CAAD 470/2014-T: Stamp Tax on Construction Land Under Verba 28 TGIS – Arbitral Decision

ARBITRAL DECISION

I. Report

1. A, Lda. (hereinafter referred to as the "Claimant"), with tax identification number ..., with registered office at Rua ... Coimbra, submitted, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, i.e., the Legal Regime for Arbitration in Tax Matters ("LRATM"), a request for the constitution of an Arbitral Tribunal in order to declare illegal the additional assessment No. 2014 ..., dated 18 March 2014, relating to Stamp Tax ("ST") for 2013, in the amount of €4,053.24, with the Tax and Customs Authority ("Respondent" or "TCA") being the defendant.

A) Constitution of the Arbitral Tribunal

1. In accordance with the provisions of Article 6(1) and Article 11(1)(b) of the LRATM, the Deontological Council of the Centre for Administrative Arbitration ("CAAD") appointed the undersigned as arbitrator of the sole arbitrator tribunal, who communicated acceptance of the appointment within the applicable time period, and notified the parties of this appointment on 26 August 2014.

2. Thus, in conformity with the provision of Article 11(1)(c) of the LRATM, and by means of communication from the President of the Deontological Council of CAAD, the Sole Arbitral Tribunal was constituted on 10 September 2014.

B) Procedural History

1. In the request for arbitral decision, the Claimant petitioned for a declaration of illegality of the ST assessment mentioned above, by reference to an urban property located in Coimbra, with the identification ... ... ... (as appearing in the document attached by the Claimant to the present arbitral decision proceeding).

2. The TCA submitted a response, petitioning for the dismissal of the request for arbitral decision, on the grounds that there was no violation of law, requesting that the tax act under analysis, as it violated no legal or constitutional provision, be maintained in the legal order.

3. By order of 10 December 2014, the Sole Arbitral Tribunal, pursuant to Article 16(c) of the LRATM, and following the submission by the TCA, decided, without opposition from the parties, that it was not necessary to hold the hearing referred to in Article 18 of the LRATM, as a result of the simplicity of the issues in question and considering that it had at its disposal all the necessary elements to reach a clear and impartial decision.

4. It also decided, in accordance with Article 18(2) of the LRATM, that oral arguments were not necessary, since the positions of the parties were clearly defined in their respective pleadings, and fixed 27 February 2015 as the date for the arbitral decision.

5. The Tribunal was regularly constituted and is competent to consider the issues indicated (Article 2(1)(a) of the LRATM); the parties possess legal standing and capacity and have full legitimacy (Articles 4 and 10(2) of the LRATM and Article 1 of Ordinance No. 112-A/2011, of 22 March). No grounds for nullity exist and no exceptions were raised, therefore nothing prevents judgment on the merits.

6. The present proceeding is thus in a position for the final decision to be issued.

II. Issue to be Decided

1. The central issue to be examined and decided with respect to the merits of the case, as may be drawn from the procedural documents of the parties, is whether urban properties legally classified as construction land should be encompassed by the concept of residential property, pursuant to Item No. 28 of the General Table of Stamp Tax ("GTST").

2. In other words, this tribunal seeks to ascertain whether, as the Claimant alleges, construction land is not classified as residential property and thus falls outside the scope of the aforementioned item, or, conversely, as the Respondent contends, is considered residential property and, in that context, is subject to ST, pursuant to Item No. 28 of the GTST.

III. Determination of Facts and Their Justification

1. Having examined the documentary evidence produced, this tribunal finds proven, as relevant to the decision of the case, the following facts:

I. The Claimant is the owner of an urban property, legally classified as construction land, registered under Article ..., in the urban property register of the parish of ..., of the municipality of Coimbra, with a Tax Patrimonial Value ("TPV") of €1,215,974.30.

II. The Claimant, in accordance with the tax year 2013 and as a result of the provisions in Item No. 28 of the GTST, received the assessment notice from the TCA, mentioned above, relating to the second instalment of ST, in the amount of €4,053.24, from a total amount of €12,159.74.

1. This tribunal's conviction regarding the facts found proven resulted from the documents appended to the case file and contained in the uncontested claims and allegations of the parties, as specified in the factual points enunciated above.

2. There are no material facts relevant to the decision of the case found not proven.

IV. Law

A) Legal Framework

1. Given that the legal issue to be decided in the present proceeding requires the interpretation of the relevant legal texts, it is first necessary to set out the norms that comprise the relevant legal framework, as of the date of the occurrence of the facts.

2. The subjection to ST of residential property resulted from the addition of Item No. 28 to the GTST, carried out by Article 4 of Law 55-A/2012, of 29 October, which established the following tax facts:

"28 – Ownership, usufruct or surface right of urban properties whose tax patrimonial value appearing in the register, in accordance with the Property Tax Code (PTC), is equal to or exceeding €1,000,000.00 – on the tax patrimonial value used for purposes of Property Tax:

28.1 – For residential property – 1%

28.2 – For property where the taxpayers that are not natural persons are resident in a country, territory or region subject to a clearly more favourable tax regime, listed in the list approved by ordinance of the Minister of Finance – 7.5%."

1. The aforementioned law also added, to the ST Code, Article 23(7), relating to the assessment of ST: "in the case of tax due for situations provided for in item no. 28 of the General Table, the tax is assessed annually, in relation to each urban property, by the central services of the Tax and Customs Authority, applying, with the necessary adaptations, the rules contained in the PTC", and Article 67(2) which provides that "to matters not regulated in this Code concerning item 28 of the General Table, the PTC shall apply, subsidiarily".

2. In this context, and having regard to the above indication, let us now turn our attention to the Property Tax Code ("PTC").

3. In the Property Tax Code, the types of properties are enumerated (in Articles 2 to 6), as follows:

"Article 2 – Concept of Property

1 – For purposes of this Code, property is any parcel of land, including waters, vegetation, buildings and constructions of any nature incorporated therein or situated thereon, with a character of permanence, provided that it forms part of the assets of a natural or legal person and, in normal circumstances, has economic value, as well as waters, vegetation, buildings or constructions, in the circumstances above, endowed with economic autonomy in relation to the land where they are located, although situated on a parcel of land that constitutes an integral part of a different asset or does not have a patrimonial nature.

2 – Buildings or constructions, even if movable by nature, are deemed to have a character of permanence when dedicated to non-transitory purposes.

3 – The character of permanence is presumed when buildings or constructions are situated in the same location for a period exceeding one year.

4 – For purposes of this tax, each autonomous fraction, under the horizontal property regime, is deemed to constitute a property.

Article 3 – Rural Properties

1 – Rural properties are lands situated outside an urban settlement that are not to be classified as construction land, pursuant to Article 6(3), provided that:

a) They are dedicated or, in the absence of concrete dedication, have as their normal destination a use generating agricultural income, such as are considered for purposes of personal income tax (PIT);

b) Not having the dedication indicated in the preceding paragraph, they are not built on or have only buildings or constructions of an accessory nature, without economic autonomy and of reduced value.

2 – Also considered rural properties are lands situated within an urban settlement, provided that, by virtue of legally approved provision, they cannot be used for generating any income or can only be used for generating agricultural income and are actually being used for this purpose.

3 – Also considered rural properties are:

a) Buildings and constructions directly dedicated to the production of agricultural income, when situated on the lands referred to in the preceding paragraphs;

b) Waters and vegetation in the situations referred to in Article 2(1).

4 – For purposes of this Code, urban settlements are considered, in addition to those situated within legally fixed perimeters, nuclei with a minimum of 10 dwellings served by streets of public use, with their perimeter delimited by points distanced 50 m from the axis of the streets, in the transversal direction, and 20 m from the last building, in the direction of the streets.

Article 4 – Urban Properties

Urban properties are all those that should not be classified as rural, without prejudice to the provisions of the following article.

Article 5 – Mixed Properties

1 – Whenever a property has rural and urban parts, it is classified, in its entirety, in accordance with the main part.

2 – If neither of the parts can be classified as main, the property is deemed mixed.

Article 6 – Types of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Construction land;

d) Other.

2 – Residential, commercial, industrial or for services are buildings or constructions licensed for such or, in the absence of a license, which have as their normal destination each of these purposes.

3 – Construction land is considered to be lands situated within or outside an urban settlement, for which a license or authorization has been granted, or for which prior notification has been accepted or favorable prior information for a subdivision or construction operation has been issued, and also those which have been declared as such in the acquisition deed, except for lands where the competent entities prohibit any of those operations, in particular those located in green areas, protected areas or which, in accordance with municipal land use plans, are dedicated to spaces, infrastructure or public facilities.

4 – Included in the provision of Article 6(1)(d) are lands situated within an urban settlement that are not construction land nor are covered by Article 3(2) and also buildings and constructions licensed or, in the absence of a license, which have as their normal destination purposes other than those referred to in Article 6(2) and also those in the exception of Article 6(3)".

1. Likewise, and since it is one of the issues raised by the Respondent, it is also necessary to set forth Article 45 of the Property Tax Code.

"Article 45 – Tax Patrimonial Value of Construction Land

1 - The tax patrimonial value of construction land is the sum of the value of the building footprint area to be constructed, which is that situated within the perimeter of the building's attachment to the ground, measured by its exterior, added to the value of the land adjacent to the footprint.

2 - The value of the footprint area varies between 15% and 45% of the value of the buildings authorized or envisaged.

3 - In fixing the percentage value of the land footprint, consideration is given to the characteristics referred to in Article 42(3).

4 - The value of the area adjacent to the construction is calculated in accordance with Article 40(4).

5 - When the document proving constructive viability referred to in Article 37 only makes reference to the Municipal Development Plan indices, the appraising experts must estimate, on a reasoned basis, the respective construction area, taking into account, in particular, the average construction areas in the surrounding area".

1. Lastly, attention should be paid to the norms on the interpretation of laws, which are fundamental to understanding the scope of the concept of residential property.

2. Article 11 of the General Tax Law ("GTL") establishes the essential rules for the interpretation of tax laws as follows:

"Article 11 – Interpretation

1. 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. Whenever tax norms employ terms specific to other branches of law, they shall be interpreted in the same sense as they have therein, unless otherwise directly follows from the law.

3. If doubt persists concerning the meaning of the applicable provisions of incidence norms, account shall be taken of the economic substance of the tax facts.

4. Gaps resulting from tax norms covered by the reservation of law of the Assembly of the Republic are not susceptible to analogical integration".

5. The general principles for the interpretation of laws, to which Article 11(1) of the GTL refers, are established in Article 9 of the Civil Code, which provides as follows:

"Article 9 – Interpretation of Law

1. Interpretation must not be confined to the letter of the law, but must reconstruct from the texts the legislative intent, taking especially into account the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in which it is applied.

2. However, the interpreter cannot consider legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3. In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and was able to express his intent in adequate terms".

4. Thus, it is within this legal framework that it is important to decide whether urban properties classified as construction land are or are not included in the concept of residential property, pursuant to Item No. 28 of the GTST.

B) Arguments of the Parties

1. In this regard, the Claimant, after introducing its petition with an in-depth description of the relevant legal-tax framework for the present issue, alleged, in summary, the following:

2. In the perspective of the Claimant, the concept of construction land, pursuant to Article 6 of the Property Tax Code, "is based on assumptions of an objective and subjective nature. Regardless of whether they are situated within or outside an urban settlement, all lands for which a license or authorization for subdivision or construction has been granted, or for which prior notification has been accepted or favorable prior information for such operations has been issued, are considered construction land. Once any of these circumstances is verified (…) the land is immediately classified as construction land, for tax purposes".

3. Indeed, in the understanding of the Claimant, "a property is classified as construction land whenever a set of circumstances is verified, typically corresponding to the application of relevant norms of the legal regime governing urban construction or the subdivision of rural properties, which in any case indicate the intention to build thereon (…)".

4. Similarly, in the opinion of the Claimant, "in defining the scope of the taxation of assets referred to in Item 28 of the GTST, the legislator considers, as a relevant element of contributory capacity, high-value properties that, in the segment relating to taxpayers resident in Portuguese territory, are held for residential purposes".

5. In this context, the Claimant points out that the legislator, in directing the aforementioned item to residential property, "does not establish any specific concept of what should, for this purpose, be understood, instead referring to the norms of the PTC".

6. For the Claimant, "the expression with «residential use» conveys, on simple reading, an idea of real and present functionality. From the norm in question it is not possible to extract, by interpretation, that, as is stated in the respondent's reply, the legislator's choice of that expression aims to integrate «other realities beyond those identified in Article 6(1)(a) of the PTC». Such interpretation has no legal support, given the principles contained in Articles 9 of the Civil Code and 11 of the GTL".

7. Additionally, the herein Claimant refutes the understanding of the TCA, which is to the effect that construction land is encompassed within the concept of residential property, by virtue of Article 45 of the Property Tax Code.

8. This is because the Claimant cannot share the opinion of the TCA that understands that the expression residential property extends beyond the types provided for in Article 6(1) of the Property Tax Code.

9. Indeed, in its opinion, "it is not possible, however, to follow such conclusion. On the one hand, because nothing in the law allows the conclusion that the legislator of the stamp tax intended to broaden, for purposes of the incidence of this tax, the types provided for in Article 6(1) of the PTC, as already referred to above; on the other hand, because the application of an allocation coefficient – in the event it were to be admitted – refers to one of the elements to be considered in the assessment of the land, that is, in determining the value of the buildings authorized or envisaged.

Regardless of whether in determining the value of buildings authorized or envisaged for construction land an allocation coefficient should or should not be considered, it is admitted, as it is obvious and of common knowledge, that the value of land is decisively influenced by the type and characteristics of those buildings. However, this is a matter that goes beyond the issue on which the present request for arbitral decision is focused.

Under the circumstances referred to, the fact that for a given construction land authorization exists for the construction of a property intended for residential use, or for any other purpose, even though it must be considered in its assessment, does not determine any change in the classification of the land which, for tax purposes, continues to be considered as such".

1. In this manner, the Claimant concludes its exposition by concluding that Article 6 of the Property Tax Code establishes a clear distinction between residential urban properties and construction land, and that the latter cannot be classified, for purposes of the incidence of Item No. 28 of the GTST, as residential property, thus requesting the annulment of the assessments in question.

2. In turn, the Respondent, after being duly notified for this purpose, submitted its response in which, in summary, it alleged the following:

3. The Claimant understands that the present additional assessment is illegal by violation of Article 1 of the ST Code and Item 28.1 of the GTST, "thus requesting its annulment by the Arbitral Tribunal".

4. However, in the opinion of the Respondent, the concept of residential property, for purposes of the provision in item no. 28 of the GTST, comprises both built properties and construction land, beginning with regard to the literal element of the norm.

5. The Respondent notes that "the legislator does not refer to «properties intended for residential use», having opted for the notion of «residential use» – an expression that is different and broader, whose meaning must be found in the need to integrate other realities beyond those identified in Article 6(1)(a) of the PTC".

6. Subsequently developing an extensive reasoning that, in its opinion, allows the classification of construction land within the concept of residential property, relying, in particular, on Article 45 of the Property Tax Code.

7. "The mere establishment of a right of potential construction immediately increases the value of the real property in question, hence the rule contained in Article 45 of the PTC which requires the separation of the two parts of the land.

On one side, the part of the land where the building to be constructed will be situated is considered, and on the other the area of free land (…)."

1. In this sense, in the opinion of the Respondent, "well before the actual construction of the property, it is possible to ascertain and determine the dedication of the land for construction".

2. The Respondent concludes that, in light of the foregoing, "the assessment at issue constitutes a correct interpretation and application of the law to the facts, not suffering from a violation of law (…) and therefore the claim made should be judged without merit and the Respondent Entity should be absolved of the petition".

C) Tribunal's Assessment

1. In the understanding of this tribunal, and having regard to the legal framework previously presented, the essential normative proposition to be considered for the decision of the case is that resulting from Item No. 28 of the GTST.

2. It should also be noted that, in the eyes of the Arbitral Tribunal, the issue to be decided concerns exclusively a matter of law, namely to understand, for purposes of the application of the aforementioned item, whether the concept of residential property includes or does not include construction land.

3. In this regard, this tribunal will follow closely the Arbitral Decision concerning case no. 42/2013-T, of 18 October (a decision which it hereby applauds for its relevance, detail and proximity to the present discussion).

4. By way of introduction, it should be noted that the Property Tax Code does not resort, in classifying urban properties, to the concept of residential property (in fact, this concept is not found in any other statute either).

5. Thus, it is necessary to perform, based on the legal framework set out above, an interpretation of the concept of residential property.

6. In this regard, and in order to support the present decision, we set forth below part of Arbitral Decision No. 42/2013-T, of 18 October, where the following was decided:

"From a literal interpretation of the incidence norm in question it follows that the legislator intended to include within the scope of application of the norm urban properties that have a «residential use».

The expression «residential use» does not appear to be capable of having any meaning other than actual residential use, that is, urban properties that have an effective use for residential purposes, whether because they are licensed for such or because such is their normal destination.

And we cannot confuse a «residential use» which implies an actual dedication of an urban property to that end, with the expectancy, or potentiality, of an urban property being able to come to have a «residential use».

Construction land, not being built upon, does not satisfy, by itself, any condition to be considered as residential property, since, on the one hand, it does not possess a license for residential use, and on the other hand, it is not habitable (because it simply is not built).

Therefore, it does not appear to us to be sufficient for framing within the objective incidence norm in question that there exist an expectancy of an urban property coming to have a residential use, or the potentiality of coming to have a residential use" (emphasis added).

1. Now, in the case of construction land, indeed, nothing more exists than the mere expectancy, (or, possibly, potentiality), thereof, and only after construction, of coming to have a residential use.

2. However, only when such use is realized is it that we can consider that the urban property falls within the scope of Item No. 28 of the GTST.

3. In fact, the concept of residential use must undoubtedly be reduced to something that is capable of being inhabited, even though, as set out above, it is not legally recognized as such.

4. As such, notwithstanding that construction land will likely result in the future in a property with residential use, while it thus remains (that is, legally classified as construction land), it cannot, as of the date of the facts, in the understanding of this tribunal, be included within the scope of incidence of Item No. 28 of the GTST.

5. Likewise, the TCA demonstrated, as described above, that, in its opinion, it is by virtue of Article 45 of the Property Tax Code that construction land is classified as residential property.

6. In this context, and for its relevance to the present decision, let us turn again to Arbitral Decision No. 42/2013, of 18 October.

7. As set forth in the aforementioned arbitral decision, "Article 45 of the PTC aims at the assessment of construction land, considering as one of its elements the authorized or possible destination, depending on urban development constraints.

Once again we are merely in the field of potentialities, of expectations, and this is not sufficient to change the nature of the property, which continues to be considered as construction land, nor to sustain that the property in question comes to have a «residential use» for purposes of the objective incidence of item 28.1 of the GTST".

1. In this manner, this tribunal agrees with the Claimant, who stated, correctly, that "the fact that for a given construction land authorization exists for the construction of a property intended for residential use, or for any other purpose, even though it must be considered in its assessment, does not determine any change in the classification of the land which, for tax purposes, continues to be considered as such".

2. Indeed, it is the opinion of this tribunal that, as of the date of the facts, the concept of residential property, referred to in Item No. 28 of the GTST, is reduced, exclusively, to the concept of residential urban property, pursuant to Article 6(1)(a) of the Property Tax Code.

3. In other words, in the understanding of this tribunal, in harmony with the understanding set forth by the Claimant and in Decision No. 42/2013-T, of 18 October, the TCA cannot resort to Article 45 of the Property Tax Code to establish a relationship between construction land and residential property.

4. In that sense, this tribunal concludes that, since the urban property in question is construction land, it cannot be included within the scope of Item No. 28 of the GTST.

5. Finally, and notwithstanding the framing up to now carried out being, from the point of view of this tribunal, sufficient to recognize the illegality of the assessment act performed by the TCA, it is important to note that, if any doubts existed, the recent amendment to the text of Item No. 28 of the GTST would surely dissipate them.

6. Indeed, Law No. 83-C/2013, of 31 December, which came into force on 1 January 2014, amended the text of item no. 28 of the GTST to "residential property or construction land whose authorized or envisaged construction is for residential use, in accordance with the provisions of the Property Tax Code (…)" (emphasis added).

7. Now, in the understanding of this tribunal, such amendment occurred, naturally, because the legislator will have perceived that there existed a need, verified only from 2014 onwards, to extend the aforementioned item to construction land, in the manner referred to above.

8. In these terms, it is clear that until that date (2014), the text of the aforementioned item left out of its scope of application the properties legally classified as construction land (otherwise, there would have been no need to amend the text of the aforementioned item).

9. Thus, and based on the reasons listed above, this tribunal understands that construction land cannot, as of the date of the facts, be encompassed by the concept of residential property, as referred to in the text of Item No. 28 of the GTST, whereby it is concluded that the legal presupposition of incidence is not satisfied.

IV. Decision

1. Accordingly, this Arbitral Tribunal decides:

A) To find the request for arbitral decision well-founded and, in consequence, to declare illegal and annul the ST assessment mentioned above, in relation to 2013, from which resulted tax to be paid in the amount of €4,053.24, concerning the taxation of urban properties with residential use, in accordance with the provisions of Item No. 28 of the GTST;

B) To condemn the Respondent to pay the costs of the proceedings.

V. Value of the Proceeding

1. The value of the proceeding is fixed at €4,053.24, in accordance with Article 97-A(1)(a) of the Code of Administrative Procedure and Tax Procedure, applicable by virtue of Article 29(1)(a) and (b) of the LRATM and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings ("RCTAP").

VI. Costs

1. In accordance with the provisions of Article 22(4) of the LRATM, the arbitration fee is fixed at €612, in accordance with Table I of the aforementioned Regulation, to be borne by the Respondent, given the entire success of the petition.

Notify accordingly.

Lisbon, CAAD, 25 February 2015

The Arbitrator

(Sérgio Santos Pereira)