Stamp Tax on Vertical Property: VPT Threshold Under Verba 28.1 TGIS – CAAD 498/2015-T

ARBITRAL DECISION

Report

1. A…, Lda., legal entity no.…, with registered office at Rua … no.…, …-… Lisbon, requested, on 28 July 2015, pursuant to the provisions of articles 2, no. 1, paragraph a) and 10, no. 2 of Decree-Law no. 10/2001, of 20 January, which regulates the Legal Framework for Tax Arbitration (RJAT), the constitution of the Arbitral Tribunal with a view to declaring the illegality of Stamp Duty (IS) assessments, dated 20/03/2015, made on the basis of Item 28.1 of the General Table of Stamp Duty (TGIS) annexed to the Stamp Duty Code (CIS), relating to the year 2014, in the total amount of €11,553.50, relating to an urban real property, not constituted in horizontal property regime, registered in the urban property register of the parish of …, municipality of Lisbon, under article…, of which the Claimant became aware through the collection notes relating to the first instalment, documents identified under numbers 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015…, 2015… and 2015…, with payment deadline in April 2015.

2. In the request for arbitral decision, the Claimant chose not to designate an arbitrator.

3. Pursuant to articles 6, no. 2, paragraph a) and 11, no. 1, paragraph b) of the RJAT, the Deontological Council designated as sole arbitrator the undersigned, who accepted the appointment within the legally stipulated period.

4. The Arbitral Tribunal was constituted on 20 October 2015.

5. The Respondent submitted its reply on 17 November 2015.

6. The Claimant replied, in writing, to the objection of incompetence raised by the Respondent.

7. Having no opposition from the parties, the Tribunal decided to waive the meeting referred to in art. 18/1 of the RJAT.

8. The parties submitted written arguments.

Arguments of the Parties

1. The Claimant alleged, in summary, that:

9.1 It is the owner of an urban real property, in total ownership with storeys capable of independent use, located at Rua … nos …, …, …, … and …, in Lisbon, registered in the urban property register of the parish of … under article…, 1st to 6th floor intended for residential use.

9.2 The Respondent proceeded, for the year 2014, to assess the stamp duty, by applying item 28.1 of the TGIS, in the total amount of €11,553.50, stating in the assessment notes "Taxable Property Value of the entire property: €1,155,350.00".

9.3 However, the storeys or divisions capable of independent use, object of taxation, have TPV between €33,080.00 and €104,860.00.

9.4 In all assessment notes, the Respondent stated "Taxable Property Value of the entire property: €1,155,350.00."

9.5 The assessments in question are based on the understanding that Stamp Duty will apply whenever the sum of the TPVs of the storeys, individually considered, exceeds €1,000,000.00.

9.6 It concludes that the illegality of the assessments in question is manifest, due to the illegal interpretation by the Tax Authority of item 28 of the TGIS.

9.7 The Claimant further argues that the norm contained in item 28, with the interpretative scope given by the TA, is unconstitutional, for violation of the principle of tax-paying capacity as an expression of tax equality (articles 13 and 104 of the Constitution) and the principle of proportionality (articles 18/2, 266/2 and 62 of the Constitution).

9.8 Finally, the Claimant requests that the Respondent be condemned to pay compensation for the guarantee that may be provided to suspend the tax enforcement process pending this litigation.

1. Notified to reply, the Respondent alleges, in summary, the following:

10.1 By way of exception, it argues the material incompetence of the Arbitral Tribunal to assess the legality of a portion of the assessment act, given the provision of article 2 of the RJAT, since, in its view, the Claimant requests the assessment of the legality of a portion of the tax act, which is not in itself any tax act, particularly since all documents together constitute the collection notes for the first instalment of the tax for the year 2014.

10.2 By way of contestation, it argues that, at the date in question, the Claimant held full ownership of the urban real property in question, with taxable property value exceeding €1,000,000.00.

10.3 With reference to the year 2014, in compliance with the provision of article 6, no. 2 of Law no. 55-A/2012, of 29 October, it proceeded, pursuant to item no. 28.1, with the amendment made by Law no. 83-C/2013, of 31 December, to notify collection documents for payment of the 1st instalment of the assessments in question, which apply to urban real properties, valued according to the CIMI, with property value equal to or greater than €1,000,000.00.

10.4 In compliance with the provision of article 119, no. 1 of the CIMI, the collection document is sent to the taxpayer with specification of the parts capable of independent use, respective taxable property value and the tax liability assigned to each municipality of the location of the properties.

10.5 The assessment being correct and the tax calculated being due, there is no error attributable to the services, which merely acted, as they should, in strict compliance with the legal norm.

10.6 With regard to the violation of the principles of tax equality and tax-paying capacity, it argues that there is no violation of the equality principle, there being no discrimination between properties constituted in horizontal ownership and properties in total ownership with storeys or divisions capable of independent use, or between properties with residential use and properties with other uses.

10.7 It maintains the full validity and legality of the stamp duty collection notes, 1st instalment for the year 2014, by application of item 28.1 of the TGIS, concluding as to the legality of the same.

10.8 Regarding the request for payment of compensation for alleged undue provision of guarantee, it argues that the Tax Tribunal is incompetent for this purpose, not only because we are not dealing with the assessment of the legality of a tax act, but also because the Tax Procedural Code contains the procedural means specially provided for this purpose.

Established Facts

1. Based on the facts alleged by the parties, and not contested by the Respondent, as well as the documentation joined to the file, the following factuality relevant to the proper decision of the case is established:

A) The Claimant was in 2014 owner of an urban real property, in total ownership with storeys or divisions capable of independent use, located at Rua … nos …, …, …, … and …, in Lisbon, registered in the urban property register of the parish of…, municipality of Lisbon, under article….

B) The said property, in total ownership, with storeys or divisions capable of independent use, consists of a basement, ground floor, 6 storeys, with total taxable property value of €1,493,000.00.

C) According to the respective property register entry, the sum of the taxable property values of the various parts that make up the property, intended for residential use, is €1,155,350.00, as results from the sum of the storeys capable of independent use, detailed below:

D) The Claimant was notified to proceed with payment, by April 2015, of the 1st instalment of the assessments made.

E) From all documents issued, the following statement also appears: "You may lodge a claim or contest the assessment in accordance with the terms and deadlines established in art. 70 and 102 of the CPPT".

Sanation

1. The Tribunal is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5, no. 2, and 6, no. 1, all of the RJAT.

The parties have legal personality and capacity, are entitled and are legally represented, pursuant to articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The process does not suffer from defects that invalidate it, so the conditions for issuing the final decision are met.

Grounds for Decision

The three issues to be decided within the scope of this case are as follows:

• On the competence of the Arbitral Tribunal to know of the claim filed by the Claimant in this case;

• On the application of item no. 28.1 of the table annexed to the CIS, as amended by Law no. 55-A/2012, of 29 October, to the property of which the Claimant is owner, more specifically, it consists of determining whether in the case of properties in total or vertical ownership, with storeys or divisions capable of independent use, the taxable property value to be considered for the purposes of the incidence of item 28.1 of the TGIS is the taxable property value of each storey or division capable of independent use, with residential use, as the Claimant argues; or if it is the total value of the property resulting from the sum of the taxable property values corresponding to the storeys or divisions capable of independent use with residential use, as the Respondent argues.

• On the request for compensation for guarantee provided.

a) On the competence of the arbitral tribunal

In the petition presented by the Claimant to the Arbitral Tribunal, the Claimant requests that the illegality and unconstitutionality and consequent annulment of the Stamp Duty assessment acts, item no. 28.1 of the TGIS, relating to the year 2014, from which resulted a tax liability in the total amount of €11,553.50, relating to the urban real property described in the register under article…, of the parish of …, municipality of Lisbon, be declared. In the final prayer for relief, the Claimant petitions for the declaration of illegality of the stamp duty assessment acts identified above and the consequent annulment.

In the reply presented, the Respondent argues that the Arbitral Tribunal is materially incompetent, given the provision of article 2 of Decree-Law no. 10/2011, of 20 January, to assess the legality of a portion of the assessment act, which is not in itself a tax act, arguing that the Claimant contests the collection notes which constitute the first instalments of the tax relating to the property in question.

Notified to reply to the exception raised by the Respondent, the Claimant reiterates that it contests the stamp duty assessments and not any payment instalment.

Regarding competence, it should be noted that, as is well known, by virtue of article 2, paragraph a), of Decree-Law no. 10/2011, of 20 January, the Arbitral Tribunal is competent to decide claims regarding "declaration of illegality of tax assessment acts, self-assessment, withholding at source and payment on account;".

Now, from a reading of the petition for constitution of the Arbitral Tribunal, it appears clear that the litigation in this case concerns the stamp duty assessments relating to the urban real property registered in the register under article…, for the year 2014, in the total amount of €11,553.50, this being the value assigned to the process.

In fact, having regard to the content of the petition for constitution of the arbitral tribunal, the final prayer for relief, and the value assigned to the present action, it appears unequivocal that the Claimant intended to contest the stamp duty assessment acts.

From this it follows that, contrary to what the Respondent argues, the Arbitral Tribunal is competent to decide the request for declaration of illegality of the stamp duty assessment filed by the Claimant.

The exception of incompetence raised by the Respondent is therefore unfounded.

b) On the application of item no. 28.1 of the TGIS to properties in total ownership

As we have already mentioned, the issue to be decided in this case consists in knowing whether the TPV relevant for the purposes of the incidence of IS (Item 28 of the TGIS, as amended by Law no. 55-A/2012, of 29 October) is the one corresponding to the sum of the taxable property value attributed to the various divisions or storeys (total TPV) or, rather, the TPV attributed to each of the residential divisions or storeys.

The question has already been considered in various proceedings, within the scope of Tax Arbitration, in which it was decided that when it is verified that each of the storeys that make up a property in vertical ownership has a taxable property value lower than one million euros, the legal condition for the incidence of Stamp Duty provided for in item no. 28.1 of the TGIS is not met and, consequently, it was decided on the illegality of the respective assessment acts (cf. decisions issued within the scope of processes numbers 51/2015-T, 391/2014-T, 451/2014-T, 153/2015-T, among others). Also, the Supreme Administrative Court, by judgment of 9/09/2015, process no. 47/15, in which Francisco Rothes was the reporting judge, decided that when dealing with a property in vertical ownership, the incidence of IS (Item 28.1 of the TGIS, still in the wording given by Law no. 55-A/2012, of 29 October) should be determined, not by the TPV resulting from the sum of the TPV of all divisions or storeys capable of independent use (individualized in the property register article), but by the TPV attributed to each of these storeys or divisions intended for residential use.

No arguments have been identified so far that would allow breaking the unanimity achieved by the decisions already issued, so it is important to reiterate the jurisprudence already established.

Item 28 of the TGIS, annexed to the CIS, was added by article 4 of Law no. 55-A/2012, of 29 October, and initially had the following wording:

"28 – Ownership, usufruct or right of superficies of urban real properties whose taxable property value shown in the register, in accordance with the Municipal Property Tax Code, is equal to or greater than €1,000,000 – on the taxable property value for purposes of IMI:

28.1 – For property with residential use – 1%;

28.2 – For property, when 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 schedule approved by ordinance of the Ministry of Justice – 7.5%."

The wording of item no. 28.1 was subsequently amended by Law no. 83-C/2013, of 31 December, which approved the State Budget for 2014, and point 28.1 came to use the concept of residential property, coming to provide the following: "28.1 For residential property or for construction land whose construction, authorized or planned, is for residential purposes, in accordance with the provisions of the Municipal Property Tax Code – 1%".

The question arises as to the scope of incidence of item 28.1 of the TGIS as amended by Law no. 83-C/2013, of 31 December, more specifically, whether it applies to urban properties in total ownership, but with storeys capable of independent use, with residential use, when the taxable property value attributed to each of these storeys is less than 1,000,000.00, although the sum of the storeys, with independent use, assigned to residential purposes has a total value equal to or greater than that amount.

With regard to the norm in question – item 28.1 of the TGIS –, the legislative intent that underlies it can be discerned from the presentation and discussion, in Parliament, of the bill no. 96/XII (2nd), in which the Secretary of State for Tax Affairs expressly stated:

"The Government proposes the creation of a special tax on high-value urban residential properties. This is the first time in Portugal that special taxation of high-value properties intended for residential purposes has been created. This tax 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."

From the semantic variety of the discussion, it is immediately apparent the indiscriminate use of expressions such as "urban residential properties", "high-value properties intended for residential use" and "houses with a value equal to or greater than 1 million euros", everything seemingly pointing to the intention to tax single-family units of higher economic value, parameterized through their respective taxable property value equal to or greater than one million euros.

However, from the preparatory works it is not possible to gather, with the necessary rigor, as has already been emphasized in previous decisions, what concept of property underlies that norm (cf. decisions 21/2015-T and 451/2014), namely, whether an urban residential property is, in the meaning of item 28 of the TGIS, an autonomous unit (self-sufficient for its intended purpose), distinct and separate in which the life of each individual or family unit resident is conducted, in single-family or multi-family buildings; or whether it encompasses multi-family properties with autonomous units, but without legal autonomization, characteristic of the autonomous fractions that make up properties constituted in horizontal ownership.

In this case, the Claimant's property constitutes an urban real property in total ownership, composed of several storeys capable of independent use (1st to 6th floor), assigned to residential use.

The individual taxable property values of the various storeys capable of independent use are less than €1,000,000.00.

Item 28 has the following wording "Ownership, usufruct or right of superficies of urban real properties whose taxable property value shown in the register, in accordance with the Municipal Property Tax Code, is equal to or greater than €1,000,000 – on the taxable property value for purposes of IMI.

It is therefore important to determine what taxable property value is considered for purposes of IMI since from item 28.1 it follows that stamp duty applies to "Ownership, usufruct or right of superficies of property whose taxable property value shown in the register, in accordance with the Municipal Property Tax Code (CIMI), is equal to or greater than €1,000,000 (...)".

Reference is thus made to the IMI Code for all the regulatory content regarding the incidence "urban properties with the taxable property value shown in the register", in accordance with the IMI Code, and regarding the taxable matter "taxable property value for purposes of IMI". A referral which, moreover, is provided, in a subsidiary manner, by article 67, no. 2 of the CIS which refers to the IMI Code "matters not regulated in this Code relating to item 28 of the General Table".

We highlight from the IMI Code, with regard to storeys or divisions capable of independent use, the following rules:

a) Each property corresponds to a unique register article (cf. article 82, no. 2 of the IMI Code);

b) Each storey capable of independent use is considered separately in the property register entry, which also specifies its taxable property value (cf. article 12, no. 3 of the IMI Code);

c) The determination of taxable property value is established for each storey or division capable of independent use, in accordance with the use of each unit, being valued separately according to its use and areas (cf. article 38 of the IMI Code);

d) The collection document contains, mandatorily, the specification of the properties, their parts capable of independent use, respective taxable property value (cf. article 119, no. 1 of the IMI Code).

e) Failure to specify the taxable property value of urban properties by storeys or divisions capable of autonomous use constitutes grounds for claiming incorrect property register entry (cf. article 130, no. 3, paragraph h), of the IMI Code).

In legal literature, Silvério Mateus and Freitas Corvelo emphasize that one of the aspects that should be highlighted in the register concerns the need to demonstrate the autonomy that, within each property, can be attributed to each of its parts, functionally and economically independent.

The IMI Code grants tax relevance – at the level of property register entry, determination of taxable property value, specification of taxable property value, assessment, grounds for claims – to the autonomization in the register of each part of a property, capable of independent use.

It follows from the IMI Code that the parts of a property in total ownership endowed with autonomy, that is, self-sufficient for their intended purpose, are the subject of individual and separate valuation, are individualized in the respective property register entry, possess their own taxable property value shown in the register and are the subject of individualized assessments (all as results from articles 7, no. 2 paragraph b), 13, no. 2 and 119, no. 1 of the IMI Code), that autonomy must be respected and is relevant for the purposes of applying item 28 of the TGIS.

Item 28 of the TGIS makes reference to "urban properties with taxable property value shown in the register, in accordance with the Municipal Property Tax Code" and to "taxable property value used for purposes of IMI".

In turn, article 12, no. 3 of the IMI Code provides that "each storey or part of property capable of independent use is considered separately in the property register entry, which also specifies its respective taxable property value".

Whence to the storeys capable of independent use – as is the case here – is assigned a specific and own taxable property value which is the subject of autonomous entry in the respective property register.

There is thus an autonomization for IMI purposes of the storeys capable of independent use which are the subject of a specific valuation, pursuant to article 7, no. 2, paragraph b) of the IMI Code, of individual property register entry and with autonomous taxable property value for IMI purposes.

In the case of properties in vertical or total ownership with storeys or divisions capable of independent use, but without being constituted in horizontal ownership, there is clear tax autonomy which is evidenced by the different units (valued with distinct parameters according to the specific use of each unit), indication of floor/storey, including with specification of gross private area and gross dependent area, all as if they were true autonomous fractions, as occurs in the case here – cf. document no. 14 attached to the petition for constitution of the Arbitral Tribunal.

There being thus no reason – in the context of the incidence of Stamp Duty, provided for in item 28.1 of the TGIS –, to give to the storeys/divisions capable of independent use (integrated in properties in vertical ownership) treatment distinct from that given in the CIMI.

Thus, for the purposes of the incidence of Stamp Duty, namely, for the purposes of applying item 28.1 of the TGIS, "the taxable property value shown in the register" and the "taxable property value used for purposes of IMI" corresponds to the taxable property value that appears in the register in relation to each storey or part of property capable of independent use, as results from the provision of article 12, no. 3 of the IMI Code.

In light of the foregoing, it is reiterated, following the decisions already issued, that the application in this case of item 28.1 of the TGIS with respect to the property of which the Claimant is owner is illegal because the aforementioned item should be interpreted to mean that the taxable property value relevant is that corresponding to each of the storeys capable of independent use and not the property value that results from the arithmetic sum of all the taxable property values, in part, attributed to each of the storeys intended for residential use, in cases where only from the sum of the property values results the determination of a property value equal to or greater than 1,000,000.00. Since none of the independent units that make up the property has a taxable property value greater than one million euros, item 28.1 of the TGIS does not apply.

c) On compensation for guarantee

The Claimant also presents a request for compensation for losses resulting from the provision of guarantee to suspend the tax enforcement process pending this litigation.

However, the established facts in this case do not contain sufficient factual basis to rule on and condemn the Respondent to pay compensation for losses that are not alleged or quantified.

Decision

For the reasons stated, the arbitral tribunal decides:

a) To uphold the exception of incompetence raised by the Tax Authority as unfounded;

b) To uphold the request for arbitral decision and, consequently, to declare illegal the Stamp Duty assessments, by application of Item 28.1 of the TGIS, year 2014, relating to the urban real property located at Rua de … no.…, …, …, …, and … parish of…, municipality of Lisbon, registered in the respective register under article….

c) To uphold the request for compensation for guarantee as unfounded.

d) To condemn the Respondent in the costs of the proceedings.

Value of the case

Pursuant to the provision of no. 2 of art. 315 of the CPC, combined with paragraph a) of no. 1 of art. 97-A of the CPPT and no. 2 of art. 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €11,553.50, which constitutes the total amount of the tax resulting from the contested assessments whose annulment was requested.

Costs

For the purposes of the provision of no. 2 of art. 12 and no. 4 of art. 22 of the RGAT and no. 4 of art. 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €918.00, in accordance with Table I annexed to the regulation, to be borne by the Respondent.

Lisbon, 16 March 2016

The Arbitrator

(Alexandra Gonçalves Marques)

[1] All available in the CAAD database, at www.caad.org.pt.

[2] Available at www.dgsi.pt

[3] We will follow closely the established jurisprudence and the text of the decisions issued within the CAAD in processes no. 153/2015-T, 263/2015-T, 320/2015-T and 420/2015-T all drafted by the undersigned.

[4] Cf. DAR I Series no. 9/XII-2, of 11 October, page 32.

[5] Silvério Mateus and Freitas Corvelo (2005), Property Taxes and Stamp Duty, Commented and Annotated, Engifisco, pp. 159-160.