CAAD Arbitration on Stamp Tax (IS) – Verba 28.1 TGIS and Vertical Property Taxation Rules

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 471/2014-T

Subject: Stamp Tax - Item 28.1 of the General Table of Stamp Tax - Vertical Ownership

The arbitral tribunal functioning with a single arbitrator constituted on 07-10-2014 at CAAD – Administrative Arbitration Center pursuant to the legal framework established by Decree-Law No. 10/2011 of 20 January[1], for which was appointed by the respective Deontological Council, the arbitrator from the Center's list, Nuno Maldonado Sousa, hereby presents his arbitral decision.

REPORT

Constitution of the Arbitral Tribunal

A…, resident in … in …, holder of Citizen Card No. …, valid until …, tax identification number …, filed a petition for constitution of the arbitral tribunal, in accordance with the combined provisions of articles 2 and 10 of the LRAT and articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, in which the Tax and Customs Authority[2] is the Respondent.

The petition for constitution of the arbitral tribunal was accepted by the President of CAAD on 10-07-2014 and notified to the Tax and Customs Authority on 11-07-2014.

Pursuant to the provisions of article 6, No. 1 and article 11, No. 1, subparagraph b) of the LRAT, the Deontological Council appointed the undersigned as arbitrator of the single arbitral tribunal, who communicated acceptance of the assignment within the applicable period, and notified the parties of this appointment on 22-09-2014. In accordance with the rule contained in article 11, No. 1, subparagraph c) of the LRAT, the arbitral tribunal was constituted on 07-10-2014.

The Petitioner's Request

In its Initial Petition, clarified through an amended submission presented in response to an invitation from the Arbitral Tribunal, the Petitioner requested:

The declaration of illegality and consequent annulment of the following Stamp Tax assessments for 2012, of the urban property registered in the cadastral roll of the parish of … (extinct), municipality of …, by article …:

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €610.58, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €898.50, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €458.25, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €651.68, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €692.85, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €939.68, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €651.68, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €692.85, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €939.68, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €651.68, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €692.85, paid in November/2013;

Assessment No. 2013 …, relating to the year 2012, concerning article …, in the amount of €939.68, paid in November/2013.

The reimbursement of the tax assessed and paid in the total amount of €8,819.96.

The Petitioner bases its request on the fact that the taxable property value of each one of the divisions or floors capable of independent use is, in each of them, less than €1,000,000.00 and it is not lawful to add them together to determine their subjection to the tax.

The Position of the Tax Authority

The Tax and Customs Authority responded upholding the legality of the assessment and defending the lack of merit of the request and its grounds, understanding that the taxable property value of the urban property, for purposes of determining the lower limit of the incidence of item 28-1 of the GTSТ[3], results from the sum of the taxable property values of its parts capable of independent use (especially in point 25 of its response). It thus considers that item 28.1 of the GTST is applicable to properties where parts capable of independent use coexist, the sum of whose taxable property values with residential allocation results in a value equal to or exceeding €1,000,000.00. It concludes by defending its acquittal from the request.

Proceedings and Arguments

On 15-01-2015 the meeting provided for in article 18 of the LRAT took place.

The Tax Authority and the Petitioner did not request the production of any evidence beyond the documentary evidence on file.

The Petitioner and the Tax Authority agreed in writing on the arguments, which they presented, reiterating the positions taken in their submissions.

Preliminary Ruling

The arbitral tribunal was regularly constituted and has jurisdiction ratione materiae in accordance with the rules of article 2, No. 1, subparagraph a) of the LRAT.

The Parties possess legal personality and capacity (that of the Tax Authority in accordance with the provisions contained in article 4, No. 1 of the LRAT and article 10, No. 2 of the same statute and article 1, subparagraph a) of Ordinance No. 112-A/2011, of 22 March), are legally entitled and are regularly represented.

There are no defects that would vitiate the proceedings.

Accordingly, there is no obstacle to the tribunal's consideration of the merits of the case and therefore a decision must be rendered.

DECISION

Facts

Facts Considered Proven

The following facts were established in these proceedings:

The Petitioner is the owner in the proportion of ¾ of the urban property, located in …, parish of …, municipality of …, registered in the respective urban cadastral roll under article … (previously article …)[2nd RA[4] and PA[5], pp. 32-40].

The property referred to in A) was not constituted as vertical ownership and consisted of a basement, ground floor, 3 floors and grounds, had 13 floors or divisions with independent use, and a total taxable property value of €1,224,890.00 [4th RA and PA, pp. 32-40].

The 12 divisions or floors with "residential" allocation were the following and had the taxable property values indicated [6th and 7th RA and PA, pp. 32-40]:

The Petitioner was notified of the following 12 Stamp Tax assessments relating to the year 2012, concerning item 28.1 of the GTST, dated 17-04-2013, for payment in the month of November 2013, relating to the divisions or floors of the property identified in A) [1st and 8th RA and PA, pp. 8-31]:

On 27-11-2013 the Petitioner made payment of the 12 Stamp Tax assessments identified in D), totaling the sum of €8,819.96 [docs. 1 to 12 attached to RA].

Facts Considered Not Proven

No other facts of interest to the decision of the case were alleged.

Grounds for the Proven Facts

The tribunal's conviction rested on the documentary evidence on file and on the position taken regarding each fact by the Parties in their submissions, duly identified.

Law

The following issues arise in these proceedings, which shall be resolved hereinafter, to the extent necessary, according to a criterion of logical precedence:

The fundamental issue consists in determining whether, for purposes of determining the lower limit of the incidence of item 28-1 of the GTST in the version in force until 31-12-2013, resulting from Law No. 55-A/2012, of 29 October, the calculation of the TPV[6] of a property not subject to the vertical ownership regime and composed of divisions or floors capable of independent use, results from the sum of the taxable property values of those parts with residential allocation or whether the tax subjection should be determined for each division or floor capable of such independent use.

In case of an affirmative answer to the preceding issue, it must be determined whether the petition for reimbursement of the tax paid is well-founded.

Fundamental Issue: Item 28.1 GTST

The fundamental issue to be considered in these proceedings consists in determining in what manner the TPV should be calculated for application of the combined provisions of article 1-1 of the STC[7] and item 28.1 GTST, in the version in force until 31-12-2013, resulting from Law No. 55-A/2012, of 29 October.

The Petitioner defends its position by resort to the subsidiary regime of the RITC[8], which it considers adopts in its article 2-4 the concept of residential urban property and which includes both autonomous fractions of properties constituted as vertical ownership and divisions or floors capable of independent use. Consequently, subjection to item 28.1 GTST must be verified against the TPV of the fraction, division or floor capable of independent use. It considers that in accordance with the provision of article 12-3 RITC it is obligatory to distinguish the respective TPV. It appeals to the interpretive principle ubi lex non distinguit, nec nos distinguere debemus and to the teleological element, namely the ratio legis, which it states was the intention to "tax the wealth expressed by the ownership of (…) urban residential properties of luxury," considering that those with a value exceeding €1,000,000.00 reflect that reality. It also points to the historical-interpretive element derived from the discussion in Parliament where the bill was justified by reference to the intention to "impose the new special rate on houses with a value equal to or exceeding 1 million euros."

The Tax Authority argues that divisions or floors capable of independent use are not in themselves properties (unlike what is understood regarding autonomous fractions of buildings in vertical ownership) and that therefore the taxation "results from the direct application of the legal rule, which is expressed in objective elements," specifically the taxable property value of the urban property which "necessarily results from the sum of the taxable property values of the floors capable of independent use," in accordance with the rule of article 7-2-b) of the RITC, its value being over €1,000,000.00 and having residential allocation.

Let us now examine what solution applies to this dispute.

Law No. 55-A/2012 of 29 October introduced an amendment to the rule of article 1 of the STC such that this provision now contemplates also "legal situations" in addition to "acts, contracts, documents, titles, papers and other facts" provided for in the GTST. Furthermore, the same legislative amendment added item 28 to the GTST, which provides for the taxation of ownership of the right of property, usufruct or surface right of urban properties whose taxable property value recorded in the cadastral roll, in accordance with the RITC, is equal to or exceeding €1,000,000.00, with the tax being levied on the taxable property value used for purposes of the Real Estate Tax. The tax is calculated at the rate of 1% when the property in question has residential allocation and at the rate of 7.5% if it is a legal person resident in a country, territory or region subject to a regime that is clearly more favorable.

The STC does not directly answer the generality of interpretive issues that item 28 of the GTST raises, and therefore the legislature wisely chose from the outset to elect the regime of the RITC to govern matters not regulated (article 67-2 of STC). It is natural that this should be so, for it is precisely in the RITC that the basic concepts are enshrined that tax law uses for the taxation of assets, as can be seen from article 1-6 of the STC itself and article 1-2 of the Real Estate Transfer Tax Code.

Tax law has not entirely adopted the civil law conceptualization of property, adapting it to the needs of this branch of law. For purposes of taxation of assets, a property is any fraction of territory, including waters, plantations and constructions of any nature incorporated or situated therein, with a character of permanence, provided it forms part of a person's assets and has economic value (article 2 of RITC). Properties in turn may be rural or urban.

Rural properties are lands situated outside urban agglomerations that are not building land, intended or capable of being intended for agricultural activities, including constructions directly related to that activity, their waters and plantations (article 3 of RITC).

Urban properties, which are all others, are divided into several types, namely (i) residential properties; (ii) commercial, industrial or service properties; (iii) building land; and (iv) others (article 6-1 of RITC). The specification of urban properties is made in accordance with their purpose, either because it is licensed for the purpose in question or because that is the purpose to which it is normally intended (article 6-3). Building land includes (i) land for which a building or development license or authorization has been granted, preliminary communication accepted or favorable preliminary information issued for a development or construction operation; (ii) land declared as such in the acquisition title (article 6-3 of RITC).

In turn, other urban properties are classified as (i) lands within the limits of urban agglomerations in which the competent entities or territorial planning instruments prohibit development or construction (ii) lands within an urban agglomeration that cannot have use generating any income and are not dedicated to use generating agricultural income; (iii) buildings and constructions licensed or, in the absence of a license, which have as their normal purpose ends other than residential, commercial, industrial or service purposes (article 6-4 of RITC).

Mixed property classification is also admitted, when the same property has both a rural and urban part and neither can be classified as principal in relation to the other (article 5-1 and 2 of RITC).

It is believed that the conceptual constructions of the RITC should be understood as structuring the taxation of assets, for several reasons. First, because the very norms of the tax laws in this area of taxation are expressed in this sense, specifically article 1-6 of the STC and article 1-2 of the Real Estate Transfer Tax Code. Second, because the RITC is a true code in its legal meaning, i.e., it contains the nuclear regime of the rules relating to a particular matter; it contains the fundamental discipline, treating it in a systematic and scientific manner[9]. Third, the provisions of the RITC in question were elaborated in the context of the reform of asset taxation, considered in the complex of norms in which they are integrated, and have the function of "establishing the precise contours of the reality subject to taxation" (preamble to RITC).

The entire system of organization of real property embodied in the RITC thus has as its purpose the rigorous characterization of real property assets that are subject to taxation and uses for this purpose a criterion of multiple dimensions – the economic perspective. It is the economic perspective that makes it possible to state that only fractions of territory that can constitute the assets of persons and that have economic value are properties (article 2 of RITC); it is the characteristic of having economic autonomy that permits the concept of property to embrace waters, plantations, buildings and constructions (article 2 of RITC); it is use generating agricultural income that permits qualification of properties as rural (article 3-1-a of RITC); it is believed to be the same lens of economic individuality, much more than legal, that mandates treating each autonomous fraction of buildings in vertical ownership as a property (article 2-4 of RITC), although for civil law it is merely an independent unit of an urban property (article 1414 of the Civil Code); they also appear to be reasons of an economic nature that lead each part of a property capable of independent use to be considered separately in the cadastral registration, so as to permit the distinction of its respective taxable property value (article 12-3 of RITC).

The concern for individualization following criteria of an economic character is well understood; the aim is to characterize each asset in accordance with its aptitude and to tax it accordingly. To this end, there is a permanent concern to have recorded the value of each part that could be subject to differentiated use (e.g., article 12-3 of RITC). The concern for the described and individually registered autonomous parts ultimately has the purpose of also individualizing the taxation, for each part of the real property assets; it is precisely this individualization that the provision of article 119-1 of RITC sanctions, by imposing not only the distinction of properties but also that of their parts capable of independent use and their respective taxable property value. For the RITC, it is therefore the value of the parts capable of independent use that serves as the basis of incidence for the tax and not some other value calculated on its basis through arithmetic operation.

Being this the criterion used for calculation of the Real Estate Tax and the RITC being subsidiary to the STC (article 67-2 of Law No. 55-A/2012 of 29 October), there is no reason not to follow its guidance. Let us see to what it leads.

The rule of incidence – item 28-1 GTST – only determines the application of the tax to properties with residential allocation with TPV equal to or exceeding €1,000,000.00. Two approaches could be explored:

To consider that the limit of €1,000,000.00 refers to each part of the property that is fiscally relevant, by having its own tax significance;

To obtain a TPV corresponding to residential allocation, through the arithmetic operations necessary to purge the total TPV of the autonomized divisions with different allocation.

In theory either solution might seem possible, but it must be acknowledged that the machinery of the second approach has no legal basis whatsoever and does nothing more than create a corrected TPV that the law does not sanction and that appears to be outside its spirit.

Indeed, as has been seen, the taxation of assets is marked by the rigorous characterization of the realities subject to taxation. This rigor is not compatible with reasoning and arithmetic operations that have no clear legal support.

The teleological and historical elements of interpretation also point in the same direction. When the law was discussed in Parliament, it was made clear that the intention was to tax properties of high value and that the tax would be levied on houses with a value equal to or exceeding €1,000,000.00[10]. Now, the magnitude of the value of a house is a judgment that is measured in relation to each floor and not in relation to a building, which may consist of multiple small divisions, possibly with TPV totaling a substantial amount but without that being able to assert that we are dealing with "high-value houses." A building with two houses of €1,000,000.00 each will have high-value houses; another with 100 fractions of €100,000.00 each will not merit the description of having high-value houses.

The dominant case law has sanctioned solutions in the direction indicated, which can be seen in the review conducted on this matter by the recent Decision of the Single Arbitral Tribunal constituted at CAAD of 29-01-2015, in case 313/2014-T [Jaime Carvalho Esteves][11].

It thus appears that the best interpretation of the provision contained in item 28.1 of the GTST requires that each part of the property that is fiscally relevant, by being capable of autonomous use, shall only be subject to taxation if its TPV is equal to or exceeding €1,000,000.00.

Let us now examine the extent to which this interpretation is applicable to the factual situation presented by the Petitioner.

It was established that the assessments applied to 12 divisions or floors with "residential" allocation, each with a TPV below €1,000,000.00. From the law as expounded above, it is clear that these divisions or floors cannot be the basis of tax incidence because their TPV falls below the taxation threshold.

There is therefore reason to conclude for the illegality of the assessment and the well-foundedness of the Petitioner's request, in this respect.

Reimbursement of the Amount Paid

The Petitioner also petitions that the Tax Authority reimburse it the amount of the tax paid relating to the challenged assessments.

Pursuant to article 100 of the General Tax Law[12], "the tax administration is obliged, in case of full or partial success of complaints or administrative appeals, or of judicial proceedings in favor of the taxpayer, to the immediate and full restoration of the situation that would have existed if the illegality had not been committed, including payment of compensatory interest, in accordance with the terms and conditions provided for in law." It appears clear that the taxpayer has the right to be reimbursed for the amounts it has paid relating to assessments tainted by illegality, so that its assets are restored to the amount it had at the moment preceding that payment.

It is important, however, to assess whether this Arbitral Tribunal has the competence to recognize this right or to order the Tax Authority to do so. To this end, it is important to bear in mind that (i) the LRAT intended to strengthen effective protection of the rights and legally protected interests of taxpayers (preamble to Decree-Law No. 10/2011 of 20 January); (ii) the mandatory character of arbitral decisions for the Tax Authority extends to the exact terms of those same decisions (article 24-1 LRAT); (iii) the Tax Authority's obligation of restoration is subject to the very scope of the success of the petition (which may be full or partial) (article 100 of General Tax Law).

The first interpretive element cited prevents any system from being conceived that would obstruct or hinder an arbitral decision from achieving its objective, which is the determination of the law in the specific case. The protection of the rights of taxpayers is not satisfied with less, i.e., the decision must produce all consequences necessary to obtain legality. It cannot be conceived that, with the illegality of the tax act declared, the taxpayer still has to resort to another instance to have its right to restoration of the situation declared.

On the other hand, the second element leads to the consideration that, since arbitral decisions are mandatory for the Tax Authority in their exact terms (article 24-1 LRAT), this means that these must contain all elements necessary for the Tax Authority to restore legality with complete precision, and for this it is indispensable that the decision contain the precise limits and terms in which it rules.

The third element illustrates in fact this need for precision or exactness of the decision. By stating that the Tax Authority's obligation of restoration is subject to the very scope of the success of the petition, the law (article 100 of General Tax Law) creates a nexus of dependence between the decision and the restoration obligation. Restoration is effected to the extent the claim is judged successful. There is no restoration without success and the measure of success defines the measure of restoration. The need for this precision is very clear in cases of partial success. When partial success occurs, how should the Tax Authority behave? The answer can only be one – in the exact terms and limits in which the decision was rendered, whether it be judicial or arbitral.

It follows from the foregoing that the decision on restoration must be taken by the arbitral tribunal when requested to consider the issue.

In these proceedings it was established that the Petitioner made payment of the 12 Stamp Tax assessments for the year 2012 in the total amount of €8,819.96.

The Petitioner is entitled to full restoration of the situation that would have existed if the assessments had not been made, and therefore must be reimbursed for the amount it paid.

DECISION

In view of the factual and legal elements gathered and presented, the Arbitral Tribunal decides to render judgment in favor of the petition for arbitral pronouncement:

Declaring the illegality of the twelve Stamp Tax assessments relating to the year 2012, relating to the urban property registered in the cadastral roll of the parish of … (extinct), municipality of …, by article …, and annulling in consequence these assessments;

Condemning the Tax and Customs Authority to reimburse the Petitioner in the total amount of €8,819.96, corresponding to the sum of the twelve assessments it paid.

Value of the Case

In accordance with the provisions of article 306-2 of the Code of Civil Procedure, pursuant to article 29-1-e) LRAT and article 97-A, No. 1-a) of the Code of Tax Procedure, pursuant to article 3-2 of the Regulation of Fees in Tax Arbitration Proceedings, the value of the case is set at €8,819.96.

Costs

The costs shall be borne by the party that caused them, with it being understood that the defeated party causes them (articles 527-1 and 2 of the Code of Civil Procedure). In these proceedings and considering the cited rule, responsibility for the costs is that of the Tax Authority, as the defeated party.

In accordance with article 22-4 LRAT, the amount of the costs is set at €918.00, in accordance with Table I annexed to the Regulation of Fees in Tax Arbitration Proceedings, which shall be borne by the Tax and Customs Authority.

Lisbon, 5 May 2015

The Arbitrator,

Nuno Maldonado Sousa

[1] In this decision designated by the abbreviated form of common use "LRAT" (Legal Framework of Tax Arbitration).

[2] In this decision designated by the abbreviated form "Tax Authority" as is in generalized use.

[3] In this document the acronym GTST is used to designate the General Table of Stamp Tax.

[4] In this document the acronym "RA" is used to designate the (amended) petition presented by the Petitioner on 19-01-2015.

[5] In this document the acronym "PA" is used to designate the administrative file attached by the Tax Authority to these proceedings.

[6] In this document the acronym "TPV" is used to designate the taxable property value.

[7] In this document the acronym STC is used to designate the Stamp Tax Code.

[8] In this document the acronym RITC is used to designate the Real Estate Tax Code.

[9] See José de Oliveira Ascensão – Law – Introduction and General Theory. 3rd ed., Lisbon, Calouste Gulbenkian Foundation, 1983, pp. 282-283.

[10] Journal of the Parliament, I Series, No. 9/XII-2, 11 October, p. 32.

[11] Accessible at http://www.caad.org.pt/

[12] In this document the acronym GTL is used to designate the General Tax Law.