Stamp Tax on Building Land (Verba 28.1 TGIS) – CAAD Arbitration Decision 515/2015-T

ARBITRAL DECISION

I. REPORT

A..., SA with registered office at Rua ... – Building..., …, in ...-..., holder of the Single Identification Number for Legal Entities ... presented a request for the constitution of a singular Arbitral Tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as RJAT), in which the Tax and Customs Authority (hereinafter AT) is respondent, with the objective of obtaining a declaration of illegality and unconstitutionality of the acts of assessment of Stamp Tax relating to the year 2014 identified in the case, in the amount of €26,021.90.

The request for constitution of the Arbitral Tribunal was accepted by the Honourable President of CAAD on 31.08.2015 and automatically notified to the AT.

In accordance with the provision in paragraph c) of Article 1 of Article 11 of the RJAT, the singular Arbitral Tribunal was constituted on 28.10.2015.

The AT responded, defending the lack of merit of the request, arguing for the maintenance of the assessment act as it represents the correct interpretation of item 28 of the General Stamp Tax Table.

The meeting referred to in Article 18 of the RJAT was dispensed with and the submission of final arguments was waived, in light of the nature of the matter contained in the case file.

The Arbitral Tribunal was duly constituted.

The parties possess legal capacity and standing, are legitimate (Articles 4 and 10, No. 2, of the same legislation and Article 1 of Ordinance No. 112-A/2011, of 22 March) and are properly represented.

There are no nullities, exceptions or preliminary matters that prevent the immediate adjudication of the merits of the case.

II. FACTUAL MATTERS

Based on the elements contained in the case file, the following facts are considered proven:

A. The Applicant is a commercial company which, within its activities, is dedicated to the promotion and construction of high-quality real estate;

B. In March 2015, the Applicant was notified of the act of assessment of Stamp Tax (IS) materialized in the collection documents Nos. 2015... and 2015..., dated 20 March 2015, referring to the year 2014, concerning the ownership of land for construction located in the Union of Parishes of ... (... and...), Municipality of Tavira, registered in the urban property register under items U-... and U-..., respectively, in the total amount of €26,021.90;

C. The IS assessment was issued based on the provision of item 28.1 of the TGIS;

D. The real estate subject to the assessments constitute plots of land for construction;

E. The Applicant proceeded to make voluntary payment of the first installments of the assessments sub judice.

With relevance to the decision, there are no facts that should be considered as unproven.

Having regard to the positions taken by the parties, in light of Article 110, No. 7 of the CPPT and the documentary evidence attached to the case file, the facts listed above are considered proven, with relevance to the decision.

III. LEGAL MATTERS

The principal question raised in the present case is whether the provision contained in item 28.1 of the TGIS underlying the assessment act sub judice is materially unconstitutional by virtue of violation of the principle of equality and contributive capacity.

In this regard, the Applicant argues, in summary, the following:

1. The provision of incidence underlying the assessments now challenged is applicable only to real estate classified, under the terms of the Property Tax Code (IMI Code), as residential properties or land for construction whose building, authorized or planned, is for housing purposes, and whose tax property value is equal to or greater than €1,000,000;

2. Such provision of incidence, however, cannot fail to appear as a violation of the constitutional principle of equality [cf. Article 13 of the Constitution of the Portuguese Republic (CRP)],

3. On one hand, not all owners, usufructuaries or holders of surface rights over real estate with a tax value equal to or greater than €1,000,000 are subject to this tax burden, but only those who are owners of urban properties used for housing purposes or land for construction whose building, authorized or planned, is for housing purposes, excluding all those who have other urban or rural properties;

4. On the other hand, only the owners, usufructuaries or holders of surface rights over these urban properties with a tax value equal to or greater than €1,000,000 suffer the tax burden and, in these cases, the taxation is levied on the global tax property value thereof;

5. The principle of fiscal equality, as a concretization of the general principle of equality, imposes, from the outset, a universal and uniform configuration of the duty to pay taxes.

6. There are no discernible reasons that justify that only properties with housing use and land for construction whose building, authorized or planned, is for housing purposes, are subject to this tax and that, as a consequence, other types of properties have been excluded from the objective scope of incidence, but with the same tax property value, thus indicating the same contributive capacity;

7. The taxation of patrimonial wealth by reference to the value of the "unit" property excludes from taxation individuals holding the same rights over real estate assets composed of several properties with individual values below that defined in the provision of incidence but whose total value is substantially greater than the reference value of the "unit" for taxation purposes;

8. Similarly, no reasons are apparent as to why owners, usufructuaries or holders of surface rights over urban properties used for housing purposes or land for construction whose building, authorized or planned, is for housing purposes, with a tax value greater than €1,000,000 should bear the tax burden on the entirety of the tax property value of such properties and not merely on the amount exceeding that value, when owners, usufructuaries or holders of surface rights over the same type of urban properties with a tax value less than €1,000,000 bear no taxation whatsoever;

9. In the case at hand, the IS on the ownership, usufruct or right of surface of urban properties with housing use or potentially housing use, with a tax property value equal to or greater than €1,000,000.00, at the rate of 1%, does not assume a progressive character.

10. Indeed, in the IS on property ownership no degree of progressivity is noticeable, as it merely taxes at a single rate urban properties with a value equal to or greater than €1,000,000.00, with no distinction whatsoever in the tax rate or even in the taxable matter;

11. Now, if the taxation of properties with a value equal to or greater than €1,000,000 is understandable from the perspective of just distribution of wealth and taxation in accordance with each person's contributive capacity, under the constitutional principles that inform the tax system (cf. No. 1 of Article 103 and No. 3 of Article 104); and if the same is better understood in the context of the effort for budgetary consolidation in face of the country's economic and financial situation, it is already difficult to foresee in the legislative option a valid reason for the discrimination it introduces in the taxation of patrimony, burdening only part of the individuals who demonstrate identical levels of real estate wealth and, in relation to these, even affecting the value of that patrimony which in general terms was defined as irrelevant for these purposes;

12. In light of all the above, it must be concluded that the IS on the ownership, usufruct and right of surface of urban properties with housing use and land for construction whose building, authorized or planned, is for housing purposes, provided for in item 28.1 of the TGIS, in the form given by Law No. 55-A/2012, of 29 October and amended by Law 83-C/2013, of 31 December, is materially unconstitutional by virtue of violation of the principle of tax equality provided for in Articles 13, 103, No. 1 and 104, No. 3 of the CRP, which, as a consequence, justifies the material unconstitutionality of the IS assessments in question.

For its part, the AT alleges, in summary, the following:

1. The CRP requires that what is necessarily equal be treated equally and what is essentially different be treated as different, not preventing differentiated treatment, but only arbitrary, unreasonable discriminations, namely distinctions of treatment that lack justification and material foundation;

2. The constitutional principle of equality does not imply the prohibition of all and any negative or positive discriminations, but only those that appear devoid of reasonable, perceptible or intelligible foundation, which constitutes the constitutional limit of the prohibition of arbitrariness;

3. The Legislator conceived item 28.1 of the TGIS as a measure for obtaining fiscal revenue necessary for the budgetary consolidation effort provided for in the Economic and Financial Adjustment Programme (PAEF) agreed between the Portuguese Government and the IMF, the European Commission and the ECB.

4. The taxation in the IS provided for in item 28 complies with the criterion of adequacy, in that it aims at the taxation of wealth embodied in the ownership of high-value real estate whose acquisition implicitly evidences a certain economic capacity;

5. It possesses sufficient material foundation, according to "a rationally credible weighting criterion", the limitation of the incidence of the taxation in question to luxury residential properties, with exclusion of properties with strictly economic uses, which is understandable in a context where the economy is in a recessionary spiral, publicly proclaimed at the highest level, with unemployment rates reaching all-time historical highs, with an avalanche of business closures derived from economic unsustainability;

6. There is no logical reason that underpins an interpretive practice that permits advocating equal taxation, when we are faced with substantially different factual situations;

7. The provision of item 28.1 of the TGIS does not constitute any violation of the principle of equality, with no discrimination existing in the taxation of properties held in horizontal property ownership and properties held in full ownership with apartments or divisions susceptible to independent use, or between properties with housing use and properties with other uses.

Let us see what should be understood.

The Constitution of the Portuguese Republic (CRP) establishes in its Article 13 the principle of equality, in the following terms:

1. All citizens have the same social dignity and are equal before the law.
2. No one may be privileged, benefited, prejudiced, deprived of any right or exempted from any duty on grounds of ancestry, sex, race, language, territory of origin, religion, political or ideological beliefs, education, economic situation, social condition or sexual orientation.

It is provided, for its part, by Article 103 of the CRP that:

1. The tax system aims at satisfying the financial needs of the State and other public entities and a just distribution of income and wealth.
2. Taxes are created by law, which determines the incidence, the rate, tax benefits and the guarantees of taxpayers.
3. No one may be obliged to pay taxes that have not been created in accordance with the Constitution, that have a retroactive nature or whose assessment and collection are not carried out in accordance with the law.

Under Article 104 of the CRP:

1. The personal income tax aims at reducing inequalities and shall be single and progressive, taking into account the needs and income of the family unit.
2. The taxation of business entities is fundamentally based on their actual income.
3. The taxation of patrimony should contribute to equality among citizens.
4. The taxation of consumption aims to adapt the structure of consumption to the evolution of the needs of economic development and social justice, and should burden luxury consumption.

It is in light of the aforementioned provisions that the constitutionality of the provision contained in items 28 and 28.1 of the TGIS should be assessed, which determines the incidence of IS on:

"Ownership, usufruct or right of surface of urban properties whose tax property value contained in the register, under the terms of the Property Tax Code (IMI Code), is equal to or greater than €1,000,000 – on the tax property value used for the purpose of IMI:

28.1. – For each residential property or for land for construction whose building, authorized or planned, is for housing purposes, under the terms of the Property Tax Code…… 1%."

From the analysis of the constitutional provisions referenced it follows that the constitutional principle of tax equality constitutes a specific expression of the general structuring principle of equality, "which represents not only a formal equality – equality before the law, (…), but also and above all a material equality – equality of the law, which also obligates, in various respects, the legislator."[1]

Thus, the principle of fiscal equality unfolds in two aspects: the aspect of the generality of taxes and the aspect of the uniformity of taxes.

In the aspect of the generality of taxes, the principle of fiscal equality determines that the duty to pay taxes is universal, while in the aspect of the uniformity of taxes, the said principle implies the adoption of the same criterion for all taxpayers.

In essence, "the principle of fiscal equality requires that what is (essentially) equal be taxed equally, and what is (essentially) unequal be taxed unequally to the extent of that inequality."[2]

To determine what is equal and what is unequal, the criterion of contributive capacity emerges, which is concretized in the aspect of horizontal equality when it requires that taxpayers with the same contributive capacity pay the same tax, and in the aspect of vertical equality, insofar as it leads taxpayers with different contributive capacity to pay different taxes (qualitatively and/or quantitatively), with arbitrariness being prohibited.

In this context, the Applicant understands that the IS on the ownership, usufruct or right of surface of urban properties with housing use and land for construction, with a tax property value greater than €1,000,000.00, at the rate of 1%:

a) Does not respect the principle of equality, in that taxation is levied only on urban properties used for housing and land for construction, excluding all other urban and rural properties;

b) Violates the principle of contributive capacity, since properties with other types of use but with the same tax property value, thus indicating the same contributive capacity, are excluded from the scope of incidence of the provision;

c) Violates the principle of contributive capacity, considering that taxation is by reference to the value of the "unit" property;

d) And, finally, the principle of tax equality is violated, in that taxation is levied on the entirety of the tax property value of properties exceeding €1,000,000 and not merely on the amount exceeding that value.

The Applicant, however, is not correct.

In fact, from the principle of tax equality does not result the prohibition of the freedom of choice by the legislator of taxation of certain tax facts in detriment of others, but rather the prohibition of arbitrariness.

In the case under analysis, the Legislator considered that on residential urban properties and (later) on land for construction there should be levied the "luxury tax", within the scope of the budgetary consolidation effort. It was intended with the said taxation to distribute the sacrifices required of owners of high-value residential properties with those who live on the income from their work (See Economic and Financial Adjustment Programme (PAEF), agreed between the Portuguese Government and the IMF, the European Commission and the ECB).

The creation of this new tax fact occurred in the context of economic crisis and serious public finance crisis, with the purpose of increasing the State's tax revenues, through the taxation of those who demonstrate greater indicators of wealth.

In fact, through item 28.1, it is intended to tax wealth externalized in the ownership, usufruct or right of surface of luxury urban properties which, by their value substantially higher than that of the generality of urban properties, reveal greater indicators of wealth, susceptible of founding the imposition of increased contribution for the sanitation of public accounts to their holders, in realization of the aforementioned "principle of social equity in austerity, ensuring an effective distribution of the sacrifices necessary to comply with the adjustment programme." – (See Legislative Proposal No. 96/XII).[3]

The option for the taxation of residential urban properties and not of rural properties or those intended for commerce results from a choice of economic policy, based on the idea that the penalization of properties with economic use would contribute to the worsening of the country's economic situation.

As José Maria Fernandes Pires teaches, "the application of the tax to properties with use for housing and land for construction in which the construction of housing is foreseen and approved, reveals the intention not to burden the productive sector and companies in general. In fact, properties used for business activities, namely commerce, services or industrial activity, can easily reach a value exceeding one million without such fact being able to reveal a relevance in terms of wealth identical to that revealed by those with housing use with the said value."[4]

In this manner, it is noted that the tax facts contemplated by item 28.1 of the TGIS were not chosen in an arbitrary manner, their option being justified by the underlying political-economic context.[5]

The Applicant's argument therefore does not hold that the provision of incidence here under discussion violates the principle of equality.

For the reasons set out above, this Tribunal also does not consider that the principle of contributive capacity is breached by the exclusion of other properties, beyond those contemplated in the provision, that demonstrate equal contributive capacity.

In fact, the principle of tax equality based on the criterion of contributive capacity does not prohibit any type of positive or negative discrimination, prohibiting instead arbitrariness. Therefore, no illegality is discernible in the justified choice of the tax facts contained in item 28.1.

Likewise, this Tribunal does not perceive that there is a violation of the principle of contributive capacity by the fact that the incidence of IS is carried out property by property or "by unit", having regard to the motivations of the Legislator and since there is no global tax on patrimony that would impose another type of consideration.

It is certain that the principle of contributive capacity does not apply equally to all types of tax, having a first-degree expression in taxes on income, a second-degree expression in taxes on patrimony and a third-degree expression in taxes on consumption.

In fact, in taxes on patrimony, the contributive capacity of the subject of the formal legal relationship of the tax is determined chiefly by having regard to the capacity to acquire manifested, which is verified by considering only the purchasing power of the passive subject per urban property or land for construction.

Finally, the Applicant alleges the violation of the principle of tax equality, by the taxation of the entirety of the tax property value of properties exceeding €1,000,000 and not merely on the amount exceeding that value.

Now, the CRP does not impose on the legislator with the same intensity the creation of a tax on patrimony with a progressive character, as occurs with respect to personal income tax.

In fact, as regards the taxation of patrimony, the legislator is essentially obliged to contribute to equality among citizens (Article 104, No. 3 of the CRP), which does not prevent it from proceeding to the discrimination of patrimonies, taxing the higher ones and exempting the lower ones, nor does it oblige the existence of a tax on patrimony with progressive rates.

Having regard to the principle of contributive capacity, as a criterion for determining respect for the principle of tax equality, it is found that the tax fact selected by the legislator in item 28.1 is revelatory of contributive capacity, there being also a connection between the tax obligation and the economic premise selected by the legislator.

In fact, the provision in analysis selected as the economic premise the right of property, usufruct or right of surface of urban properties, with a tax property value exceeding €1,000,000.00 and to this economic premise it made correspond a rate of 1%, with any economic premise of value lower than the aforesaid being irrelevant.

Having regard to the principle of fiscal legality, the provision in analysis could not fail to determine the concrete tax property value from which onwards there would be levied on such properties a special rate of Stamp Tax. It is certain that "the existence of distinct applicative results in face of very approximated values – by excess or by defect – of a quantitative expression stipulated normatively as a limit – positive or negative – of any legal effect is inherent to its fixation by the legislator. Whether in the definition of tax incidence, whether in the enactment of exemptions or tax benefits based on value criteria, it is always possible to find examples of taxpayers with differentiated treatment based on a very small quantitative variation."[6]

In sum: the violation of the constitutional parameters invoked by the Applicant is not considered verified.

IV. DECISION

This Arbitral Tribunal hereby decides to dismiss in full the request for a declaration of illegality and consequent annulment of the act of assessment of IS relating to the land for construction located in the Union of Parishes of ... (... and...), Municipality of Tavira, registered in the urban property register under items U-... and U-....

V. CASE VALUE

In accordance with the provision of Article 306, No. 2 of the Code of Civil Procedure, 97-A, No. 1 a) of the CPPT and Article 3, No. 2 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the request is fixed at €26,021.90.

VI. COSTS

In accordance with the provision of Articles 12, No. 2 and 22, No. 4, both of the RJAT, and Article 4, No. 4 of the Regulations on Costs in Tax Arbitration Proceedings, the value of the arbitration fee is fixed at €1,530.00, in accordance with Table I of the mentioned Regulations, to be borne by the Applicant.

Let notice be given.

Lisbon, 15 December 2015

The Arbitrator

Magda Feliciano

(The text of this decision was produced by computer, in accordance with Article 131, No. 5 of the Code of Civil Procedure, applicable by reference in Article 29, No. 1, paragraph e) of Decree-Law No. 10/2011, of 20 January (RJAT), with its drafting governed by the orthography prior to the Orthographic Agreement of 1990.)

[1] José Casalta Nabais, in The Fundamental Duty to Pay Taxes, Theses Almedina, 2009, pp. 435.

[2] Ibid. pp. 442.

[3] See Decision of the Constitutional Court No. 590/2015, handed down in Case No. 542/2014.

[4] In Lessons on Taxes on Patrimony and Stamp Tax, 3rd Edition, Almedina, pp. 507.

[5] See Decision of the Constitutional Court No. 187/2013, of 5 April, Nos. 33 and 35:
"Only the choices of regime made by the ordinary legislator can be censured on the grounds of violation of the principle of equality in those cases in which it is proven that they result in differences of treatment between persons that do not find justification in reasonable, perceptible or intelligible grounds, having the constitutional objectives that, with the measure of the difference, are pursued (…) this principle, in its dimension of prohibition of arbitrariness, constitutes an essentially negative criterion (…) which, not eliminating 'the freedom of legislative conformation' – understood as the freedom which belongs to the legislator to 'define or qualify the factual situations or relations of life that are to function as reference elements to be treated equal or unequally' – falls to courts not the faculty of withdrawing themselves from the legislator, 'weighing the situation as if they were in his place and imposing their own idea of what would be, in the case, the reasonable, just and opportune solution (what would be the ideal solution of the case)', but rather that of 'setting aside those legal solutions that are completely incapable of being rationally accredited.'"

[6] Decision of the Constitutional Court No. 590/2015, handed down in Case No. 542/2014.