CAAD 536/2015-T: Stamp Tax on Construction Land Under Verba 28 TGIS Ruled Illegal

Arbitral Decision

I. Report

1. The company A… – S.A., (hereinafter referred to as "Applicant"), with tax identification number … with registered office at Rua…, no.…, … Dto., … Lisbon, presented, pursuant to the combined provisions of articles 2º and 10º of Decree-Law no. 10/2011, of 20 January, i.e., Legal Regime for Arbitration in Tax Matters ("LRATM"), a request for the establishment of an Arbitral Tribunal in order to declare illegal the acts of assessment of Stamp Duty ("SD"), relating to the fiscal year of 2013, corresponding to the 1st and 2nd instalments (no. 2014 … and 2014…, respectively) in the total amount of €6,981.60, with the Tax Authority and Customs Authority ("Respondent" or "TA") being the respondent party.

A) Constitution of the Arbitral Tribunal

1. Pursuant to the provisions of paragraph (a) of article 6º, paragraph 2, and paragraph (b) of article 11º, paragraph 1, of the LRATM, the Ethics Council of the Administrative Arbitration Centre ("CAAC") designated the undersigned as arbitrator of the sole arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe, and notified the parties of such designation on 21 October 2015.

2. Thus, in accordance with the provisions of paragraph (c) of article 11º, paragraph 1, of the LRATM, and through communication by the President of the Ethics Council of the CAAC, the Sole Arbitral Tribunal was constituted on 5 November 2015.

B) Procedural History

1. In the request for arbitral pronouncement, the Applicant petitioned for the declaration of illegality of the acts of assessment of SD mentioned above, with respect to an urban property, legally classified as a building site, located at Avenue…, parish and municipality of Nazaré, which is registered at the Property Registry Office of Nazaré under number … and registered in the urban property register of the said parish under article….

2. The TA submitted a reply, requesting the dismissal of the request for arbitral pronouncement, as there was no breach of law, requesting that the tax act in question, as it does not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 14 February 2016, the Sole Arbitral Tribunal, pursuant to the provisions of paragraph (c) of article 16º of the LRATM, decided, without opposition from the parties, that it was not necessary to convene the meeting referred to in article 18º of the LRATM, given the simplicity of the issues at hand, as well as considering that it had at its disposal all the necessary elements to make a clear and impartial decision.

4. It also decided, in accordance with article 18º, paragraph 2, of the LRATM, that oral arguments were not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set the end of March 2016 as the deadline for the arbitral decision.

5. Within the scope of the order, it also requested the parties to submit their final arguments. In this respect, it is important to note that both the Applicant and the Respondent chose not to make any submissions.

6. The Tribunal was regularly constituted and is competent to review the issues indicated (article 2º, paragraph 1, paragraph (a) of the LRATM), the parties have legal personality and capacity and have full standing (articles 4º and 10º, paragraph 2 of the LRATM and article 1º of Ordinance no. 112-A/2011, of 22 March). There are no nullities and no exceptions were raised, so there is nothing to impede judgment on the merits.

7. The present proceedings are therefore in a position for final judgment to be rendered.

II. Issue to be Decided

1. As a preliminary matter, it is incumbent upon this arbitral tribunal to determine, as requested by the Applicant, the possibility of cumulating claims in the present case.

2. The central issue to be reviewed and decided with respect to the merits of the case, as is apparent from the procedural documents of the parties, is whether urban properties legally classified as building sites should be encompassed by the concept of properties with residential use, pursuant to Item no. 28 of the General Table of Stamp Duty ("GTSD").

3. That is, this tribunal must determine whether, as the Applicant alleges, building sites are not classified as properties with residential use, and thus fall outside the scope of the said item, or, conversely, as the Respondent contends, they are considered properties with residential use and, in that context, subject to SD, pursuant to Item no. 28 of the GTSD.

III. Determination of Facts and Reasoning

1. Having examined the documentary evidence produced, this tribunal determines as established, and as relevant to the decision of the case, the following facts:

I. The Applicant is the owner of an urban property, legally classified as a building site, located at Avenue…, parish and municipality of Nazaré, which is registered at the Property Registry Office of Nazaré under number … and registered in the urban property register of the said parish under article…, with a Tax Property Value ("TPV") of €1,047,240.

II. The Applicant, with respect to the fiscal year of 2013 and as a result of Item no. 28 of the GTSD, received the assessment acts from the TA, relating to the first instalment (no. 2014…) and the second instalment (2014…), in the total amount of €6,981.60, out of a total amount of €10,472.40 (of the SD assessment relating to that fiscal year), which it paid.

III. Due to disagreement with such assessment, the Applicant filed a request for administrative review, which was expressly denied on 6 May 2015.

1. This tribunal's conviction regarding the facts established resulted from the documents attached to the case file and contained in the request and the uncontested allegations of the parties, as specified in the points of the statement of facts enumerated above.

2. There is no relevant factuality for the decision of the case determined as not established.

IV. On the Law

A) Legal Framework

1. Given that the legal issue to be decided in the present proceedings requires interpretation of the relevant legal texts, it is first necessary to enumerate the norms that comprise the relevant legal framework, at the date the facts occurred.

2. The subjection to SD of properties with residential use resulted from the addition of Item no. 28 to the GTSD, effected by article 4º of Law 55-A/2012, of 29 October, which defined the following taxable events:

"28 – Ownership, usufruct or surface right of urban properties whose tax property value shown in the register, in accordance with the Code of Real Property Tax (CRPT), is equal to or exceeding €1,000,000.00 – on the tax property value used for purposes of Real Property Tax:

28.1 – Per property with residential use – 1%

28.2 – Per property, when the taxpayers that are not natural persons are resident in a country, territory or region subject to a clearly more favorable tax regime, shown in the list approved by ordinance of the Minister of Finance – 7.5%".

1. The said law also added to the Code of SD, article 23º, paragraph 7, concerning the assessment of SD: "in the case of the tax due under situations provided in item no. 28 of the General Table, the tax is assessed annually, in relation to each urban property, by the central services of the Tax Authority and Customs Authority, applying, with the necessary adaptations, the rules contained in the CRPT", and article 67º, paragraph 2, which provides that "to matters not regulated in the present Code relating to item 28 of the General Table, the CRPT shall apply, subsidiarily".

2. In this context, and taking into account the above indication, let us now turn our attention to the Code of Real Property Tax ("CRPT").

3. In the Code of CRPT, the species of properties are enumerated (in articles 2º to 6º), as follows:

"Article 2º - Concept of Property

1 – For purposes of this Code, property is any portion of territory, including waters, plantations, buildings and constructions of any kind incorporated or placed therein, with a permanent character, provided that it forms part of the assets of a natural or legal person and, under normal circumstances, has economic value, as well as waters, plantations, buildings or constructions, in the circumstances above, endowed with economic autonomy in relation to the land where they are located, although situated on a portion of territory that forms an integral part of assets that are otherwise diverse or do not have a patrimonial nature.

2 – Buildings or constructions, even though mobile by nature, are deemed to have a permanent character when devoted to non-transitory purposes.

3 – The permanent character is presumed when the buildings or constructions are placed at the same location for a period exceeding one year.

4 – For purposes of this tax, each autonomous fraction, in the horizontal property regime, is deemed to constitute a property.

Article 3º - Rural Properties

1 – Rural properties are lands situated outside an urban settlement that are not to be classified as building sites, pursuant to paragraph 3 of article 6º, provided that:

a) They are devoted or, in the absence of concrete devotion, have as normal destination a use generating agricultural income, such as is considered for purposes of personal income tax (PIT);

b) Not having the devotion indicated in the preceding subparagraph, they are not built on or have only buildings or constructions of an ancillary character, without economic autonomy and of reduced value.

2 – Also rural properties are lands situated within an urban settlement, provided that, under a legally approved provision, they cannot have use generating any income or can only have use generating agricultural income and are in fact having this devotion.

3 – Also rural properties are:

a) Buildings and constructions directly devoted to the production of agricultural income, when situated on the lands referred to in the preceding paragraphs;

b) Waters and plantations in the situations to which paragraph 1 of article 2º refers.

4 – For purposes of this Code, urban settlements are considered, in addition to those situated within legally fixed perimeters, nuclei with a minimum of 10 dwelling units served by public use streets, with their perimeter delimited by points spaced 50 m from the axis of the streets, in the transversal sense, and 20 m from the last building, in the direction of the streets.

Article 4º - Urban Properties

Urban properties are all those that should not be classified as rural, without prejudice to the provisions of the following article.

Article 5º - Mixed Properties

1 – Whenever a property has rural and urban parts, it is classified, in its entirety, according to the main part.

2 – If neither part can be classified as main, the property is deemed mixed.

Article 6º - Species of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Building sites;

d) Others.

2 – Residential, commercial, industrial or for services are buildings or constructions licensed for such purposes or, in the absence of license, that have as normal destination each of these purposes.

3 – Building sites are considered lands situated within or outside an urban settlement, for which a license or authorization has been granted, prior communication admitted or favorable prior information issued for subdivision or construction operations, and also those that have been so declared in the acquisition title, except for lands in which the competent entities prohibit any of those operations, namely those located in green areas, protected areas or which, in accordance with municipal land-use planning plans, are devoted to spaces, public infrastructure or public facilities.

4 – Within the provision of subparagraph (d) of paragraph 1 are lands situated within an urban settlement that are not building sites nor are covered by the provision of paragraph 2 of article 3º and also buildings and constructions licensed or, in the absence of license, that have as normal destination purposes other than those referred to in paragraph 2 and also those of the exception of paragraph 3".

1. Parallelly, and since it is one of the issues raised by the Respondent, it is important to highlight what is provided in article 45º of the Code of CRPT.

"Article 45º - Tax Property Value of Building Sites

1 - The tax property value of building sites is the sum of the value of the area of implantation of the building to be constructed, which is the one situated within the perimeter of fixing the building to the ground, measured by the outer part, added to the value of the land adjacent to the implantation.

2 - The value of the implantation area varies between 15% and 45% of the value of the buildings authorized or foreseen.

3 - In fixing the percentage of the value of the implantation land, consideration is given to the characteristics referred to in paragraph 3 of article 42º.

4 - The value of the area adjacent to the construction is calculated in accordance with paragraph 4 of article 40º.

5 - When the document proving constructive viability referred to in article 37º makes reference only to the PDM indexes, the assessing experts must substantively estimate the respective construction area, taking into account, in particular, the average construction areas of the surrounding zone".

1. Finally, attention should also be paid to the norms on the interpretation of laws, which are fundamental for understanding the scope of the concept of property with residential use.

2. Article 11º of the General Tax Law ("GTL") establishes the essential rules for interpreting tax laws as follows:

"Article 11º - Interpretation

1. In determining the meaning of fiscal norms and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever fiscal norms employ terms specific to other branches of law, these must be interpreted in the same sense as they have there, unless otherwise directly provided by law.

3. If doubt persists regarding the meaning of the applicable norms of incidence, the economic substance of the taxable facts should be considered.

4. Gaps resulting from tax norms covered by the legislative reserve of the Assembly of the Republic are not susceptible to analogical integration".

5. The general principles of interpretation of laws, to which article 11º, paragraph 1, of the GTL refers, are set forth in article 9º of the Civil Code, which provides the following:

"Article 9º - Interpretation of Law

1. Interpretation must not be confined to the letter of the law, but must reconstruct from the texts the legislative intent, taking especially into account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

2. However, the interpreter cannot consider the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed.

3. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and knew how to express its intent in appropriate terms".

4. Thus, it is within this legal framework that it is important to decide whether urban properties classified as building sites are, or are not, included in the concept of property with residential use, pursuant to Item no. 28 of the GTSD.

B) Arguments of the Parties

1. The Applicant, in summary, alleged the following:

2. "As a preliminary matter, it is important to emphasize that taxes are subject to the constitutional imperative of legality, from which it follows that their essential elements must be defined by parliamentary law, thus guaranteeing the security and predictability of legal relations (typicity), and that this definition of essential elements must be made with such rigor that it is possible for the average taxpayer to foresee, with reasonable precision and security, the amount of tax due…".

3. Notwithstanding, according to the Applicant, "the concept of property with residential use is not found in any other sector or branch of the Portuguese legal system", so it will be necessary to resort to the general rules and principles of interpretation and application of laws, particularly those provided in the Civil Code.

4. It is precisely based on these rules that the Applicant understands that "it becomes clear and evident that the concept of urban property with residential use must necessarily be interpreted by resorting to the meaning it has in common language".

5. And, in that sense, the Applicant is of the opinion that "the word 'devotion' (afetação), in this context of the use of a property, has the meaning of 'action of allocating something to a particular use', reason for which there can be no doubt that the legislator, in using the expression 'property with residential use', intended to refer to the use or utilization of the urban property".

6. Accordingly, for the Applicant "the only question concerns whether the residential use or devotion must be current and effective. In other words, whether the property must have effective residential use at the moment when the SD incidence is determined".

7. The Applicant further resorts to arbitral jurisprudence and that of the Supreme Administrative Court to support its thesis, citing, in particular, the arbitral decision relating to case no. 42/2013, "in the case of 'building sites' there exists nothing more than the expectation, or potentiality, of an urban property being able, after construction, to come to have residential use. But only when the residential use is realized, and never before its construction, is that we may consider that the urban property falls within the scope of the objective norm of incidence at issue".

8. Finally, the Applicant also draws attention to the fact that the relevant Item (28 of the GTSD) was only altered with respect to the fiscal year 2014 and following, with the modification of the text of the relevant norm to "per residential property or per building site whose construction, authorized or foreseen, is for residential purposes…", confirming, in the Applicant's opinion, "the acknowledgement that this reality, before the said legislative change, was not subject to SD taxation".

9. In conclusion, from the Applicant's perspective, "there can be no doubt that, in this case, the TA made an interpretation of the objective norm of incidence contained in Item no. 28.1 of the GTSD not in conformity with the Law approved by the Assembly of the Republic, reason for which the SD assessments at issue are affected by a defect of violation of law, by virtue of error as to the legal assumptions…", thus requesting that the assessments be declared illegal and, consequently, annulled.

10. Additionally, the Applicant also requested payment of indemnitary interest.

11. For its part, the Respondent, after being duly notified, submitted its reply in which, in summary, it alleged the following:

12. "In the absence of any definition regarding the concepts of urban property, building site and residential use, in the context of SD, one must resort to the CRPT, in search of a definition that allows determining the possible subjection to SD, in accordance with the provision of article 67º, paragraph 2 of the Code of SD, as amended by Law no. 55-A/2012, of 29/10".

13. Establishing that, pursuant to the said legal provision, to matters not provided for in the Code of SD, and relating to Item no. 28 of the GTSD, the provisions of the Code of CRPT must be applied, subsidiarily.

14. Subsequently, the Respondent develops an extensive reasoning which, in its opinion, allows framing building sites within the concept of property with residential use, basing itself, in particular, on article 45º of the Code of CRPT.

15. "As appears from the expression '… value of the buildings authorized', contained in article 45º, paragraph 2 of the Code of CRPT, the legislator opted to determine the application of the methodology for valuation of properties in general, to the valuation of building sites, and therefore the devotion coefficient provided for in article 41º of the Code of CRPT is applicable to them".

16. The Respondent therefore believes that, if for purposes of determining the TPV of building sites there is an application of the devotion coefficient (in the valuation of the land), then that coefficient should likewise be considered, for purposes of applying Item no. 28 of the GTSD.

17. Additionally, in the Respondent's opinion, "the mere establishment of a potential right to construct immediately increases the value of the property in question, hence the rule contained in article 45º of the Code of CRPT which orders the separation of the two parts of the land.

On one side, the part of the land where the building to be constructed will be implanted is considered, and on the other the area of free land (…)."

1. Therefore, for the Respondent, "well before the actual construction of the property, it is possible to ascertain and determine the devotion of the land as a building site.

From what was set forth above it is clear that the SD assessment challenged does not suffer from any defect, being, moreover, in conformity with the law".

1. In conclusion, the Respondent requests that the request for declaration of illegality and consequent annulment of the contested assessment be judged unfounded, thus absolving it of the claim.

C) Tribunal's Assessment

1. First, it is necessary to validate the cumulation of claims, as indicated by the Applicant.

2. Indeed, it follows from article 3º, paragraph 1, of the LRATM that "the cumulation of claims, even if relating to different acts and the joinder of plaintiffs are admissible when the merits of the claims depend essentially on the assessment of the same factual circumstances and on the interpretation and application of the same principles or rules of law".

3. Now, the cumulation of claims underlying the present proceedings is admissible, in that it concerns acts of assessment of the same tax, in this case SD. There is also identity in the factual matter and the merits of the claim depend on the interpretation of the same principles and rules of law.

4. Having said this, this tribunal considers that the conditions are met to examine the central issue of this proceeding, which concerns the application of Item no. 28 of the GTSD.

5. It should also be noted that, in the view of the Arbitral Tribunal, the issue to be decided concerns exclusively a matter of law, namely to understand, for purposes of applying the said item, whether the concept of property with residential use includes, or does not include, building sites.

6. To this end, the present tribunal will closely follow the Arbitral Decision relating to case no. 42/2013-T, of 18 October (a decision which it already applauds), for its relevance, detail and proximity to the present discussion (also mentioned by the Applicant).

7. By way of introduction, it should be noted that the Code of CRPT does not resort, in the classification of urban properties, to the concept of property with residential use (in truth, such concept is also not found in any other statute).

8. Thus, it is necessary to conduct, based on the legal framework set forth above, an interpretation of the concept of property with residential use.

9. In that respect, and in order to support the present decision, we transcribe below part of Arbitral Decision no. 42/2013-T, of 18 October, which decided the following:

"From a literal interpretation of the norm of incidence at issue it appears that the legislator wished to include within the scope of application of the norm urban properties that have 'residential use'.

The expression 'residential use' does not appear to have any meaning other than residential utilization, that is, urban properties that have an actual use for residential purposes, either because they are licensed for such purposes or because they have such normal destination.

And we cannot confuse 'residential use' which implies an actual devotion of an urban property to that purpose, with the expectation, or potentiality, of an urban property being able to come to have 'residential use'.

Building sites, not being constructed, do not satisfy, by themselves, any condition to be considered as properties with residential use, since, on the one hand, they do not possess a use license for residential purposes, and, on the other hand, they are not habitable (because they are quite simply not constructed).

Therefore, it does not appear to us to be sufficient for being able to be framed within the objective norm of incidence at issue that there exist the expectation of an urban property coming to have residential use, or the potentiality of coming to have residential use" (emphasis ours).

1. Now, in the case of building sites, in fact, nothing more exists than the mere expectation, (or, possibly, potentiality), of the same, and only after construction, to come to have residential use.

2. However, only when the aforementioned devotion is realized, can we consider that the urban property falls within the scope of Item no. 28 of the GTSD.

3. Indeed, the concept of residential use will necessarily have to be traced back to something that is capable of being inhabited, even though, as set forth above, it is not legally recognized as such.

4. As such, although a building site will very likely result in the future in a property with residential use, while it remains as such (that is, legally classified as a building site), it cannot, at the date of the facts, in the understanding of the present tribunal, be included within the scope of Item no. 28 of the GTSD.

5. In parallel, the TA demonstrated, as described above, that, in its opinion, it is by force of article 45º of the Code of CRPT that building sites are classified as properties with residential use.

6. In this context, and for its relevance to the present decision, let us turn our attention once more to Arbitral Decision no. 42/2013, of 18 October.

7. As set forth in the arbitral decision previously mentioned, "article 45º of the Code of CRPT has as its objective the valuation of building sites, considering as one of its elements the authorized or possible destination, as a function of the urbanistic conditions.

Once again we are only in the realm of potentialities, of expectations, and that is not sufficient to alter the nature of the property, which continues to be considered as a building site, nor to sustain that the property in question comes to have 'residential use' for purposes of the objective incidence of item 28.1 of the GTSD".

1. Thus, it is the opinion of the present tribunal that, at the date of the facts, the concept of property with residential use, referred to in Item no. 28 of the GTSD, is confined exclusively to the concept of residential urban property, pursuant to article 6º, paragraph 1, subparagraph (a) of the Code of CRPT.

2. In other words, in the understanding of the present tribunal, in keeping with the opinion expressed by the Applicant and in Decision no. 42/2013-T, of 18 October, the TA cannot resort to article 45º of the Code of CRPT to establish a relationship between building sites and property with residential use.

3. In that sense, the present tribunal concludes that, the urban property under discussion being a building site, it cannot be included within the scope of Item no. 28 of the GTSD.

4. In parallel, and although the framing carried out thus far is, in the view of the present tribunal, sufficient to recognize the illegality of the assessment act performed by the TA, it is important to note that, if there were any doubt, the recent amendment to the text of Item no. 28 of the GTSD would surely dispel it.

5. Indeed, Law no. 83-C/2013, of 31 December, which entered into force on 1 January 2014, amended the text of item no. 28 of the GTSD to "residential property or building site whose construction, authorized or foreseen, is for residential purposes, pursuant to the provisions of the Code of CRPT (…)" (emphasis ours).

6. Now, in the understanding of the present tribunal, such amendment occurred naturally because the legislator will have perceived that there was a need, verified only from 2014 onwards, to extend the said item to building sites, as referred to above.

7. In this manner, it is clear that until that date (2014), the text of the previously mentioned item left out of its scope of application properties legally classified as building sites (otherwise, there would have been no need to amend the text of the said item).

8. Thus, and on the basis of the reasons enumerated above, the present tribunal understands that building sites cannot, at the date of the facts, be encompassed by the concept of property with residential use, as is referred to in the text of Item no. 28 of the GTSD, and therefore concludes that the legal assumption of incidence is not met.

V. Decision

1. On these grounds, this Arbitral Tribunal decides:

A) To adjudicate the request for arbitral pronouncement as well-founded and, consequently, to declare illegal and annul the acts of assessment of SD mentioned above, by reference to 2013, from which resulted tax payable in the amount of €6,981.16, relating to the taxation of urban properties with residential use, pursuant to the provisions of Item no. 28 of the GTSD;

B) To condemn the Respondent, pursuant to article 43º, paragraph 1 of the GTL and article 61º, paragraphs 2 and 5 of the Code of Tax Procedure and Process ("CTPP"), to the payment of indemnitary interest, at the rate resulting from paragraph 4 of article 43º of the GTL, calculated on the amount paid, from the day on which the aforementioned assessments were paid and until the full reimbursement of the amount referred to; and

C) To condemn the Respondent to the costs of the proceeding.

VI. Value of the Proceeding

1. The value of the proceeding is set at €6,981.16, pursuant to article 97º-A, paragraph 1, subparagraph (a) of the CTPP, applicable by force of subparagraphs (a) and (b) of article 29º, paragraph 1 of the LRATM and paragraph 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings ("RCTAP").

VII. Costs

1. In accordance with the provisions of article 22º, paragraph 4, of the LRATM, the value of the arbitration fee is set at €612, pursuant to Table I of the aforementioned Regulation, to be borne by the Respondent, given the full merits of the claim.

Let notice be given.

Lisbon, CAAC, 24 March 2016

The Arbitrator

(Sérgio Santos Pereira)