luxury or residential allocation properties, with exclusion and to the detriment of properties with strictly economic allocations.

r. And it is unquestionable that it does not constitute an absolutely unreasonable solution that, in the context of the particular economic situation of a grave economic and financial crisis, of budgetary imbalance and degradation of public finances, additional tax effort be imposed on owners of luxury residential properties, without equally encompassing owners of properties with non-residential allocations, which are intended for the development of economic activities.

s. Thus, the AT understands that the provision of item 28 of TGST does not constitute any violation of the principle of equality of art. 13 of CRP.

1. By ruling of 23.01.2017, the exception raised by the Respondent was judged unfounded.

Given the non-existence of any situation provided for in art. 18, no. 1, of LRAT, that would make necessary the arbitral hearing provided for therein, its realization was dispensed with, based on the prohibition of practice of useless acts and also on the principles of celerity, simplification and procedural informality.

It was further determined that written submissions be presented within a period of 7 successive days for the Claimant and Respondent.

The parties presented submissions in which, in essence, they maintained the positions already expressed in the initial petition and in the response.

1. The following issues must be resolved:

• Whether the assessment is vitiated by violation of law and, consequently, should be annulled.

• Whether, in case of acceptance of the annulment claim, the Respondent should be condemned to reimburse to the Claimant the amounts allegedly paid with compensatory interest at the legal rate.

II. Purging of Defects

1. The tribunal is materially competent and is regularly constituted pursuant to LRAT.

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

The proceedings are not vitiated by defects that would render it invalid.

III – The Relevant Factual Matter

1. The following facts are considered proven:

a. The Claimant appears in the property matrix as owner of the land for construction registered in the urban property matrix under matrix article U-… (Ex-…) of the Parish …– Union of Parishes of … and … (Ex-… –…), Municipality of Vila Nova de Gaia and District of Porto, and described in the Land Registry Office of Vila Nova de Gaia under the registration number … .

b. The Claimant was notified of the stamp tax assessment, made on 5.04.2016, relating to the year 2015, pursuant to item 28.1 of the General Stamp Tax Table annexed to Law no. 150/99, of 11 September, which approves the Stamp Tax Code, on the identified property, in the amount of €39,949.30

c. The Claimant paid the amounts corresponding to the first installment on 29.04.2016 and to the second installment on 29.07.2016, of the Tax in question, in the amount of €13,316.44 and €13,316.43, respectively.

d. It results from a decision granting a request for licensing of a subdivision operation issued by the Municipality of Vila Nova de Gaia, notified to the Claimant on 27.12.2013, that on the land for construction in question the construction of three buildings is planned with ground floor, 1st, 2nd, 3rd, 4th and 5th floors, each intended for multifamily housing, with two basement levels per building intended for automatic parking, storage and technical areas, with a maximum capacity of sixty spaces per building planned.

e. In the buildings to be constructed the planned typologies of the fractions are typology 1 with the planned area of 70 square meters, typology 2 with the planned area of 100 square meters and typology 3 with areas ranging between 122 and 150 square meters.

With interest for the decision of the case, regarding facts alleged by the parties, there are no unproven facts.

1. The Tribunal's conviction regarding the decision on the factual matter was based on the documents in the file, which were not challenged by the parties, specifically, the notification of the assessment and the proof of payments, property records and notification of the decision granting the request for licensing of a subdivision operation, issued by the Municipality of Vila Nova de Gaia, it being noted that no disagreement results from the submissions presented regarding the factual matter.

-IV- The Applicable Law

1. Item 28 of the General Stamp Tax Table establishes, in the wording introduced by Law no. 83-C/2013, of 31 December (State Budget Law for 2014), that the following is subject to stamp tax:

"Ownership, usufruct or right of superficies of urban properties whose tax patrimonial value recorded in the matrix, pursuant to the Municipal Property Tax Code (MPIT), is equal to or greater than (euro) 1 000 000 - on the tax patrimonial value used for MPIT purposes:

28.1 Per residential property or per land for construction whose building, authorized or planned, is for housing, pursuant to the provision of the MPIT Code: 1%.

(…)

The original wording of the norm in question, in this part, was as follows:

"28 – Ownership, usufruct or right of superficies of urban properties whose tax patrimonial value recorded in the matrix, pursuant to the Municipal Property Tax Code (MPIT), is equal to or greater than 1 000 000 euros – on the tax patrimonial value used for MPIT purposes:

28.1 – Per property with residential allocation – 1%;

(…)

1. According to the new wording of the norm in question, land for construction is also subject to taxation "whose building, authorized or planned, is for housing, pursuant to the provision of the MPIT Code".

The new segment of the norm, in its apparent simplicity, raises various questions, particularly in light of the recognized legislative intent embodied in item 28.1 of TGST of taxing "luxury properties".

Indeed, it is settled in national jurisprudence that, in the original wording, the ratio legis of item 28 of TGST was the taxation of constructed luxury properties that were allocated to housing.

With the change in wording established by Law no. 83-C/2013, of 31 December, the taxation of land for construction whose building, authorized or planned, is for housing and have a tax patrimonial value exceeding one million euros was also established in similar manner to what occurs in the case of residential buildings.

We understand, in light of the teleological element, that the legislator, in making the taxation of item 28.1 apply to land plots for construction, is anticipating the taxation of "luxury", which constitutes the assumption of taxation, insofar as, although the possibility of the property of high tax patrimonial value being subject to residential use has not yet occurred, the mere fact of being owner of land destined for building of a property with such characteristics and also itself, immediately, holder of high tax patrimonial value, creates a presumption of increased taxpaying capacity, the assumption and criterion of this taxation.

But this increased taxpaying capacity, this "luxury", is only verified if the authorized or planned construction is for "luxury" housing, that is, for housing units with value exceeding one million euros.

The "ratio legis" of the provision is in no way the taxation of land plots intended for housing of average value or social housing, apparently resulting from the literal element of the norm, since a land plot for construction intended for construction of average value or lower housing may reach a value exceeding one million euros, which may depend, in particular, on the number of dwellings to be built.

An interpretive restriction of the provision is thus required, in the sense of considering that land plots for construction are subject to taxation but, only and solely, in the case where the authorized or planned construction is for housing of high value or that is, for housing units with value exceeding one million euros ("cessante ratione legis cessat eius dispositivo"). [1]

Furthermore, the interpretation of the norm that we adopt, in addition to being in perfect harmony with the teleological element and having in the letter of the law a minimum of verbal correspondence, is the one that best conforms to the unity of the legal system and, in particular, to the principle of interpretation in conformity with the constitution. Indeed, if it were understood that the taxation of land plots provided for in item 28.1 of TGST were not limited to plots intended for building high-value housing, this would imply the possibility of taxation applying to land intended for average-value housing or even social housing, which, besides clearly violating the principles of equality and taxpaying capacity, would also manifestly affront art. 65 of the Constitution of the Portuguese Republic.[2] [3]

1. In the case at bar, from the proven factual matter does not emerge the verification of the legal assumption, in the interpretation adopted, quite the contrary, insofar as it results from a decision granting a request for licensing of a subdivision operation, issued by the Municipality of Vila Nova de Gaia, notified to the Claimant on 27.12.2013, that on the land for construction in question the construction of three buildings is planned with ground floor, 1st, 2nd, 3rd, 4th and 5th floors, each intended for multifamily housing with planned areas of fractions ranging between 70 square meters (typology 1) and 150 square meters (some fractions of typology T3), so one is before housing units of average value, being evident, taking into account such areas and location, that they will not be luxury housing fractions, capable of reaching the tax patrimonial value of one million euros.

In this measure, and without need for further consideration, it is understood that the property of which the Claimant is registered owner in the matrix does not come under the norm contained in item 28.1 of TGST, so the assessment sub judice cannot but be annulled, even though, with legal grounds not coinciding with those alleged by the Claimant, it being certain that the Tribunal is not bound by the allegations of the parties as to matters of law, pursuant to art. 5, no. 3, of the Code of Civil Procedure, applicable ex vi of art. 29, no. 1, al. e) of LRAT.

1. The Claimant further requested the condemnation of the Respondent to reimburse the amounts paid corresponding to the assessment subject to the present proceedings, as well as the respective compensatory interest.

Let us see.

In accordance with the provision in subsection b) of article 24 of LRAT, the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the tax administration as from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the acceptance of the arbitral decision in favor of the taxpayer and until the end of the period provided for spontaneous execution of sentences from tax courts, "reestablish the situation that would exist if the tax act subject to the arbitral decision had not been made, adopting the necessary acts and operations for that purpose", which is in harmony with what is provided for in article 100 of the LGT [applicable by virtue of the provision in subsection a) of no. 1 of article 29 of LRAT] which establishes that "the Tax Administration is obligated, in case of acceptance, whether total or partial, of complaint, judicial challenge or appeal in favor of the taxpayer, to the immediate and full reestablishment of the legality of the act or situation subject to the dispute, including the payment of compensatory interest, if applicable, as from the end of the period of execution of the decision".

Although art. 2, no. 1, als. a) and b), of LRAT uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals that function in CAAD, not making reference to condemnatory decisions, it should be understood that the powers that in judicial challenge proceedings are attributed to tax tribunals are comprised in its jurisdiction, and this is the interpretation that is in harmony with the meaning of the legislative authorization on which the Government based itself to approve LRAT, in which it proclaims, as the first directive, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".[4]

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

Thus, no. 5 of art. 24 of LRAT in establishing that "payment of interest, regardless of its nature, is due, pursuant to the provisions of the general tax law and the Code of Procedure and Tax Process" should be understood as permitting the recognition of the right to compensatory interest in the arbitral process.

In the case at hand, it is manifest that, as a consequence of the illegality of the assessment act, reimbursement of the tax is in order, by virtue of the cited arts. 24, no. 1, al. b), of LRAT and 100 of LGT, since such is essential to "reestablish the situation that would exist if the tax act subject to the arbitral decision had not been made".

With respect to compensatory interest, this claim must also be assessed in light of article 43 of the General Tax Law.

It is provided in no. 1 of that article that "Compensatory interest is due when determined, in gracious complaint or judicial challenge, that there was error attributable to the services from which results payment of the tax debt in amount exceeding that legally due".

We agree with 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 made the assessment is demonstrated when they proceed with gracious complaint or judicial challenge of that same assessment and the error is not attributable to the taxpayer" (GENERAL TAX LAW, Annotated and Commented, 4th Edition, 2012, page 342).

In the case "sub judice", the error that gave rise to the assessment, now annulled, not being attributable to the Claimant, the request for condemnation of the Respondent cannot but proceed regarding compensatory interest.

Thus, the Tax and Customs Authority must give execution to the present decision, pursuant to art. 24, no. 1, of LRAT, reimbursing the amounts paid by the Claimant with respect to the annulled assessment, with compensatory interest, at the legal rate.

Compensatory interest is due from the date of payment to the date of processing of the credit note, in which they are included (art. 61, no. 5, of CPPT).

-IV- Decision

Thus, the arbitral tribunal decides, judging the arbitral pronouncement request as wholly successful:

a) To decree the annulment of the assessment subject to the present proceedings.

b) To condemn the Respondent to reimburse to the Claimant the amounts paid with compensatory interest at the legal rate, counted from the date of payment to the date of processing of the credit note.

Value of the action: €39,949.30 (fifty-nine thousand six hundred fifty-four euros and forty cents), pursuant to the provision in art. 306, no. 2, of CPC and 97-A, no. 1, al. a), of CPPT and 3, no. 2, of the Regulation of Costs in Arbitration Proceedings.

Costs payable by the Respondent in the amount of €1,224.00 (one thousand two hundred twenty-four euros) pursuant to no. 4 of art. 22 of LRAT.

Notify.

Lisbon, CAAD, 20.03.2017

The Arbitrator

Marcolino Pisão Pedreiro

[1] Pursuant to art. 11, no. 1, of the General Tax Law "In determining the meaning of tax norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed."

[2] In this sense the arbitral decisions of 5.02.2016, handed down in proceedings 482/2015-T and of 9.03.2017, handed down in proceedings 395/2016-T, in which the undersigned arbitrator was the arbitrator in the present arbitral decision. (https://caad.org.pt/tributario/decisoes/)

[3] In the arbitral decision of 17-03-2016, handed down in proceedings 507/2015-T, it was considered that "the norm of item 28.1 of TGST, in the wording introduced by Law no. 83-C/2013, of 31 December, is materially unconstitutional, by offense of the principle of equality, generically stated in article 13 of CRP, because it applies to land for construction of tax patrimonial value equal to or greater than €1,000,000.00 for which the authorized or planned construction does not include any fraction susceptible to independent use with value equal to or greater than that amount.

The same reasons for distinguishing will apply with respect to land for construction intended for building individual housing of value equal to or greater than €1,000,000.00, since the holding of rights over land for this purpose reveals, by itself, a situation of wealth, at the level of "higher standards of Portuguese society": that is, if the land, by itself, has value equal to or greater than €1,000,000.00 and if it is intended for construction of individual housing of value also equal to or greater than this, one is before situations in which the mere holding of rights over the land reveals wealth corresponding to "higher standards of Portuguese society". (https://caad.org.pt/tributario/decisoes/)[emphasis in original].

[4] 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).