Process: 483/2015-T

Date: March 23, 2016

Tax Type: Selo

Source: Original CAAD Decision

Summary

This arbitration case (Process 483/2015-T) addresses the controversial application of Stamp Tax under item 28.1 of the General Stamp Tax Table (TGIS) to construction land in mixed-use zones. The claimant, a real estate company, challenged a €12,550.63 Stamp Tax assessment on undeveloped land located in an area designated by municipal authorities as predominantly residential but permitting complementary commercial, services, equipment, and industrial activities. The central legal dispute concerns whether item 28.1 TGIS, which taxes building plots "whose construction, authorized or envisaged, is for residential purposes," applies to land in mixed-use zones or only to exclusively residential parcels. The claimant argued that the legislative intent behind item 28.1 was to tax luxury residential properties reflecting enhanced tax capacity, not commercial investment assets held by real estate companies in mixed-use areas. Additional grounds for annulment included lack of proper reasoning in the assessment and violation of constitutional principles of tax equality and ability to pay. The Tax Authority defended the assessment on grounds of unassailability, arguing that once property valuation and use classification are determined, they cannot be subsequently challenged. The Authority contended that "predominantly residential" zoning suffices for tax incidence under item 28.1, relying on municipal prior information and master plan designations. The case raises fundamental questions about the scope of Stamp Tax on construction land, the interplay between municipal zoning classifications and tax law, procedural requirements for challenging assessments, and the constitutional limits of taxation on investment property. It also addresses whether taxpayers can use tax arbitration to challenge such assessments and the availability of compensatory interest upon annulment.

Full Decision

ARBITRAL DECISION

Claimant: A…, Lda.

Respondent: AT - Portuguese Tax and Customs Authority

I – REPORT

1. Request

A…, Lda., with taxpayer number …, with registered office at Rua …, no. …, …-… …, submitted, on 27-07-2015, pursuant to the provisions of paragraph a) of article 2(1) and article 10 of Decree-Law no. 10/2011, of 20 January, which approves the Legal Framework for Tax Arbitration (RJAT), a request for arbitral decision, against the AT - Portuguese Tax and Customs Authority, with a view to:

  1. The annulment of the Stamp Tax assessment provided for in item 28.1 of the General Stamp Tax Table, embodied in the tax collection document no. 2015 …, on the property registered in the urban real estate tax register of the municipal union of … and … with article …, relating to the year 2014, in the amount of 12,550.63 euros;

  2. The refund of the amounts unduly paid as a consequence of the contested assessment, plus the corresponding compensatory interest.

To support its request, the Claimant alleges, in summary:

  • The Claimant is a co-owner of the urban property which is the subject of the contested assessment, located at Rua … and Avenida …, described in the Land Registry Office of … under no. … and in the urban real estate tax register with article …;

  • The property in question is a building plot on which no construction work has been initiated to date;

  • Following submission to the Municipal Council of … of a prior information request regarding the possibility of construction on the said property, the municipal authority informed that the area in which the land in question is located is intended for the predominant location of residential activities, supplemented with other activities, namely commercial, equipment, services, business and industrial, provided they do not create incompatibility with residential activity;

  • Item 28.1 of the General Stamp Tax Table (TGIS) provides for the incidence on building plots "whose construction, authorized or envisaged, is for residential purposes, in accordance with the provisions of the Real Estate Tax Code (IMI Code)", the land in question, with the characteristics described, does not fall within this provision, since the construction envisaged in the area does not include only residential use, but encompasses services, commerce, equipment and industry;

  • In the absence of any specific construction envisaged for the land in question, and being possible, in accordance with the municipal master plan and with the prior information obtained, to install thereon buildings of the types equipment, commerce, services or industry, it is not possible to assert, as the contested assessment incorrectly did, that this is a plot "whose construction, authorized or envisaged, is for residential purposes, in accordance with the provisions of the IMI Code";

  • The taxation established in item 28.1 of the TGIS has a specific objective, which is to tax taxpayers with an enhanced tax capacity, manifested through ownership of luxury residential properties, making it reasonable to conclude that the legislator also intended in the case of plots to tax only "residential houses" and not any other type of properties;

  • Furthermore, the holding by a real estate company of a building plot, even if intended for the construction of residential properties, does not reveal any special tax capacity;

  • In constitutional terms, the holding by a real estate company of a building plot, which is an investment asset, does not reveal tax capacity, so the assessment in question is not in accordance with the constitutional principle of tax capacity, which should prevail over the fiction of an objective subjection to Stamp Tax as a pseudo-implementation of the principle of equality, all of which leads to the conclusion that the contested assessment is unlawful due to violation of the constitutional principle of tax equality;

  • The contested assessment is further unlawful due to lack of reasoning, as the Tax Authority, in order to properly justify the act, was obliged to state that we are dealing with a plot "whose construction, authorized or envisaged, is for residential purposes", which it did not do.

2. Response

In its Response, the Respondent AT – Portuguese Tax and Customs Authority, alleges, in summary:

a) By Exception

  • Given the unassailability of the performance of assessment acts contained in the tax collection notes which are the subject of the present request for arbitral decision, the dilatory exception provided for in paragraph c) of article 89(1) of the Code of Administrative Court Procedure (CPTA), subsidiarily applicable to the present case by virtue of article 29(1), paragraph c) of the RJAT, prevents the merits from being heard and results in the Respondent being absolved of the proceedings;

b) By Way of Defence on the Merits

  • Any illegalities or incorrections made in the valuation of properties should have been challenged at the time such valuation occurred, by the appropriate means provided for in law;

  • Since this did not occur, all positive prerequisites – valuation record, taxable value, use of the property and holder of the right – upon which tax incidence depends became unassailable;

  • The notion of the use of urban property finds its basis in the section relating to property valuation, which is understandable since the valuation of the property (purpose) adds value to it, constituting a fact of distinction that is decisive (coefficient) for valuation purposes;

  • For the purpose of determining the taxable property value (VPT) of building plots, the application of the use coefficient in the context of valuation is clear, so its consideration for the purposes of applying item 28.1 of the TGIS cannot be ignored;

  • In the valuation of building plots, one must necessarily take into account the authorized area to be constructed and the use to be given to such construction, that is, the characteristics of the urban property that will be built on it; the determination of the VPT of building plots must take into account the use of constructions authorized or envisaged for residential purposes;

  • Well before the actual construction of the property, it is possible to ascertain and determine the use of the building plot, as the authorization permit for urbanization operations should contain, among other elements, the number of plots and the indication of the location area, purpose, implantation area, construction area, number of floors, number of units in each plot, with specification of units intended for cost-controlled housing, where applicable, in accordance with paragraph a) of article 77 of the Legal Framework for Urbanization and Construction (RJUE);

  • The prior information issued by the Municipal Council at the request of the Claimant clearly states that the property in question is located in a predominantly residential area, with other activities envisaged always being a complement to the residential use;

  • If there were any doubts as to the residential use of the land in question, these would be dispelled by its normal destination which, as can be inferred from reading the master plan, would be presumably the construction of residential buildings;

  • Therefore, the contested assessment embodies a correct interpretation and application of item 28.1 of the TGIS, as amended by Law no. 83-C/2013, which expressly provides that building plots constitute objects subject to taxation;

Regarding lack of reasoning:

  • All elements – identification of the taxpayer, tax year, identification of the property, tax year, rate, VPT, collection and tax payable – are expressly stated in the tax collection notes for payment, with no underlying administrative procedure for each assessment act.

Regarding the alleged unconstitutionality of the norm applied to the assessment:

  • Residential buildings or constructions and, on the other hand, commercial, industrial or service buildings or constructions, as well as building plots and the undetermined category "others" are autonomous and clearly differentiated categories (a difference that is manifested in the different regulations contained in articles 40-A(1), (2), (3) and (5) and articles 41 and 45 of the IMI Code);

  • Since it is imperative to treat unequally that which is not equal, fully complying with the constitutional provision of equality, item 28 of the TGIS does not constitute any violation of the principle of equality in article 13 of the Portuguese Constitution.

Regarding the request for payment of compensatory interest:

  • The Respondent cannot be ordered to pay compensatory interest to the claimant, since it applied the law, and the contested assessments do not suffer from any illegality.

3. Subsequent proceedings

By order of 01-01-2016, and with the agreement of the Parties, the Tribunal determined to dispense with the meeting provided for in article 18 of the RJAT and set a deadline for the Parties to present written submissions.

4. Submissions

In the submissions presented by it, the Claimant began by responding to the exception raised by the Respondent, as follows:

  • The Claimant identified on the first page of the initial petition the subject matter of the request for arbitral decision as the "assessment of the legality of the tax act assessing Stamp Tax provided for in item 28.1 of the General Stamp Tax Table", so the exception invoked by the Respondent is unfounded;

  • The invocation of the exception of incompetence, without any justification and in contradiction with the Respondent's conduct in many previous proceedings, constitutes bad faith litigation;

Regarding the substantive question of the illegality of the contested assessment, the Claimant alleged that the Tax Authority does not invoke as justification that we are dealing with building plots with use envisaged or approved for residential purposes, in accordance with the IMI Code, and that it overlooked the fact that, in addition to the plot being authorized for the construction of units for residential use, it also has envisaged construction intended for commerce and services, a situation that neither the substance nor the intent of the incidence provision contemplate.

The Respondent did not present submissions.

II. EXAMINATION OF PROCEDURE

The Sole Arbitral Tribunal was duly constituted on 06-10-2015, with the Arbitrator appointed by the Deontological Council of CAAD, having complied with the respective legal and regulatory formalities (articles 11(1), paragraphs a) and b) of the RJAT and 6 and 7 of the CAAD Deontological Code), and is competent ratione materiae in accordance with article 2 of the RJAT.

The Parties have legal personality and capacity and are duly represented.

No procedural defects were identified.

III. ISSUES FOR DECISION

The following are the issues to be decided in the present arbitral proceedings:

  1. The merits of the exception of incompetence of the Arbitral Tribunal invoked by the Respondent;

  2. The violation, by the contested assessment, of the provisions of item 28.1 of the TGIS due to error in the factual and legal prerequisites for the application of such norm;

  3. The unconstitutionality of the incidence provision contained in item 28.1 of the TGIS, to the extent that it subjects to taxation building plots "whose construction, authorized or envisaged, is for residential purposes, in accordance with the IMI Code";

  4. The violation, by the contested assessment, of the legal obligation to state reasons for tax acts.

IV – FACTS

1. Proven facts

The following are the proven facts considered relevant for the decision of the case:

1st: On 21.07.2015, the Claimant was registered as a co-owner of half of a property described as a building plot, described under article … in the urban real estate tax register of the municipal union of … and …, with a VPT of 2,510,125.03 euros;

2nd The property referred to is included, as lot no. …, under the subdivision permit no. …/91 of the Municipal Council of …;

3rd In accordance with the subdivision permit, and in accordance with amendment …/2015 to the same, the respective area intended for residential purposes is 5,239.00 m², corresponding to 35 units; the area intended for commerce and services is 730.00 m², corresponding to 2 spaces;

4th The property referred to was the subject of prior information issued by the Municipal Council of … at the request of the Claimant, in which it is stated that, in accordance with the Master Plan and Urban Plan of … South, the property is located in a predominantly residential area and "is intended for the predominant location of residential activities, supplemented with other activities, namely commercial, equipment, services, business and industrial, provided they do not create conditions of incompatibility with residential activity in accordance with the law";

5th The Claimant was notified of the assessment of Stamp Tax, under item 28.1 of the TGIS, on the said property, assessment embodied in document no. 2015 …, in the amount of 12,550.63 euros;

6th Prior to the submission of the request for arbitral decision, the Claimant had proceeded to pay the first installment of the assessed tax, in the amount of 4,183.55 euros;

7th Subsequently, during the course of the present arbitral proceedings, the Claimant proceeded to pay the second and third installments of the assessed tax, each in the amount of 4,183.54 euros.

The proven facts were established on the basis of the documentation presented by the Parties.

2. Facts not proven

There are no facts with relevance for the arbitral decision that have not been established as proven.

V – REASONING

1. The merits of the exception of incompetence of the Arbitral Tribunal invoked by the Respondent

Pursuant to article 2(1), paragraph a) of the RJAT, the jurisdiction of arbitral tribunals includes the assessment of the claim for "declaration of illegality of assessment acts for taxes, self-assessments, withholding at source and payments on account".

In article 1 of the initial petition, the Claimant states:

"The present request for arbitral decision is hereby submitted against the assessment of Stamp Tax provided for in item 28.1 of the General Stamp Tax Table (…)".

In article 2, the Claimant identifies the property on which the tax is assessed, the year to which it relates and the amount of the tax debt and indicates the tax collection document through which the assessment was communicated to it.

There is no doubt, therefore, that the subject matter of the request for arbitral decision is the declaration of illegality of a tax assessment act, being thus in conformity with the aforementioned article 2(1), paragraph a) of the RJAT.

There is no basis for the assertion, sustained by the Respondent, that the request for arbitral decision has as its object the annulment of a tax collection note.

What the Claimant does, indeed, is indicate the tax collection document as the document that incorporates the assessment act, which is by no means equivalent to contesting the tax collection note. Knowing that the Respondent's practice is not to communicate the assessment act by means other than the tax collection document, which moreover contains all elements of the assessment, the invocation of the exception of incompetence is not only devoid of any foundation but creates unnecessary procedural difficulty.

The exception of incompetence of the Arbitral Tribunal is therefore unfounded.

2. The violation, by the contested assessment, of the provisions of item 28.1 of the TGIS due to error in the legal prerequisites

Item 28.1 of the TGIS (introduced by Law no. 55-A/2012, of 29 October) subjects to Stamp Tax "ownership, usufruct or right of superficies over urban properties whose taxable property value contained in the register, in accordance with the Real Estate Tax Code (IMI Code), is equal to or greater than (euro) 1,000,000", specifying two categories of properties that are covered by the tax: residential properties and building plots "whose construction, authorized or envisaged, is for residential purposes, in accordance with the provisions of the IMI Code" (as amended by Law no. 83-C/2013 of 31 December).

As to what constitutes building plots, it seems clear that the concept should be found in the Real Estate Tax Code (IMI Code), in accordance with the final part of the provision in item 28.1 of the TGIS – "in accordance with the provisions of the IMI Code".

In accordance with article 6(3) of the IMI Code, "Building plots are plots of land situated within or outside an urban agglomeration for which a license or authorization has been granted, prior notification admitted or favorable prior information issued for subdivision or construction operations, and also those so declared in the title of acquisition, except for plots where the competent authorities prohibit any of such operations, namely those located in green spaces, protected areas or which, in accordance with municipal land use plans, are intended for public spaces, infrastructure or facilities".

The property subject to the contested assessment is included, as lot no. …, in an area with a subdivision permit. In accordance with amendment …/2015 to the same permit, the area of the property intended for residential purposes is 5,239.00 m², corresponding to 35 units; the area intended for commerce and services is 730.00 m², corresponding to 2 spaces.

The property subject to the contested assessment was further the subject of prior information issued by the Municipal Council of … at the request of the Claimant, in which it is stated that, in accordance with the Master Plan and the Urban Plan of … South, the property is located in a predominantly residential area and "is intended for the predominant location of residential activities, supplemented with other activities, namely commercial, equipment, services, business and industrial, provided they do not create conditions of incompatibility with residential activity in accordance with the law".

Therefore, there is no doubt that the property in question meets the requirements to be classified as a building plot.

However, for the property to come within the scope of the incidence of item 28.1 of the TGIS, it is not sufficient to meet the requirements to be classified as a building plot, it being also necessary to be a plot "whose construction, authorized or envisaged, is for residential purposes, in accordance with the provisions of the IMI Code".

This second part of the provision is the one that raises the greatest interpretation problems.

First, it is not clear what was intended by the expression "in accordance with the IMI Code", since the IMI Code does not contain the category of "building plots whose construction, authorized or envisaged, is for residential purposes". It only provides in article 6(3) the category of building plots, not distinguishing according to the type of construction envisaged or authorized for them.

In order to derive a useful meaning from the referral, it should be understood that it authorizes seeking an itemized fulfillment of the normative provision by resorting to various parts of the IMI Code.

Thus, we believe that the expression "building plots" refers to article 6(3), the expression "for residential purposes" should be understood to refer to article 6(2) of the same provision. A construction will be for residential purposes when the envisaged or authorized construction is intended for normal residential use.

When can it be said, on the other hand, that a plot has construction that is "envisaged or authorized"?

Construction should be considered authorized when a building license has been requested from the competent services and that license has been granted. That is not what occurs in the present case.

As for finding that construction is "envisaged", the concept is much more vague.

It should be noted that article 45(2) of the IMI Code also speaks of "constructions authorized or envisaged", without however defining what they consist of.

A subdivision permit consists of a license for urbanization of an urban area with a view to the construction of buildings. This permit is requested by the interested parties, which implies that there is an intention to construct. On the other hand, the subdivision permit provides for the type of construction to be implemented, with the respective areas. This means that, where a subdivision permit exists, it should be considered that there is a provision for construction with certain characteristics.

Clearly, such provision may not materialize. The possibility of non-materialization is inherent in any provision. Being so, when the law – in item 28.1 of the TGIS – refers to envisaged constructions, it necessarily accepts this possibility of non-materialization. That is, the law intends for building plots to be taxed when there is provision for construction, regardless of its future materialization.

It thus appears beyond doubt that, in the present case, there is provision for construction.

It remains for us to determine whether it is possible to state in the case at issue that the "construction envisaged is for residential purposes".

For construction envisaged or authorized to meet the provision of this rule: is it sufficient that it be partly for residential purposes; is it required that it be predominantly for residential purposes; or is it necessary that it be exclusively for residential purposes? Knowing that the legislator is aware that collective urban buildings are nowadays never exclusively for residential purposes, and bearing in mind the principle of typicality in tax law, it would have been advisable for it to have clarified which of these meanings it intended to be considered. But it did not.

The Claimant argues that, because constructions are envisaged for the plot in question for purposes other than residential, the plot would not fall within the scope of the incidence provision (article 47 of the Constitution).

In the first place, it is observed that any of the three meanings pointed out above falls within the wording of the legal provision in question, since the provision does not contain the adverb "only" or "exclusively". Therefore, any of them will be, in the face of the literal meaning of the rule, admissible.

However, bearing in mind that a building plot for residential construction with a VPT equal to or greater than 1,000,000 euros is intended, in principle, for the construction of collective urban buildings and that collective urban buildings are never exclusively residential, being always supplemented with units for commercial purposes or for services, it appears to us that it should be excluded that the legislator intended to limit the scope of the tax to exclusively residential constructions. The opposite would imply concluding that the legislator did not express itself properly, establishing a rule without useful meaning, which is prohibited by article 9(3) of the Civil Code (CC).

On the contrary, seeking to reconstruct the legislative intent, from the texts, taking into account the circumstances in which the law was drafted and the conditions specific to the time in which it is applied, as prescribed for the interpretation of law in article 9(1) of the CC, it should be concluded that the legislator intended that building plots for which construction is envisaged of buildings that are, predominantly, for residential purposes be taxed.

In the present case, the envisaged constructions – according to the amendment to the permit – are 87.7% for residential purposes and only the remaining 12.3% for commercial purposes. Moreover, the prior information communication also states that services, commerce and equipment activities are complementary to residential activity, being admissible only to the extent that they are not incompatible with it. It therefore appears clear that the non-residential part (services, commercial, equipment and industrial) has a purely complementary role to the residential part in the buildings to be constructed on the land in question.

In this sense, we believe it correct to consider that the property subject to the contested assessment is a building plot "whose construction, authorized or envisaged, is for residential purposes", to the extent that it is predominantly for residential purposes. That is, we consider that in the concrete case, there are elements in the administrative licensing process – subdivision permit, amendment to the subdivision permit and prior information communication – that allow determination with certainty that the construction envisaged for the plot in question is for residential purposes.

The Claimant argues that, because the envisaged constructions are also or may also be intended for other purposes, it cannot be said that the envisaged constructions are for residential purposes and this because "they may be intended, jointly or separately, for many other purposes".

We do not see how to follow the Claimant's thesis since it is a fact, on which no uncertainty weighs, that the plot in question has envisaged constructions that are predominantly for residential purposes, in accordance with the subdivision permit, the amendment to the subdivision permit and the prior information communication.

The Claimant resorts to subjective elements of interpretation in support of its thesis, arguing, based on statements by the member of Government responsible for introducing item 28.1 of the TGIS, that "the reality intended to be taxed by the legislator would be (…) «urban residential properties», in common language «houses» and not other realities". It goes on to say: "following this same reasoning and considering that with the State Budget for 2014 the legislator expanded, with the same intent, the objective scope of Stamp Tax in accordance with item 28.1 of the TGIS to building plots, we can infer that (…) also in this case the legislator only intended to subject to tax (…) only houses whose construction is authorized or envisaged in accordance with the IMI Code".

Here too we do not believe the Claimant's argument should be followed. In the initial version, item 28.1 did not tax building plots. From 2014 onwards inclusive, building plots came to be covered by item 28.1 of the TGIS, whose construction authorized or envisaged is for residential purposes. It cannot, in our view, be sustained, after this amendment, that the legislator still intends, through item 28.1 of the TGIS, to tax only "residential houses". Particularly so because, as the Claimant also correctly observes, in the case of "residential houses", the legislator only subjects to taxation those of exceptionally high value, i.e., those with a property value equal to or greater than 1,000,000 euros. In taxing a building plot whose construction authorized or envisaged is for residential purposes, if it were understood that here there was still a tax on "residential houses", it would certainly be the case that all houses to be built on the affected plots would be affected, regardless of their value. This argument leads us to conclude that the taxation of building plots is not based on the purpose of taxing luxury houses, as appeared to be effectively the initial intent of item 28.1 of the TGIS, but on the purpose of taxing certain plots as such, which owe their value to the fact that construction is envisaged thereon for residential purposes.

In the terms set out, it is concluded that the allegation of illegality of the assessment due to error in the verification of the factual and legal prerequisites of the provision of item 28.1 of the TGIS is unfounded.

3. The unconstitutionality of the incidence provision contained in item 28.1 of the TGIS, to the extent that it subjects to taxation building plots "whose construction, authorized or envisaged, is for residential purposes, in accordance with the IMI Code"

The Claimant alleges that "the constitutional principle of tax capacity implies that tax capacity be taxed. With regard to companies, taxation will be based on actual income, not on a mere legal expectation, "as is the case in the present case".

And continues: "the fact that we are dealing with building plots – property of a real estate company and intended to enable it to carry out its corporate purpose and develop real estate promotion activity, and whose authorized and/or envisaged construction is also for residential purposes, cannot be overlooked that we are dealing with an act that does not reveal tax capacity. (…) Considering that the legislator intended to tax taxpayers who demonstrate exceptional tax capacity considering the houses of which they are owners, the fact that the Tax Authority now intends to assess Stamp Tax with respect to investment assets reveals a violation of the principle of equality and tax capacity. (…) In this respect, the principle of tax capacity should prevail over the fiction of an objective subjection to Stamp Tax as a pseudo (but not actual) implementation of the principle of equality."

The Claimant concludes: "In the absence of a compelling justification that legitimates, in strict compliance and respect for the principle of tax capacity and equality in tax matters, the assessments of Stamp Tax as carried out, it cannot but be concluded that the assessment of Stamp Tax is unlawful due to violation of the principle of [equality] with foundation in article 13 of the CRP".

Let us examine whether the Claimant is right.

The current Constitution of the Republic does not expressly enshrine the principle of tax capacity, which has a long tradition in Portuguese constitutional law. However, it is the generalized understanding of legal scholarship and constitutes established constitutional jurisprudence that the principle of tax capacity operates fully in our constitutional order (e.g. in this regard the judgment no. 84/03 of the Constitutional Court (TC), available at http://www.tribunalconstitucional.pt).

The principle of tax capacity – a principal constitutional principle in tax matters – derives from the constitutional principle of equality, as is stated, for example, in judgment no. 348/97 of the TC: "The duty of citizens to pay taxes constitutes a public obligation with constitutional foundation. As such, it is subject to certain rules equivalent to those of fundamental rights, namely the principles of universality and equality, that is, that citizens in general must be subject to payment (article 12(1)), and they must be subject to it in equal measure, without any undue discrimination (article 13(2)), this constituting the principle of tax equality. This principle is relevant not only in the case of tax imposition but also in the case of tax exemptions and privileges, which cannot fail to respect it under penalty of constitutionally illicit privilege".

Therefore – as is said in judgment no. 84/03 of the TC – "the principle of tax capacity expresses and implements the principle of fiscal or tax equality in its aspect of "uniformity" – the duty of all to pay taxes according to the same criterion – tax capacity fulfilling the unitary criterion of taxation. This criterion consists in that the incidence and distribution of taxes – of "fiscal taxes" more precisely – should be made according to the economic capacity or "capacity to spend" (…) of each person and not according to what each person may eventually receive in public goods or services (benefit criterion)".

But the principle of tax capacity is not only the parameter for the realization of tax equality. It is also an absolute prerequisite for taxation, in the sense that it is only possible to tax, in conformity with the Constitution, when there exists tax capacity and in the measure of that tax capacity. The Constitutional Court has repeatedly asserted this aspect – as an absolute prerequisite for taxation – of the principle of tax capacity. In its judgment no. 84/03, the Court states, paraphrasing Casalta Nabais, that the principle of tax capacity "prevents the legislator from acting arbitrarily, obliging it, in the selection and articulation of tax facts, to adhere to revelations of tax capacity, that is, to establish as the object or taxable matter of each tax a specific prerequisite that is a manifestation of such capacity and is present in the various legal hypotheses of the respective tax". And more recently, in judgment no. 197/2013, the Court held: "in this sense, the principle of tax capacity operates both as a condition or prerequisite as well as a criterion or parameter of taxation".

It is in this aspect of the principle of tax capacity – not as a parameter of comparison but as an absolute prerequisite for taxation – that the Claimant relies in asserting that, to the extent it applies to building plots belonging to real estate companies that hold such plots as current assets, item 28.1 of the TGIS would be unconstitutional because it applies to an object that does not constitute a manifestation of tax capacity.

Article 4(1) of the General Tax Law (LGT) tells us that tax capacity is revealed through income, assets and use of income (expenditure).

The taxation under item 28.1 of the TGIS applies to assets, as can be inferred from the expression "ownership, usufruct or right of superficies of urban properties". It is the mere holding of the property in the assets of the tax subject, not the income derived from it (unlike what occurred with the Former Property Contribution), that constitutes, in the case of item 28.1 of the TGIS, the taxable fact.

The Claimant does not dispute that ownership of real rights over urban properties can be considered a manifestation of tax capacity. It contests that such ownership is a manifestation of tax capacity when it concerns ownership of a real right over a property by a company, in whose assets the property in question has the function of a current asset, having as purpose to enable the company to carry out its corporate purpose.

The Claimant presents us with a question that has not been sufficiently treated either by legal scholarship or by jurisprudence, which is to know under what conditions assets reveal tax capacity. The question, indeed, is not limited to the case of companies, but extends with equal relevance to individuals.

With regard to the IMI (Real Estate Tax) – a tax that had as predecessors the Former Property Contribution of 1963 and the Municipal Contribution of 1988 and which represented, in relation to these predecessors, a shift from a taxation based on property income to taxation based on market value of properties – it can scarcely be said that it is based on the principle of tax capacity in all the taxation hypotheses provided for therein.

Indeed, the IMI applies both to vacation homes or investment properties as well as primary residences, for example. And with respect to primary residences, it applies both to a home worth 100,000 euros as well as one worth 1,000,000 euros. It should be noted that the tax exemption provided in article 46 of the Tax Benefits Statute for residential properties is temporary, lasting for a maximum of three years. This exemption is not, therefore, related to the principle of tax capacity, in which case it would be permanent. It should instead be seen as an exemption of an extra-fiscal nature, aimed at promoting investment in the acquisition of a primary residence.

It is scarcely defensible that a primary residence worth 100,000 euros constitutes a manifestation of tax capacity, especially in a system in which the State has for several decades been encouraging, through fiscal means, the acquisition of a primary residence and discouraging rental.

With respect to situations, such as those in the present case, in which properties form part of the current assets of a company, the IMI Code provides for special treatment for them, which is established in paragraph d) of article 9(1). Such properties are exempt only for a maximum period of four years (if the year of acquisition is included). The legislator had here a clear concern not to burden with tax the production costs of companies whose main production factor is building plots.

But what of properties in which other companies have their factories, offices or commercial establishments installed? Also in these cases, the IMI burdens the production costs of these companies, and these must be reflected in final prices. Therefore, it must be concluded that taxation of assets in the Portuguese tax system does not exclude taxation of real property that forms part of the assets of companies and that serves to carry out their corporate purpose. And, therefore, the legislator considers the ownership of these assets as a manifestation of tax capacity.

As for the taxation under item 28.1 of the TGIS, it appears demonstrated, despite deficient formulation, that initially it was intended to tax only luxury homes.

From 2014 onwards, the taxation under item 28.1 of the TGIS extended to building plots of value equal to or greater than one million euros whose construction authorized or envisaged is for residential purposes.

In this hypothesis of taxation, the object is no longer the luxury residence, since the value of the plot says nothing about the value of the residences to be built on it. Through this new hypothesis of taxation, the legislator targets a distinct object, with different logic. It targets, precisely, assets that form part of the assets of companies.

The final question that arises is whether it is possible to identify in this situation a manifestation of tax capacity. Admitting that in the Portuguese tax system, the rule is taxation, and not exclusion of taxation of business real property, and that therefore our legislator considers that there is tax capacity there, it does not appear defensible to us to assert that a manifestation of tax capacity is totally absent in the case of a building plot, of VPT equal to or greater than one million euros, belonging to a company.

The fact that the legislator limited taxation to plots whose construction authorized or envisaged is for residential purposes appears to us a legitimate option of the legislator.

The Constitutional Court, which has stressed that the principle of tax capacity must be reconciled with other constitutional principles, includes among these other constitutional principles the legislator's freedom of determination (judgment TC no. 590/2015). In judgment no. 711/2006, the Court states: "To ascertain the existence of a particularity sufficiently distinct to justify an inequality of legal treatment, and to decide on the circumstances and factors to be considered as relevant in such ascertainment, is a task that primarily falls to the legislator, who holds primacy in the implementation of constitutional principles and the corresponding freedom of determination. Therefore, the principle of equality presents itself fundamentally to legal operators, in the context of constitutional review, as a negative principle (…) - as a prohibition of arbitrariness".

It does not appear that in the case of item 28.1 of the TGIS there exists a situation of arbitrariness.

On the one hand, the legislator chose to exclude from taxation building plots destined for non-residential purposes, i.e. economic activities and social equipment, and on the other, it targeted those plots that by their location and classification at the level of land use planning instruments are those subject to greater speculative appreciation, which are precisely those destined for predominantly residential constructions.

We conclude, in light of all the considerations set out, that there is no absolute absence of a manifestation of tax capacity as a prerequisite for taxation, and that consequently there is no basis for judging the rule in question unconstitutional due to violation of the principle of tax capacity.

4. The violation, by the contested assessment, of the legal obligation to state reasons for tax acts

The Claimant further alleges that the contested assessment is vitiated by a violation of law due to lack of reasoning, since the Tax Authority should invoke, in the reasoning of the assessment, that we are dealing with a building plot whose construction, authorized or envisaged, is for residential purposes.

The duty to state reasons for administrative acts, among which tax acts are included, is established on a general basis in article 268(3), which provides that "administrative acts are subject to notification to the interested parties, as provided for in law, and require express and accessible reasoning when they affect rights or legally protected interests."

In tax matters, in cases where the law does not impose special requirements for reasoning, compliance with the duty to state reasons by the Tax Administration is assessed in light of the provisions of articles 77(1) and (2) of the LGT and taking into account the purposes served by the duty to state reasons.

Article 77 of the General Tax Law provides, in its paragraph 1, that "the decision of the procedure is always reasoned through a concise statement of the factual and legal reasons that motivated it (…)".

However, paragraph 2 of the same provision adds the rule that "the reasoning of tax acts may be carried out in summary form, and should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax."

It appears that the scope of application of this summary reasoning – provided for in paragraph 2 of article 77 and distinct from that provided for in paragraph 1 – will be so-called bulk or series acts, and the same understanding is corroborated by the Supreme Administrative Court in judgment STA of 17-06-2009, proc. no. 0246/09, in which it is stated that "in bulk acts, the duty to state reasons is fulfilled by the tax administration in a "standardized" and "computerized" manner, but without being able to fail to observe the provisions of paragraph 2 of article 77 of the LGT or to undermine the purposes of the right to state reasons".

As is also stated in the judgment of the STA of 10-04-20 (proc. 30368/13), "the duty to state reasons justifiably appears to be attenuated, for reasons of rationalization required by the efficient carrying out of administrative tasks and scarcity of resources, precisely in the domain of general administrative acts associated with certain areas of administrative activity such as the tax area, where administrative organs are requested to carry out acts of the same nature in large numbers, in the context of complex procedures, in which the Administration does not proceed, for reasons of feasibility, to the individualized analysis of each concrete case in all its complexity (in the same sense, the judgment of the STA of 16-05-2012, proc. no. 0278/12).

Emphasis is placed, from the passage of the judgment transcribed, on the idea that, in the context of complex procedures that are carried out in large numbers, the Tax Administration does not proceed to the individualized analysis of each concrete case in all its complexity. This means that in these acts, the specificities of the concrete case may be omitted from the reasoning.

We believe that we are in a situation that falls within this framework. The assessment of Stamp Tax under item 28.1 is the responsibility of the Tax Authority ab initio, independent of any anomaly in the tax relationship, as is the case, conversely, in cases of official assessment due to failure to self-assess, additional assessment or indirect valuation of taxable matter.[ii] Since the assessments of tax under item 28.1 of the TGIS are carried out in bulk, it is not required that the Tax Administration proceed to the individualized analysis of each concrete case in all its complexity, as is stated in the judgment previously cited.

In bulk acts, the duty to state reasons is fulfilled by the tax administration in a "standardized" and "computerized" manner, but without being able to fail to observe the provisions of paragraph 2 of article 77 of the LGT or to undermine the purposes of the right to state reasons (judgment of the STA of 17-06-2009, proc. no. 0246/09).

As already mentioned, in accordance with article 77(2) of the LGT, the reasoning of tax acts may be carried out in summary form, and should always contain the applicable legal provisions, the qualification and quantification of the tax facts and the operations for determining the taxable matter and the tax.

Now, albeit in summary form, standardized and computerized, the assessment in the concrete case contains all these elements.

The summary reasoning provided for in paragraph 2 of article 77 also cannot undermine the purposes of the right to state reasons. This purpose is to allow the person affected by the act, "placed in the position of a normal recipient – the good man standard (bonus pater familiae) referred to in article 487(2) of the Civil Code – to come to know the factual and legal reasons that are at its genesis, so as to enable him to opt, with full knowledge, between acceptance of the act or the activation of legal means of appeal, and so that, in the latter circumstance, the court can also exercise effective control of the legality of the act, assessing its legal accuracy in light of its contextual reasoning" (STA, 26-04-1995, proc. 018218).[iii] We believe that in the concrete case, given that it is a bulk act in which the justification serving as the basis for the assessment is standardized, the elements contained in the assessment allow the recipient to come to know the factual and legal reasons that are at its genesis, so as to enable him to opt, with full knowledge, between acceptance of the act or the activation of legal means of appeal.

However, if the tax subject recipient of the act does not consider the summary and standardized reasoning provided to be sufficient, the same may always avail himself of the faculty that the law places at his disposal in article 37(1) of the Code of Procedure and Process in Tax Matters, "requesting notification of the requirements that have been omitted or the passing of a certificate containing them", thus safeguarding full realization of the fundamental right to state reasons for the tax act.

In the terms set out, the allegation of a vice of lack of reasoning of the contested assessment is also found to be unfounded.

VI - DECISION

For the reasons set out, it is decided:

a) To find the exception of incompetence of the Arbitral Tribunal to be unfounded;

b) To find the request for a declaration of illegality and consequent annulment of the contested assessment act to be unfounded.

The value of the economic utility of the case is fixed at 12,550.63 euros;

Costs: In accordance with article 22(4) of the RJAT, the amount of costs is fixed at 918.00 euros, in accordance with Table I attached to the Rules on Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Let this arbitral decision be registered and notice thereof given to the parties.

Lisbon, Administrative Arbitration Center, 23 March 2016

The Arbitrator

(Nina Aguiar)

[i] Dourado, A. P., Direito Fiscal, Almedina, Coimbra, 2015, p. 199.

[ii] Saldanha Sanches, J. L., A Quantificação da Obrigação Tributária: Deveres de cooperação, auto-avaliação e avaliação administrativa, Lisboa, CTF, 1995, where the author states that "the existence of a situation of controversy, embodied in a dispute between the taxpayer and the administration about the existence or qualification of a particular fact is therefore the distinctive feature, in the field of tax administration, for the separation between administrative acts that require especially developed reasoning and those that do not".

[iii] Duarte Morais, R., Manual de Procedimento e Processo Administrativo, Almedina, Coimbra, 2012, p. 80.

Frequently Asked Questions

Automatically Created

Is Stamp Tax under verba 28.1 TGIS applicable to construction land not exclusively designated for housing?
Based on the arguments in Process 483/2015-T, the application of Stamp Tax under verba 28.1 TGIS to construction land not exclusively designated for housing is disputed. The claimant argued that mixed-use land, where residential construction is permitted alongside commercial, industrial, services, and equipment uses, should not fall under item 28.1 because the provision requires construction to be "for residential purposes" according to the IMI Code. The legislative intent appears focused on luxury residential properties demonstrating enhanced tax capacity, not commercial investment land. However, the Tax Authority maintained that land in "predominantly residential" zones qualifies for taxation even if complementary uses are permitted, basing this interpretation on property valuation rules and municipal zoning classifications that identify residential use as primary.
Can a taxpayer challenge Stamp Tax assessments on construction land through tax arbitration in Portugal?
Yes, taxpayers can challenge Stamp Tax assessments on construction land through tax arbitration in Portugal under the Legal Framework for Tax Arbitration (RJAT - Decree-Law 10/2011). In Process 483/2015-T, the claimant successfully invoked article 2(1)(a) and article 10 of the RJAT to request arbitral review of a Stamp Tax assessment under item 28.1 TGIS. However, the Tax Authority raised a preliminary objection based on the unassailability (inimpugnabilidade) of assessment acts, arguing under article 89(1)(c) of the CPTA (applicable subsidiarily per article 29(1)(c) RJAT) that challenges to property valuation and use classification must be made when the valuation occurs, not later when tax is assessed. This procedural defense questions whether arbitration jurisdiction extends to assessments based on previously determined and unchallenged property valuations.
What criteria determine whether construction land falls under the Stamp Tax incidence of verba 28.1 TGIS?
The criteria for determining whether construction land falls under Stamp Tax incidence of verba 28.1 TGIS involve several factors debated in Process 483/2015-T. First, the legal text requires the land to be a "building plot" (terreno para construção) whose construction is "authorized or envisaged" for "residential purposes" under the IMI Code provisions. The Tax Authority interprets this based on: (1) the use coefficient applied in property valuation under IMI rules; (2) municipal zoning designations in master plans indicating predominant residential use; (3) prior information from municipal councils regarding authorized construction types; and (4) the "normal destination" of the land considering its location and regulatory framework. Conversely, taxpayers argue that mixed-use zoning where residential is merely one of several permitted uses, without exclusive residential designation, should not trigger item 28.1. The nature of the property owner (commercial real estate company versus individual) may also be relevant to determining tax capacity.
Are compensatory interest (juros indemnizatórios) available when a Stamp Tax assessment on construction land is annulled?
Yes, compensatory interest (juros indemnizatórios) are generally available when a Stamp Tax assessment is annulled in Portugal. In Process 483/2015-T, the claimant specifically requested "the refund of the amounts unduly paid as a consequence of the contested assessment, plus the corresponding compensatory interest." Portuguese tax law provides for compensatory interest when taxpayers have paid taxes that are later determined to be undue, compensating them for the financial loss from the improper retention of funds by the Tax Authority. The legal basis and calculation methods for such interest are established in the Tax Procedure and Process Code (CPPT). The availability of compensatory interest is contingent upon the assessment being successfully annulled and the taxpayer having actually paid the contested amount, which creates a claim for restitution of unduly collected taxes.
How does the municipal zoning classification of land affect Stamp Tax liability under Portuguese tax law?
Municipal zoning classification significantly affects Stamp Tax liability under item 28.1 TGIS, as demonstrated in Process 483/2015-T. The Tax Authority heavily relies on municipal master plans and zoning designations to determine whether construction land qualifies as being "for residential purposes." When a municipality classifies an area as "predominantly residential" in its master plan or issues prior information stating the location is intended for residential activities (even if complemented by other uses), the Tax Authority interprets this as sufficient to trigger item 28.1 taxation. The authorization for urbanization operations under the Legal Framework for Urbanization and Construction (RJUE) must specify the intended use, which informs the property valuation and use coefficient under IMI rules. However, taxpayers argue that mixed-use zoning where multiple non-residential activities are expressly permitted should not automatically result in residential classification for tax purposes. The tension between municipal planning designations and tax law interpretations creates uncertainty about when exactly construction land becomes subject to this Stamp Tax provision.