Stamp Tax on Construction Land: CAAD Ruling 477/2014-T Annuls Assessment Under Verba 28.1 TGIS

Arbitral Decision

I. STATEMENT OF FACTS

A… – …, LDA, with registered office in … Porto, holder of the single registration number and legal entity identification number …, hereinafter simply designated as Claimant, filed a request for constitution of an arbitral tribunal in tax matters and a request for arbitral award, pursuant to the provisions of articles 2º no. 1 a) and 10º no. 1 a), both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, abbreviated as LFRM), petitioning for the annulment of the tax act of assessment of Stamp Duty (SD) for the year 2013, in the total amount of € 38,495.08.

To substantiate its request, it alleges, in summary:

a) The Claimant is the owner of the urban property located at …, parish of Y…, Porto, registered in article … of the respective urban property register;

b) The Claimant was notified to make payment of the first and second instalments of the Stamp Duty assessment, referring to the year 2013, in the amounts of, respectively, € 12,831.70 and € 12,831.69;

c) Such assessment was made under item 28.1 of the General Table of Stamp Duty (GTSD);

d) The property subject to the stamp duty assessment in question is a construction site;

e) In the version given by Law no. 55-A/2012, of 29 October, in force on 31.12.2013, item 28.1 of the (GTSD) only provided for the taxation of properties with residential purpose, with no taxation being provided for construction sites;

f) Construction sites constitute a species of property completely distinct from properties classified as residential;

g) Neither the letter nor the spirit of the law permit the equation of construction sites with properties with residential purpose, for the purposes of their taxation by application of item 28.1 of the GTSD attached to the STC;

h) The classification of construction sites as "properties with residential purpose" for the purposes of their subsumption to SD, by application of item 28.1 of the GTSD, attached to the STC, in the version given by Law no. 55-A/2012, of 29 October, is illegal;

i) The assessment in question is illegal, for violation of the provisions of article 1 of the STC and of item 28.1 of the GTSD and unconstitutional, for violation of articles 13, 81, and no. 3 of articles 103 and 104 of the Constitution of the Portuguese Republic.

The Claimant attached four (4) documents and listed one witness.

In the request for arbitral award, the Claimant chose not to appoint an arbitrator, whereby, pursuant to the provisions of article 6º no. 1 of the LFRM, the signatory was appointed by the Deontological Council of the Administrative Arbitration Centre, with the appointment having been accepted in accordance with legal provisions.

The arbitral tribunal was constituted on 16 September 2014.

Notified in accordance with and for the purposes of the provisions of article 17º of the LFRM, the Respondent presented a response, invoking in summary that, for purposes of application of item 28.1 of the GTSD attached to SD, construction sites are equivalent to properties with residential purpose.

It concludes petitioning for the dismissal of the request and, consequently, the maintenance of the assessment acts at issue.

The Respondent did not attach a copy of the administrative file and did not list any witness.

Given the position assumed by the parties and there being no need for additional production of evidence, the questioning of the witness listed by the Claimant was dispensed with, and a waiver of the meeting referred to in article 18º of the LFRM and the presentation of arguments was also determined.

II. QUESTIONS TO BE DECIDED:

In the present case, the question to be decided consists solely in determining whether, for purposes of application of item 28.1 of the GTSD attached to the STC, in the version given by Law no. 55-A/2012, of 29 October, a construction site is considered as a property with residential purpose.

III. FACTUAL MATTERS:

a. Proven Facts:

With relevance for the decision to be rendered in the present case, the following facts were given as proven:

1. There is registered in the property register in favour of the Claimant the urban property located at Rua …, no. …, Union of parishes of X… and Y…, in the municipality of Porto, described in the Land Registry Office of Porto under the number … and registered in the urban property register under article …;

2. The property referred to in 1 is a construction site, with the tax asset value of € 3,849,508.23;

3. On 18/03/2014, the AT assessed, under item 28.1 of the GTSD attached to the STC, stamp duty on the real property referred to in 1, relating to the year 2013;

4. The Claimant was notified of the 1st instalment, in the amount of € 12,831.70, and of the 2nd instalment, in the amount of € 12,831.69, of the SD assessed by the AT.

b. Unproven Facts:

With interest to the case, there is no factual matter unproven.

c. Substantiation of the Factual Matters:

The conviction regarding the facts given as proven was based on the documentary evidence submitted by the Claimant, indicated in relation to each of the points, whose authenticity and adherence to reality was not disputed by the Respondent.

IV. PLEAS IN ABATEMENT:

The Arbitral Tribunal is regularly constituted and is materially competent.

The parties enjoy legal capacity and legal standing, are legitimate and are properly represented.

The proceedings do not suffer from defects affecting their validity, with no exceptions or preliminary questions that prevent the judgment on the merits and of which it is necessary to take official cognizance.

V. ON THE LAW:

The factual matter being fixed, it is now necessary, with reference to it, to ascertain the applicable law.

The Claimant argues that construction sites cannot be considered, for purposes of subjection to SD, as properties with residential purpose.

In its understanding, the provision of item 28.1 of the GTSD attached to the STC does not allow for any extensive interpretation, so that construction sites can be equated with properties with residential purpose, with the indicated item 28.1 therefore not being applicable to them.

To the contrary, the Respondent argues that the property on which the impugned assessment falls has the legal nature of a property with residential purpose, not suffering from any illegality or unconstitutionality.

As to objective incidence, article 1, no. 1 of the STC provides that stamp duty is levied on all acts, contracts, documents, titles, papers and other facts or legal situations provided for in the General Table.

Article 4 of Law no. 55-A/2012, of 29 October added to the GTSD, attached to the STC, approved by Law no. 150/99, of 11 September, item no. 28, with the following wording:

"28 - Ownership, usufruct or right of superficies of urban properties whose tax asset value as shown in the register, pursuant to the Code of Municipal Property Tax (CMPT), is equal to or greater than € 1,000,000 - based on the tax asset value used for purposes of CMPT:

28.1 - For property with residential purpose - 1%;

28.2 - For property, when the taxpayers who 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 order of the Minister of Finance - 7.5%."

That said,

In item 28.1 of the GTSD added by Law no. 55-A/2012, of 29 October, an innovative concept was used, which is not used by any other tax legislation: the concept of property with residential purpose.

Neither in the CMPT, indicated by the aforementioned Law no. 55-A/2012 as the subsidiary applicable statute with respect to the tax introduced by the addition of item 28 to the GTSD, is any such defined concept used.

In fact, the CMPT defines the concept of property, defines the various types of properties and identifies the species of urban properties.

Thus,

Pursuant to article 2 of the CMPT, "property is any fraction of territory, encompassing the waters, plantations, buildings and constructions of any nature incorporated in or resting on it, with a character of permanence, provided that it forms part of the assets of a natural or legal person and, under normal circumstances, has economic value."

Properties are divided into rural (article 3), urban (article 4) or mixed (article 5), with urban properties subdividing into 4 species: residential, commercial, industrial or for services; construction sites and others (article 6).

No. 3 of article 6 of the CMPT clarifies that construction sites are considered to be "lands situated within or outside an urban agglomeration, for which a licence or authorization has been granted, admitted prior notification or issued favourable prior information for a subdivision or construction operation, and also those that have been so declared in the acquisition title."

Combining the aforementioned provisions, it appears that there is no reference to property with residential purpose in any of the indicated rules.

Therefore, in order to determine what a property with residential purpose is, an exercise of interpretation must be carried out, resorting to the general rules of legal hermeneutics contained in article 9 of the Civil Code.

Thus, interpretive activity will have to begin with the analysis of the letter of the law, which constitutes the limit of interpretation, and an interpretation cannot be considered that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

Now, as results from the legal provisions already cited, the concept of property with residential purpose is absolutely innovative in the STC, not existing in any other tax law.

The closest concept is that of "residential property", defined in no. 2 of article 6 of the CMPT as the building or construction licensed for such purpose or, in the absence of a licence, that has as its normal destination this purpose.

The truth, however, is that the legislator, in item 28.1 of the GTSD attached to the STC did not use the expression "residential property" but rather "property with residential purpose".

Therefore, proceeding from the principle – which is held as certain – that the legislator knew how to express itself in adequate terms, it cannot be maintained that these distinct expressions have the same meaning. Instead, and by way of application of the principles enshrined in nos. 2 and 3 of article 9 of the Civil Code, it must necessarily be maintained that, by using distinct expressions, the legislator intended to encompass different realities.

Let us focus, therefore, on the word "purpose", the noun form of the verb "to purpose".

This concept has already been exhaustively analysed by diverse and learned jurisprudence delivered by this arbitral centre[1], so we will refrain from dissecting such concept, accepting and maintaining that it consists in the action of destining something to a specific use.

Thus, property with "residential purpose" will be that which is destined for housing.

Indeed, the same conclusion is reached also through the reconstruction of legislative intent, taking into account the unity of the legal system, the circumstances in which the law was drafted and the specific conditions of the time in which it is applied, as mandated by the aforementioned article 9 of the Civil Code.

First and foremost, it is important to take into account that the introduction of this item 28 in the GTSD occurred at a time when, given the absolute necessity of dealing with the installed crisis, it was necessary to collect the maximum possible revenue, which was intended to be achieved, in particular, through the taxation of so-called "luxury" real properties.

It was intended, therefore, with the introduction of the taxation provided for in item 28 of the GTSD, to tax wealth, externalized in the ownership, usufruct or right of superficies of "luxury" urban properties with residential purpose.

That only properties with residential purpose are included in this new taxation results expressly from the Statement of Reasons of Bill no. 96/XII, in which it is stated that, with a view to strengthening the "principle of social equity in austerity, ensuring an effective distribution of the sacrifices necessary to comply with the adjustment programme", the legal diploma to be approved "extends the taxation of capital income and property, encompassing equitably a broad set of sectors of Portuguese society".

Thus, it can also be read in the aforementioned Statement of Reasons that "a rate is created under Stamp Duty levied on urban properties of residential purpose whose tax asset value is equal to or greater than one million euros" (emphasis ours).

Already within the scope of the discussion in general of the aforementioned Bill, it can be read:

"First, the Government proposes the creation of a special rate to tax urban residential properties of higher value. It is the first time in Portugal that a special taxation on high-value properties intended for housing is created. This rate will be 0.5% to 0.8%, in 2012, and 1% in 2013, and will apply to houses with a value equal to or greater than 1 million euros" (emphasis ours).

There is no doubt, therefore, that the legislator's intention was to tax houses, urban residential properties, properties intended for housing, that is, properties that are already actually destined for residential purpose.

Having established that the concept of "property with residential purpose" is as property actually destined for, devoted to housing, it is now important to analyse the actual scope of such concept. In other words, it is necessary to verify whether such residential purpose, for purposes of application of the provisions in item 28.1 of the GTSD, must be present or may be future, that is, whether it will encompass only properties that are already actually devoted to housing or also properties that, as is the case of the property in this case, being a construction site, do not yet have any defined purpose.

The distinction assumes special significance if we consider that a construction site may be destined to build, in the future, one or more residences, whereby, if future purposes that may be given to the property are included in the concept of "residential purpose", it could, in this case, be argued that item 28.1 of the GTSD applies to construction sites.

This understanding, however, has no adherence, in our view, to the letter and spirit of the law.

In fact, when analysing the literal tenor of item 28.1 of the GTSD it seems manifest that its application to properties whose purpose is unknown must be ruled out, as these, manifestly and from any point of view, cannot be considered destined for residential purpose.

For, not being known the purpose of the property in question, this may be destined for housing, as well as for commerce, industry or services, and it is certain that item 28.1 will only be applicable to properties with residential purpose and not to properties with any other purpose, in particular economic.

In the case at hand, having analysed the proven facts, it appears that the property in question does not yet have any known purpose, whereby it is manifest that item 28.1 of the GTSD should not be applied.

But even if the property in this case already had a known purpose, although not actual, and that purpose were residential, it would not be encompassed by the application of item 28.1 of the GTSD.

This is because, from the combination of the rules contained in item 28.1 of the GTSD and in no. 3 of article 6 of the CMPT, it results, without any margin for doubt, that the purpose must be actual and not merely future or probable.

In sum, a construction site whose purpose is unknown, as is the case of the property in this case, cannot be considered as a property with residential purpose for purposes of application of item 28.1 of the GTSD attached to the STC.

Neither should it be said, as the Respondent does, that the legal identity, for purposes of application of item 28.1 of the GTSD, between construction sites and properties with residential purpose results clearly from the fact that the legislator determines the application to construction sites of the valuation methodology for properties in general.

It is true that article 45 of the CMPT determines the application to construction sites of the same valuation methods applicable to properties in general.

However, it cannot be overlooked that such identity is limited to the valuation methodology and not to their classification.

With regard to valuation, there is no doubt that the legislator mandates the application of the same rules both to construction sites and to residential properties.

But as regards the classification of the property, nothing in the law or in general legislative intent permits us to conclude the existence of such identity.

In fact, as we believe is well stated in a judgment delivered by the Supreme Court of Justice, "it would be strange, besides, if the determination of the scope of the rule of tax incidence of item no. 28 of the General Table of Stamp Duty were found, after all, in the rules for determining the tax asset value of the CMPT Code, and that the terminological imprecision of the legislator in the drafting of that rule were, ultimately, elucidated and finally clarified by means of an indirect and equivocal reference to the purpose coefficient established by the legislator in relation to built properties (article 41 of the CMPT Code)[2].

Therefore, and following closely jurisprudence already established by this arbitral centre[3], it is to be concluded that "the available interpretive elements, including the 'circumstances in which the law was drafted and the specific conditions of the time in which it is applied', clearly point to the fact that it was not intended to encompass within the scope of incidence of item 28.1 situations of properties that are not yet devoted to housing, in particular construction sites held by companies", as is the case in this case.

But not only has the jurisprudence of this arbitral tribunal pronounced itself in this sense. In judgments delivered very recently, the Supreme Administrative Court decided that "since the legislator did not define the concept of 'properties (urban) with residential purpose', and as a result of article 6 of the CMPT Code – subsidiarily applicable to the Stamp Duty provided for in the new item no. 28 of the General Table – there is a clear distinction between 'urban residential properties' and 'construction sites', these cannot be considered, for purposes of incidence of Stamp Duty (Item 28.1 of the GTSD, in the version of Law no. 55-A/2012, of 29 October), as urban properties with residential purpose[4].

And that this is so results clearly from the fact that, in the last amendment made to item 28.1 of the GTSD attached to the STC, by Law no. 83-C/2013, of 31 December, which approved the State Budget for 2014, construction sites were here expressly included. Note, however, that even with this amendment, not all construction sites are subject to taxation by the application of item 28.1 of the GTSD attached to the STC, but only and exclusively construction sites whose building, authorized or planned, is for housing.

Since the aforementioned State Budget 2014 is not any interpretative law, it seems evident that, if the legislator felt the need to include in this item 28.1 the construction sites, it is because previously such sites were not included in the same, especially since such sites, as is the case of the land in this case, do not yet have any defined purpose, and it is unknown whether they will or will not be devoted to housing.

Any other interpretation of item 28.1 of the GTSD attached to the STC, in the version given by Law no. 55-A/2012, of 29 October, has no minimal legal support and cannot be defended.

It is thus verified that the assessment at issue in the present case is clearly illegal, as it has no legal foundation or sustenance.

Thus, as construction sites are not contained in item 28.1 of the GTSD attached to the STC, in the version given by Law no. 55-A/2012, of 29 October, and as these cannot be classified, for this purpose, as properties with residential purpose, it seems evident that these cannot be the object of taxation under this item.

Therefore, as there is no legal foundation for the assessment act carried out, its annulment tout court is necessary.

VI. OPERATIVE PART:

In light of the foregoing, it is decided to rule in favour of the request for declaration of illegality of the Stamp Duty assessment act in the total amount of € 38,495.08, with the consequent annulment of the same and of the payment instructions issued.

The value of the case is fixed at € 38,495.08, pursuant to item a) of no. 1 of article 97-A of the Tax Procedure and Process Code, applicable by virtue of items a) and b) of no. 1 of article 29 of the LFRM and of no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

The value of the arbitration fee is fixed at € 1,836.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, as well as the provisions of no. 2 of article 12 and of no. 4 of article 22, both of the LFRM, and of no. 4 of article 4 of the aforementioned Regulation, to be paid by the Respondent as the unsuccessful party.

Register and notify.

Lisbon, 13 March 2015.

The Arbitrator,

Alberto Amorim Pereira

Text drawn up by computer, pursuant to no. 5 of article 131 of the Civil Procedure Code, applicable by virtue of item e) of no. 1 of article 29 of Decree-Law no. 10/2011, of 20/01, with its drafting governed by the old spelling.

[1] See, among others, the decisions delivered under proceedings 48/2013-T; 50/2013-T and 132/2013-T, all available at www.caad.org.pt.

[2] Judgment of 09/04/2014, case no. 1870/13, available at www.dgsi.pt.

[3] Case no. 53/2013-T, available at www.caad.org.pt.

[4] Judgments of 23/04/2014, case no. 0272/14, and of 09/04/2014, cases no.s 1870/13, already cited, and 48/14, all in www.dgsi.pt.