Stamp Tax on High-Value Properties (Verba 28.1 TGIS): Unconstitutionality Challenge – CAAD 517/2015-T

ARBITRAL DECISION

1. REPORT

A… – …, S.A., with headquarters at Rua … – Building …, …, …-… ..., (area of the Finance Office of … …), and with Tax Identification Number … (hereinafter referred to as the Applicant), hereby, under the combined provisions of articles 2, no. 1, subsection a), 5, no. 2, subsection a) and 10, no. 1, subsection a), of the Legal Framework for Arbitration in Tax Matters ("RJAT"), requests the constitution of a Singular Arbitral Tribunal, in which the Tax and Customs Authority (AT) is the Respondent, with a view to the declaration of illegality and consequent annulment of the assessment of Stamp Duty (Item 28.1, of the TGIS), issued on 20 March 2015 and relating to the year 2014, on the ownership of urban property registered in the property matrix of the parish of …, municipality of ..., under article …, in the total amount of €44,151.00.

Concurrently, the Applicant requests the condemnation of the Respondent to restitution of the sum of €14,717.00, corresponding to the value of the first installment of that assessment, paid on 28 April 2015, plus the payment of compensatory interest.

The following are the grounds for the request for annulment of the Stamp Duty assessment act for the year 2014:

a. The rule of incidence underlying the disputed assessment is applicable only to residential urban properties or building land whose authorized or planned construction is for residential purposes and whose tax property value (VPT) is equal to or greater than €1,000,000.00;

b. The said rule of incidence appears to violate the principle of equality enshrined in article 13 of the Constitution of the Portuguese Republic (CRP), specifically provided for in the context of property taxation (article 104, no. 3, of the CRP);

c. Not all owners, usufructuaries or holders of surface rights to properties with VPT equal to or greater than €1,000,000.00 are subject to this tax burden, but only those who are owners, usufructuaries or holders of surface rights to urban properties with those classifications;

d. And only the owners, usufructuaries or holders of surface rights to those types of urban properties bear the burden of the tax, with taxation affecting the total VPT thereof;

e. The principle of tax equality, as a realization of the general principle of equality, requires the universality and uniformity of the duty to pay taxes, with the equalizing criterion in this matter being the ability to contribute, presupposing equal taxation for those with the same ability to contribute and different taxation for those with different ability to contribute, as a function of that difference;

f. The principle of taxation according to ability to contribute is binding on the ordinary legislator in defining the objective incidence of the tax in the face of wealth revealed through income, property and consumption;

g. No reasons are apparent that justify taxation affecting only residential urban properties or building land whose authorized or planned construction is for residential purposes, excluding from the scope of objective incidence properties with other types of use but with the same VPT, which are indicative of equal ability to contribute;

h. Taxation by reference to the VPT of the "unit" property leaves untaxed real estate assets composed of several properties with individual VPT below the value defined by the rule of incidence, but whose total value is greater than that amount;

i. Nor are the reasons apparent for why owners, usufructuaries or holders of surface rights to residential urban properties or building land whose authorized or planned construction is for residential purposes, with VPT exceeding €1,000,000.00, should be taxed on the totality of the VPT and not only on the amount exceeding that value, when owners, usufructuaries or holders of surface rights to the same type of properties, with VPT of less than €1,000,000.00, are not taxed;

j. According to GOMES CANOTILHO and VITAL MOREIRA, the "binding of the tax system to the idea of social justice and the reduction of inequality in the social distribution of income and wealth requires that it be progressive." – Constitution of the Portuguese Republic Annotated, volume I, page 1089";

k. Tax progressivity requires that the amount of the tax increase in proportion to the increase in the taxable matter; the Stamp Duty of Item 28.1 of the TGIS does not assume a progressive character, is disproportionate and does not contribute to equality in the social distribution of wealth;

l. The rule of incidence violates the fundamental principle of tax equality, both from the perspective of horizontal equality, by not defining an equal criterion for the taxation of real property of equal value, and from a vertical perspective, by taxing only properties with VPT exceeding €1,000,000.00, distinguishing them from those with lower VPT, and not only by the difference;

m. It also violates the principle of equality in its negative dimension as a prohibition on arbitrariness, for although it is understandable to tax real property with VPT equal to or exceeding €1,000,000.00, from the perspective of the just distribution of wealth and taxation according to each one's ability to contribute, it is difficult to foresee in the legislative choice a valid reason for the discrimination that it introduces in the context of property taxation, burdening only a part of taxpayers who reveal real estate wealth of an identical level;

n. The same can only be understood in the consideration that residential properties (or potentially residential), with VPT exceeding €1,000,000.00, are luxury real estate assets, justifying increased taxation;

o. However, such discrimination is inadmissible, as the concept of luxury refers to the notion of enjoyment (see the constitutional provision for taxation of consumption, but not for property taxation) and the enjoyment of such real property can occur in the sphere of subjects other than the owner or may not occur at all (as is the case with building land) and there are non-residential properties, capable of meriting the same qualification (luxury hotels, golf courses, etc.), which are not taxed;

p. It is concluded, therefore, that the rule of incidence in question constitutes a distortion of the universal and uniform character of real estate property taxation, imposed by the principle of equality, in its fiscal equality aspect;

q. As results from Constitutional Court Decision no. 187/2013, it cannot be understood that the violation of the principle of ability to contribute finds justification in the Program of Economic and Financial Assistance to Portugal, as international commitments cannot justify the violation of the basic principles of the Rule of Law;

r. It must be concluded that the Stamp Duty on ownership, usufruct and surface rights to residential urban properties and building land whose construction, authorized or planned, is for residential purposes, provided for in item 28.1 of the TGIS, is materially unconstitutional due to violation of the principle of tax equality provided for in articles 13, 103, no. 1 and 104, no. 3, of the CRP, which justifies the material unconstitutionality of the disputed Stamp Duty assessment.

The Applicant concludes by invoking "expressly, primarily and autonomously" the unconstitutionality of the rule of incidence contained in item 28.1 of the TGIS, in light of which it requests the annulment of the assessment in question and the restitution of the amount paid, plus compensatory interest, under articles 43 and 100 of the LGT.

Having been notified in accordance with the terms and for the purposes provided in article 17 of the RJAT, the AT submitted a response, in which it states that it does not agree with the Applicant and argues that the assessment in question in this request for arbitral decision should be maintained, with the following grounds:

a. With the amendment of item 28.1 of the TGIS by Law no. 55-A/2012, of 29/10, Stamp Duty began to affect property ownership, usufruct or surface rights to urban properties whose VPT contained in the matrix, under the terms of the CIMI, is equal to or greater than €1,000,000.00;

b. With the amendment introduced by Law no. 83-C/2013, of 31/12, the Stamp Duty provided for in item 28.1 of the TGIS also began to affect residential properties and building land "whose construction, authorized or planned, is for residential purposes";

c. Following the entry into force of this rule, it became clear that the definition of residential property for purposes of subjection to Stamp Duty is that which results from no. 1 of article 2 of the CIMI; in turn, no. 1 of article 6 of the CIMI provides for the types of urban properties, encompassing in this concept building land;

d. The case law invoked by the Applicant was issued within the scope of the previous wording of the rule of incidence, and is not applicable to the present case;

e. The disputed assessment was made in accordance with item 28.1 of the TGIS in force, which does not violate any constitutional parameter, in particular the principle of equality and ability to contribute;

f. The Constitution of the Republic requires equal treatment of what is necessarily equal and different treatment of what is essentially different, only preventing arbitrary discriminations, unreasonable ones, that is, those that do not have justification and sufficient material basis, that appear devoid of reasonable foundation, which constitutes the constitutional limit of the prohibition on arbitrariness;

g. Law no. 55-A/2012, of 20.10, was based on Bill Proposal no. 96/XII/2nd, in whose statement of reasons it states that "The pursuit of the public interest, in light of the economic-financial situation of the Country, requires a consolidation effort that will require, in addition to permanent activism in reducing public expenditure, the introduction of fiscal measures inserted in a broader set of measures to combat the budget deficit. These measures are fundamental to reinforce the principle of social equity in austerity, guaranteeing an effective distribution of the sacrifices necessary to comply with the adjustment program. The Government is strongly committed to ensuring that the distribution of these sacrifices will be made by everyone and not just by those who live from the income of their work." It was declared: "a rate is created under Stamp Duty affecting urban residential properties whose tax property value is equal to or greater than one million euros."

h. In addition to conceiving item 28.1 of the TGIS as an instrument for obtaining the fiscal revenue necessary for the budget consolidation effort foreseen in the Economic and Financial Adjustment Program (PAEF), the Government conceived it as "a measure of equality, which was intended to reinforce the principle of social equity in austerity, guaranteeing an effective distribution of the sacrifices necessary to comply with the adjustment program", and the equality in the distribution of sacrifices aimed at with item 28.1 of the TGIS by the "fiscal effort required" from owners of "residential urban properties of higher value" was compared with "those who live from the income of their work." (Underlining and bold in the original)

i. The taxation under Stamp Duty contained in item 28 follows the criterion of adequacy, insofar as it aims at the taxation of wealth embodied in the ownership of real property of high value, whose acquisition implicitly demonstrates a certain economic capacity;

j. The legislative choice of item 28 of the TGIS is constitutionally legitimate, justified by the principle of tax equality and ability to contribute, not constituting a violation of any constitutional command nor giving rise to any censure from the perspective of constitutional parameters;

k. Based on all of the foregoing, it is thus evident that the assessment in question constitutes a correct interpretation and application of law to the facts, suffering from no defect of violation of law, whether of the CRP or the CIS, and consequently the claim made should be judged groundless and the Respondent Entity should be acquitted of the claim;

l. Article 4 of the Civil Code prohibits resort to equity by courts; thus, should the Applicant's claim prevail, the arbitral decision would be unconstitutional by making a censure of the act performed on the basis of criteria other than that of legality, implying violation of the constitutional principle of separation of powers.

The AT concludes by requesting the waiver of joining the administrative file, the holding of the meeting provided for in article 18 of the RJAT, as well as the holding of submissions.

The request for constitution of the Arbitral Tribunal was filed with the CAAD on 29 July 2015, having been accepted by His Excellency the President of the CAAD and automatically notified to the AT on 31 July 2015.

The Applicant informed that it did not intend to appoint an arbitrator, whereby, under the terms of no. 1 of article 6 of the RJAT, the signatory was appointed arbitrator by His Excellency the President of the Deontological Council of the CAAD, a position which she accepted within the legally prescribed period, without opposition from the Parties.

The Singular Arbitral Tribunal was regularly constituted on 28 October 2015 and is materially competent to appraise and decide the dispute object of these proceedings.

The Parties have legal personality and capacity, are legitimate and are duly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings do not suffer from nullities and no exceptions were invoked.

The holding of the meeting referred to in article 18 of the RJAT was waived, with the Parties submitting successive written submissions.

2. FACTUAL MATTER

2.1. Facts considered proven:

2.1.1. Both as of the date of the occurrence of the tax fact and as of the date of the request for constitution of the arbitral tribunal, the Applicant was the owner of the urban property registered under article … of the parish of …, municipality of ..., with tax property value of €4,415,100.00;

2.1.2. In accordance with the property record obtained via the internet, the identified real property (Lot …, located in … - ...) is a plot of building land, with a total area of 17,245.0000 m²;

2.1.3. In the name of the Applicant and by reference to the aforesaid urban property, there was issued on 20 March 2015, for voluntary payment in three annual installments, the Stamp Duty assessment (item 28.1 of the TGIS) for the year 2014, the first installment of which is stated in collection notice no. 2015 …;

2.1.4. Collection notice no. 2015 …, in the amount of €14,717.00, was paid by the Applicant on 28 April 2015.

2.2. Justification of the factual matter proven:

The Tribunal's conviction regarding the factual matter given as proven resulted from the analysis of documentary evidence attached to the request for arbitral decision (copies of the property record of the identified real property, proof of payment of the collection notice issued in the name of the Applicant), not contested by the Respondent.

2.3. Facts not proven

There are no facts relevant to the decision of the case that should be considered as not proven.

3. LEGAL MATTER – JUSTIFICATION

The only issue to be decided in these proceedings is that of the unconstitutionality of the rule of incidence contained in item 28.1 of the TGIS, due to violation of the principles of tax equality and ability to contribute.

The said rule, in the wording given to it by Law no. 83-C/2013, of 31 December (State Budget Law for 2014), applicable to the situation under analysis, provides that Stamp Duty affects "28 - Ownership, usufruct or surface rights to urban properties whose tax property value contained in the matrix, in accordance with the Code of Municipal Property Tax (CIMI), is equal to or greater than (euro) 1,000,000 - on the tax property value used for IMI purposes:

28.1 - For residential property or for building land whose construction, authorized or planned, is for residential purposes, in accordance with the provisions of the IMI Code - 1%"

(…).

Appraisal:

1. The tax system, as a set of taxes in force in a given legal space, must participate in certain characteristics, such as equity in the distribution of the tax burden among citizens and financial effectiveness, so that the revenues generated are adequate to the satisfaction of financial needs and budget policy objectives[1].

2. It is necessary, however, to distinguish between fiscal taxes, which have as their principal objective the collection of revenues, and extrafiscal taxes, through which other purposes are pursued than the obtaining of revenues. In our jurisdiction, in accordance with no. 1 of article 103 of the CRP, "The tax system aims at satisfying the financial needs of the State and other public entities and a just distribution of income and wealth" having as its principal scope the collection of revenues that permit the satisfaction of public needs.

3. Even fiscal taxes will tend towards equality in the distribution of burdens among taxpayers, assessed by their ability to contribute, whose principal index is income[2], without prejudice to the same being observed in the taxation of property or other manifestations of wealth which may also be indicative of that ability.

4. Legal equality requires the prohibition of arbitrariness, unjustified advantages or disadvantages in the attribution of rights or the imposition of duties, whereby, as was written in Opinion no. 14/78 of the Constitutional Commission, "(…) the satisfaction of requirements imposed by the Constitution or for other reasons will sometimes impose that the law not be apparently equal for all citizens, provided that such apparent deviations cannot be presented as an expression of privileges or burdens linked to persons as such. They are legislative inequalities of compensation or of concrete equalization of harmonious conditions still with the principle of equality, in its most exacting and modern sense of social or de facto equality"[3].

5. With regard to the principle of tax equality, it was written in Opinion no. 5/81 of the Constitutional Commission: "The principle of equality, in the field of taxes, is formulated in the Constitution, resulting from the provision of the aforementioned article 13, in conjunction with what is provided in articles 105, 106 and 107 (current articles 103, 104 and 105 of the CRP, following the 4th constitutional revision).

And at the basis of this principle of tax equality is the material content of the Rule of Law, tending towards the prohibition of unequal treatment that is not based on objective reasons.

Thus, the principle of equality has a dual content: one that is negative – which translates into the principle of generality – and another that is positive, which translates into the principle of ability to contribute.

This equality is, however, necessarily relative and does not prevent the legislator from freely choosing and treating the situations of life it considers as taxable facts.

What it should do is pay attention, in the selection it makes, to the fact that the situation chosen reveals ability to contribute. The legislator should not escape this and must always take into account such ability in defining the criteria for the measure of the tax."

1. Thus, as tax equality is necessarily relative, the principle of ability to contribute "must be compatible with other principles of constitutional dignity, such as the principle of the Social State, the freedom of the legislator to shape the law, and certain requirements of practicability and knowability of the tax fact, also indispensable for the fulfillment of the purposes of the tax system" – see Constitutional Court Decision no. 711/2006.

2. Law no. 55-A/2012, of 29 October, was approved in a context of budget disequilibrium in which it became necessary to collect supplementary fiscal revenues, with a view to meeting the budget targets established within the framework of the Economic and Financial Assistance Plan (PAEF) and fixed in the Memorandum of Economic and Financial Policies.

3. The statement of reasons for Bill Proposal no. 96/XII/2nd, which was at the origin of Law no. 55-A/2012, states that "The pursuit of the public interest, in light of the economic-financial situation of the Country, requires a consolidation effort that will require (…) the introduction of fiscal measures inserted in a broader set of measures to combat the budget deficit.

These measures are fundamental to reinforce the principle of social equity in austerity, guaranteeing an effective distribution of the sacrifices necessary to comply with the adjustment program. The Government is strongly committed to ensuring that the distribution of these sacrifices will be made by everyone and not just by those who live from the income of their work. In accordance with this goal, this statute broadens the taxation of income from capital and property, covering equitably a broad set of sectors of Portuguese society.

Accordingly, the taxation of capital income and securities gains will be increased, with their respective rates moving from 25% to 26.5% in the context of PIT. The taxation rates applicable to income obtained from or transferred to tax havens are also increased to 35%.

On the other hand, a rate is created under Stamp Duty affecting residential urban properties whose tax property value is equal to or greater than one million euros. (…)" (Underlined by us).

1. In the discussion of the statute in the Assembly of the Republic, the Secretary of State for Tax Affairs justified the fiscal measures proposed therein as follows (Journal of the Assembly of the Republic, I series, no. 9/XII/2, of 11 October 2012, pages 31 and 32): "The Government chose social equity as the priority principle of its tax policy. This is even more important in times of stringency as a way to ensure the just distribution of the tax effort. In the demanding period the country is going through, during which it is obliged to comply with the economic and financial assistance program, it becomes all the more pressing to affirm the principle of equity. It cannot always be the same people – employees and retirees – who bear the tax burdens. For the tax system to be fairer it is decisive to promote the broadening of the taxable base by requiring increased effort from taxpayers with higher incomes and thereby protecting Portuguese families with lower incomes. For the tax system to promote more equality it is fundamental that the budget effort be distributed among all taxpayers and affect all types of income, covering with special emphasis capital income and high-value properties. (…). Finally, for the tax system to be more equitable, it is crucial that everyone be called to contribute according to their real ability to contribute (…). In this sense, the Government presents today a set of measures that effectively strengthen a just and equitable distribution of the adjustment effort across a broad and comprehensive set of sectors of Portuguese society. This proposal has three essential pillars: the creation of special taxation on urban properties valued above 1 million euros; the increase in taxation on capital income and securities gains; and the strengthening of rules to combat tax fraud and evasion.

In the first place, the Government proposes the creation of a special tax on the highest value residential properties. This is the first time that in Portugal special taxation on high-value properties intended for residential use has been created. This rate will be 0.5% to 0.8% in 2012, and 1% in 2013, and will affect homes valued at equal to or greater than 1 million euros. With the creation of this additional rate the additional effort required from these owners will be significantly increased in 2012 and 2013." (Underlined by us).

1. According to Sérgio Vasques, "The subjection of individual elements of income – such as consumption or property represents by definition a violation of the principle of ability to contribute", however, the Author adds, the same may have justification "for reasons of a technical or extrafiscal nature, but only when it proves necessary, adequate and proportionate to the achievement of those same objectives"[4].

2. The taxation of ownership of residential urban properties (and building land whose authorized or planned construction is for residential purposes), with VPT equal to or greater than €1,000,000.00, "as a fiscal measure directed to more intensely affecting the holders of real rights of enjoyment over residential urban properties of higher value, within the reach only of holders of high economic power", reveals an unequivocal ability to contribute, as it relates to properties of value considerably higher than that of the generality of urban properties with residential use, even if potential, "capable of founding the imposition of increased contribution for the sanitation of public accounts on its holders, in realization of the aforementioned "principle of social equity in austerity" – See Constitutional Court Decision no. 590/2015, of 11 November.

3. On the other hand, as appears from the justification of the same Constitutional Court Decision no. 590/2015, which is followed here, the fact that the Stamp Duty of item 28.1 of the TGIS affects ownership concentrated in a property with VPT equal to or greater than €1,000,000.00, ceasing to tax assets of sometimes much higher value, but in which none of the real properties that comprise it reaches that VPT: "(…) The taxation resulting from the rule of incidence housed in item no. 28 assumes the nature of partial tax (thus, JOSÉ MARIA FERNANDES PIRES, ob. cit., page 507), taking as the tax base the urban property devoted to residential use, calculating the respective tax property value per unit of legal and economic relevance. It does not constitute a general tax on property, or even a tax on all real property, in terms of founding a comparison based on a personalization perspective of the tax and from a base that takes into account the entire property of the taxable subject. (…) It should be noted that the Constitution does not impose on the legislator the creation of a general tax on property, assigning to taxation on property the function of contributing to equality among citizens (article 104, no. 3, of the Constitution), with the legislator being free as to the solution to adopt (…)".

4. With regard to the incidence of Stamp Duty only from the threshold of €1,000,000.00, the justification of the aforementioned Constitutional Court Decision no. 590/2015 continues: "It should be noted that the existence of distinct applicative results before very approximated values – by excess or by defect – of a quantitative expression stipulated normatively as the 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 establishment of exemptions or tax benefits based on value criteria, it is always possible to find examples of taxpayers with differentiated treatment based on a quantitative variation of very reduced expression".

5. Finally, it will always be said that the fact that the real property on which the disputed assessment affected is an investment asset, devoted to real estate operations usually developed by the owner, not affecting the revealed ability to contribute, will determine that taxation under item 28.1 of the TGIS is capable of some attenuation in the business sphere, both because it constitutes a cost of activity, and because of the possibility of shifting (in prices) that, to a greater or lesser degree, always exists even in taxes on corporate income.

6. In light of the foregoing, it is concluded that item 28.1 of the TGIS is not capable of the constitutional censure requested by the Applicant, as the violation of the principles of equality and ability to contribute is not verified, in any of the aspects invoked.

4. DECISION

Based on the factual and legal grounds set out above, it is decided:

4.1. Not to declare unconstitutional the rule of item 28.1 of the TGIS, in its application to the present case;

4.2. To judge groundless the present request for arbitral decision and to determine the maintenance of the disputed Stamp Duty assessment for 2014.

VALUE OF THE CASE: In accordance with the provisions of article 306, nos. 1 and 2, of the CPC, 97-A, no. 1, subsection a), of the CPPT and 3, no. 2, of the Costs Regulation in Tax Arbitration Proceedings, the case is valued at €44,151.00 (forty-four thousand, one hundred and fifty-one euros).

COSTS: Calculated in accordance with article 4 of the Costs Regulation in Tax Arbitration Proceedings and Table I attached thereto, in the amount of €2,142.00 (two thousand, one hundred and forty-two euros), to be borne by the Applicant.

Lisbon, 20 January 2016.

The Arbitrator,

/Mariana Vargas/

Text prepared by computer, in accordance with no. 5 of article 131 of the CPC, applicable by reference of subsection e) of no. 1 of article 29 of Decree-Law 10/2011, of 20 January.

The wording of this decision is governed by the 1990 Orthographic Agreement.

[1] In this sense, see PEREIRA, Paulo T., AFONSO, António, ARCANJO, Manuela, SANTOS, José C. G., "Economy and Public Finance", Escolar Editora, Lisbon, 2005, pages 205 et seq.

[2] See, among others, RIBEIRO, J. J. Teixeira, "Lessons in Public Finance", 5th edition, Coimbra Editora, 1995, pages 264 et seq and VASQUES, Sérgio, "Manual of Tax Law", 4th Reprint, Almedina Coimbra, 2014, pages 253 and 254.

[3] Apud João Martins Claro, "The Principle of Equality", in Jorge Miranda, org. "In the Ten Years of the Constitution", Lisbon INCM, 1986, pages 29 et seq.

[4] Ob. cit. Page 255.