Stamp Tax on Vertical Property: CAAD Rules Verba 28.1 Cannot Apply to Individual Units Below €1M (554/2015-T)

ARBITRAL DECISION

Claimant: A…

Respondent: Tax and Customs Authority.

I - REPORT

1. A…, widow, Tax Number…, resident at … n.º…, …Esq., in Lisbon, requested, on 26 August 2015, pursuant to the provisions of Articles 2, n. 1, letter a) and 10 of Decree-Law n. 10/2001, of 20 January (Legal Regime for Tax Arbitration, hereinafter, "LRTA"), the constitution of an Arbitral Tribunal for the appreciation of the legality and constitutionality, and consequent annulment of the assessment acts for Stamp Duty ("SD"), by application of Item 28.1 of the General Table of Stamp Duty ("GTSD") annexed to the Stamp Duty Code ("SDC"), concerning two urban properties located at Ave. … n.º … and at Ave. … n.º…, in Lisbon.

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

3. Pursuant to Article 6, n. 2, letter a) and Article 11, n. 1, letter b) of the LRTA, the Deontological Council designated as sole arbitrator the undersigned herein, who accepted the appointment within the legally stipulated time period.

4. The Arbitral Tribunal was constituted on 11 November 2015.

5. The Respondent submitted its reply on 16 December 2015.

6. There being no objection from the parties, the Tribunal decided to dispense with the meeting referred to in Article 18, n. 1 of the LRTA.

7. By order of the Arbitral Tribunal, the parties were notified to submit arguments on the competence of the tribunal and expansion of the claim.

8. The Claimant submitted arguments on 1 April 2016 and the Respondent submitted arguments on 7 April 2016.

1. The Claimant argued, in summary, that:

9.1 She is the owner of two urban properties, one located at Ave. … n.º…, in Lisbon and another at Ave. … n.º…, in Lisbon.

9.2 The property located at Ave. … n.º … is composed of fifteen units, twelve units for residential use and three for commerce, with a total patrimonial value of € 1,296,110.00.

9.3 The property located at Ave. … is composed of eleven units, ten for residential use and one for commerce and services, with a total patrimonial value of € 1,960,430.00.

9.4 Each of these two properties is composed of floors capable of independent use, with taxable patrimonial values below € 1,000,000.00, but whose total value of each of the properties exceeds € 1,000,000.00.

9.5 With respect to each of the properties, the Tax Administration assessed, on 20 March 2015, Stamp Duty on the taxable patrimonial value of each of the units intended for residential use, provided for in item 28.1 of the GTSD, concerning the first installment due.

9.6 On 8 April 2015, the Claimant submitted two administrative review requests.

9.7 Also on 20 March 2015, the Claimant proceeded with assessments relating to the second installments.

9.8 She further alleges that the Tax Administration assessed the stamp duty herein challenged because the sum of the values of the units intended for residential use exceeds one million euros, more specifically, the units of the property located at Ave. … n.º … total the value of € 1,083,020.00 and the units of the property located at Ave. … n.º … total the value of € 1,258,950.00.

9.9 The Claimant contends that such assessments are unlawful and that the assessment acts for such duty should be annulled, which she seeks through this challenge, insofar as: a) the properties have mixed use; (ii) subjection to stamp duty is determined, not by the TPV of the property, but by the TPV of the floors or fractions;

9.10 She concludes that the illegality of the assessments in question is manifest, due to unlawful interpretation by the Tax Authority of item 28 of the GTSD.

9.11 She further invokes unconstitutionality, due to violation of the principle of equality enshrined in Article 13 of the Constitution of the Portuguese Republic, of the provision contained in item 28 of the GTSD, annexed to the SDC.

9.12 In the arguments presented, she further clarified that, as to the question of competence, the Claimant intends to challenge the assessment acts and not the collection notices.

1. Notified to respond, the Respondent argues, in summary, as follows:

10.1 By way of challenge, it invokes that, with reference to the year 2014, it proceeded with the assessment of Stamp Duty, pursuant to item 28.1 of the GTSD, amended by Article 4 of Law n. 55-A/2012, of 29 October, and proceeded with notification of the collection documents for payment of the assessments in question.

10.2 It contends that what is at issue in the present action are collection notices that result from direct application of the legal provision.

10.3 With respect to the violation of the principles of legality, equality and taxpaying capacity, it contends that there is no violation of the principle of equality, with no discrimination existing between properties constituted in horizontal property and properties in full ownership with floors or divisions capable of independent use, or between properties with residential use and properties with other uses.

10.4 It maintains the complete validity and legality of the collection notices for Stamp Duty, item 28 of the GTSD, for the year 2014, herein challenged, concluding for the legality thereof.

10.5 In arguments, it maintains the incompetence of the Arbitral Tribunal to appreciate the legality of the collection notices corresponding to the 1st and 2nd installments of the duty relating to the real estate properties in question.

C – Established Facts

1. Based on the facts alleged by the parties, and not disputed by the Respondent, as well as on the documentation attached to the proceedings, the following relevant factuality is established for the proper decision of the case:

A) The Claimant was in 2014 owner of the urban property, in the regime of full ownership with floors or divisions capable of independent use, located at Ave. … n.º…, in Lisbon, registered in the urban real estate register of the parish of…, under registration number….

B) It appears from the registration certificate that each of the floors, allocated to residential use, capable of independent use, has an individual taxable patrimonial value below € 1,000,000.00.

C) The taxable patrimonial values of each of the divisions capable of independent use, intended for residential use, determined according to the IMI, are as follows:

D) The total patrimonial value is € 1,296,110.00 and of the units intended for residential use is € 1,083,800.00.

E) On 20/03/2015, Stamp Duty assessment notices were issued, for the year 2014, based on the application of item 28.1 of the GTSD, affecting this property, individually for each of the floors capable of independent use, from which resulted the determination of the following tax amounts for each floor:

F) The documents sent to the Claimant contain, among other things, the following mention "Taxable Patrimonial Value of the property – total subject to duty: € 1,083,800.00".

G) The Claimant was notified to proceed with payment, by April 2015, of the 1st installment of the assessments made, in the amount of € 3,612.76.

H) As well as to proceed with payment of the second and third installments in the amount of € 3,612.76 each.

I) The Claimant was, in 2014, owner of the urban property, in the regime of full ownership with floors or divisions capable of independent use, located at Street … n.º…, registered in the urban real estate register of the parish of…, municipality of Lisbon, under registration number….

J) From the registration certificate it appears that it is a property with ground floor and 5 floors and 2 shops, with garage entrance, with a total patrimonial value of € 1,960,430.00".

K) Each of the five floors, right and left sides, capable of independent use, are allocated to residential use, and have an individual taxable patrimonial value below € 1,000,000.00.

L) The taxable patrimonial values of each of those floors capable of independent use, intended for residential use, according to the IMI, are as follows:

M) The total patrimonial value is € 1,960,430.00, being the residential fractions the value of € 1,258,950.00.

N) On 20/03/2015, Stamp Duty assessment notices were issued, for the year 2014, based on the application of item 28.1 of the GTSD, affecting this property identified in – individually for each of the floors capable of independent use, from which resulted the determination of the following tax amounts, in the total value of € 12,589.50:

O) The Claimant was notified to proceed with payment of the duty in three installments, in the months of April, July and November.

P) The documents issued contain, among other things, the following mention "Taxable Patrimonial Value of the property – total subject to duty: € 1,258,950.00".

Q) On 8 April 2015, the Claimant submitted two administrative review requests.

R) From the administrative proceedings attached to the file, it results that the administrative review requests had as their object, according to the understanding of the Respondent, the assessment acts for Stamp Duty.

II – PRELIMINARY MATTERS

1. The Arbitral Tribunal is regularly constituted, pursuant to Articles 2, n. 1, letter a), 5, n. 2, and 6, n. 1, all of the LRTA.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10, n. 2, of the LRTA and Article 1 of Order n. 112-A/2011, of 22 March.

The proceedings do not suffer from defects that would invalidate them, so the conditions are met for rendering the final decision.

III. REASONING

The two questions to be decided within the scope of the present proceedings are as follows:

1. Regarding the competence of the arbitral tribunal in tax matters to hear the claim formulated by the Claimant in the present proceedings.

2. Regarding the application of item 28.1 of the GTSD annexed to the SDC, to the properties of which the Claimant is owner, more specifically, it consists of ascertaining whether in the case of properties in full or vertical ownership, with floors or divisions capable of independent use, the taxable patrimonial value to be considered for purposes of the scope of item 28.1 of the GTSD is the taxable patrimonial value of each floor or division capable of independent use, with residential use, as the Claimant contends; or whether it is the value of the property resulting from the sum of the taxable patrimonial values corresponding to the floors or divisions capable of independent use with residential use, as the Respondent contends.

a) Regarding the Competence of the Arbitral Tribunal

In the petition presented before the Arbitral Tribunal, the Claimant requests that the "illegality of various stamp duty assessments" be declared and consequently that the assessment acts for stamp duty" be declared illegal and annulled, referring to the assessment acts for Stamp Duty, by application of item 28.1 of the GTSD, concerning the year 2014, from which resulted an amount to be paid in the sum of € 15,619.21 (first and second installments) and, subsequently, by expansion of the claim, referring to the third installments in the amount of € 7,809.09, in the total of € 23,428.30, concerning the urban properties described in the respective real estate register under registration numbers … of the parish of…, and … of the parish of…, municipality of Lisbon. In the final claim, the Claimant petitions for the declaration of illegality of the stamp duty assessment acts identified and their consequent annulment.

The Claimant supported the annulment request with the payment documents of the first and second installments of the assessments made, from which resulted the payment of duty in the amount of € 15,619.21. Subsequently, she requested the expansion of the claim referring that the third installments of the duty should also be covered by this challenge. In the final arguments presented, the Claimant clarifies that she intended to challenge the assessments and not the collection notices.

In the view of the Respondent, the Arbitral Tribunal would be materially incompetent, in light of the provision of Article 2 of the LRTA to appreciate the legality of a portion of the assessment act that is not, in itself, a tax act, contending that the Claimant challenges the collection notices that constitute the 1st and 2nd installments of the duty relating to the two real estate properties. However, in analyzing the administrative review requests, the Tax Authority came to understand that, although the Claimant identifies in her request the collection notices, the object of the review corresponds to the assessment of Stamp Duty, concerning the year 2014.

In fact, given the tenor of the request for constitution of the arbitral tribunal and the final claim, it appears that the Claimant intended to challenge the tax assessment made but appearing to wrongly correspond that assessment to each of the collection notices issued for payment thereof.

The identification of the object of the claim, as configured by the Claimant, may give rise to doubts as to the actual object of the request for arbitral decision, namely, whether the Claimant challenges the stamp duty assessment or the payment of each of the installments that resulted from that assessment.

However, from the grounds and reasons invoked by the Claimant and from the express references in the request for constitution of the Arbitral Tribunal, it results that the Claimant questions the Stamp Duty assessments, seeking their annulment, which gave rise to the collection notices attached to the proceedings.

Although the formulation of the claims does not, in truth, constitute a perfectionist model and gives rise to doubts, the fact is that the Claimant gave sufficient notice to the tax arbitral tribunal of the legal effect she intended to obtain and which the acts emanating from the Respondent that are the object of her annulment claim: the Stamp Duty assessments, concerning the year 2014, concerning the properties identified in her initial request, which gave rise to the collection notices attached. Indeed, the Claimant identifies as the object of the arbitral claim the Stamp Duty assessment acts and, consequently, requests their annulment. If there were doubts, the fact remains that in the arguments presented, the Claimant clarifies that she intended to challenge the Stamp Duty assessments concerning the year 2014. Furthermore, the Respondent – as results from the administrative proceedings attached – understood that the administrative review request presented by the Claimant had as its object the assessment acts, notwithstanding the Claimant having attached the respective collection notices.

As has been the case law of the Supreme Administrative Court, the law does not impose in this matter formulaic, rigid or irreplaceable formulas, requiring only that the challenger describe its claim by setting forth its grounds and object or, put another way, the legal effect intended to be obtained with the challenge action (cf. Decision of the Supreme Administrative Court of 9/02/1993, 4/10/1995 and 29/10/2008, rendered in case 541/08[1]). This understanding corresponds to that which, moreover, best aligns with the principle of effective judicial protection, enshrined in Articles 20 and 268, n. 4 of the Constitution of the Portuguese Republic, and with the principles pro accione.

It is concluded, therefore, that the Claimant intends to have appreciated within the scope of the present proceedings the legality of the Stamp Duty assessment acts, so that the object of this claim refers to annulment claims for assessment of tax acts. Wherefore it is decided that the Arbitral Tribunal is competent to hear them, pursuant to the provision of Article 2, n. 1, letter a), of the LRTA.

b) Regarding the Application of Item n. 28.1 of the GTSD to Properties in Vertical Ownership

As we have already noted, the question to be decided in the present proceedings consists of whether the TPV relevant for purposes of the scope of SD, provided for in item 28 of the GTSD is the one corresponding to the sum of the taxable patrimonial value attributed to the different divisions or floors (global TPV) or, rather, the taxable patrimonial value attributed to each of the residential floors.

The question has already been appreciated in various proceedings, within the scope of tax arbitration, in which it was decided that when it is verified that each of the floors that compose a property in vertical ownership have a taxable patrimonial value below one million euros, the legal assumption of scope of the Stamp Duty provided for in item 28.1 of the GTSD is not verified and, consequently, it was pronounced in favor of the illegality of the respective assessment acts (cf. decisions rendered within the scope of case numbers 51/2015-T, 391/2014-T, 451/2014-T, 153/2015-T, among others[2]). Also, the Supreme Administrative Court, by decision of 9/09/2015, case n. 47/15, with Francisco Rothes as the reporting judge, decided that in the case of a property in vertical ownership, the scope of SD (item 28.1 of the GTSD, as worded by Law n. 55-A/2012, of 29 October) must be determined, not by the TPV resulting from the sum of the TPV of all divisions or floors capable of independent use (individualized in the registration entry), but by the TPV attributed to each of those floors or divisions intended for residential use[3].

No arguments have been identified so far that would allow breaking the unanimity that has been achieved by the decisions already rendered, making it important to reiterate the case law already established.

Item 28 of the GTSD, annexed to the SDC, was amended by Article 4 of Law n. 55-A/2012, of 29 October, initially had the following wording:

"28 – Ownership, usufruct or right of surface of urban properties whose taxable patrimonial value recorded in the register, pursuant to the Municipal Property Tax Code, is equal to or greater than € 1,000,000 – on the taxable patrimonial value for purposes of IMI:

28.1 – For property with residential use – 1%;

28.2 – For property, when the taxpayers who are not natural persons are resident in a country, territory or region subject to a clearly more favorable tax regime, contained in the list approved by order of the Ministry of Justice – 7.5%."

The wording of item 28.1 was subsequently amended by Law n. 83-C/2013, of 31 December, which approved the State Budget for 2014, with point 28.1 now using the concept of residential property, now providing as follows: "28.1 For residential property or for land for construction whose construction, authorized or foreseen, is for residential purposes, pursuant to the provisions of the IMI Code – 1%".

The question raised in the present proceedings is whether the scope of item 28 of the GTSD, as worded by Law n. 83-C/2013, of 31 December, is, to ascertain whether item 28.1 of the GTSD applies to urban properties in full ownership, but with floors capable of independent use, with residential use, when the taxable patrimonial value attributed to each of these floors is below 1,000,000.00, although the sum of the floors, with independent use, allocated to residential use has a global value equal to or greater than that amount.

With respect to the provision in question – item 28.1 of the GTSD – the legislative thinking that underlay it can be discerned in the presentation and discussion, in Parliament, of bill n. 96/XII (2nd), in which the State Secretary for Tax Matters expressly stated[4]:

"The Government proposes the creation of a special rate on high-value residential urban properties. It is the first time that Portugal has created special taxation on high-value properties intended for residential use. This rate will be 0.5% to 0.8% in 2012 and 1% in 2013, and will apply to houses valued at equal to or greater than 1 million euros."

From the variety of semantic discussion emerges, from the outset, the undifferentiated use of expressions such as "residential urban properties," "high-value properties intended for residential use," and "houses valued at equal to or greater than 1 million euros," all appearing to point to the intention to tax single-family units of greater economic value, parameterized through their respective taxable patrimonial value equal to or greater than one million euros.

However, from the preparatory work it is not possible to collect, with the necessary rigor, as already emphasized in previous decisions, what concept of property underlies that provision (cf. decisions 21/2015-T and 451/2014), namely, whether a residential urban property is, in the meaning of item 28 of the GTSD, an autonomous unit (self-sufficient for the purpose to which it is intended), distinct and isolated in which the life of each individual or family group resident is processed, 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 compose properties constituted in horizontal property.

In the case at hand, the two properties of the Claimant constitute urban properties in full ownership, being composed of various floors capable of independent use, allocated to residential use. The taxable patrimonial values of the various floors capable of independent use are below € 1,000,000.00.

From the wording of item 28.1 it provides that "Ownership, usufruct or right of surface of urban properties whose taxable patrimonial value recorded in the register, pursuant to the Municipal Property Tax Code, is equal to or greater than € 1,000,000 – on the taxable patrimonial value for purposes of IMI.

It is therefore necessary to determine what taxable patrimonial value is considered for purposes of IMI given that from item n. 28.1 results that the stamp duty applies to the "Ownership, usufruct or right of surface of property whose taxable patrimonial value recorded in the register, pursuant to the Municipal Property Tax Code (IMTC), is equal to or greater than € 1,000,000 (...)".

It thus refers to the IMI Code all the regulatory content regarding the scope "urban properties with the taxable patrimonial value recorded in the register", pursuant to the IMI Code, and as to the taxable matter "taxable patrimonial value for purposes of IMI". A referral that, moreover, is contained, as a subsidiary matter, in Article 67/2 of the SDC which refers to the IMI Code for "matters not regulated in the present Code concerning item 28 of the General Table.

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

a) each property corresponds to a single registration entry (– cf. Article 82, n. 2 of the IMI Code;

b) each floor capable of independent use is considered separately in the registration entry, which also discriminates its respective taxable patrimonial value (cf. Article 12, n. 3 of the IMI Code);

c) the determination of taxable patrimonial value is ascertained for each floor or division capable of independent use, in accordance with the use of each unit, being evaluated separately based on its use and areas (cf. Article 38 of the IMI Code);

d) the collection document must contain, mandatorily, the discrimination of properties, their parts capable of independent use, respective taxable patrimonial value (cf. Article 119, n. 1 of the IMI Code).

e) the non-discrimination of the taxable patrimonial value of urban properties by floors or divisions capable of autonomous use constitutes grounds for complaint of incorrect registration (cf. Article 130, n. 3, letter h) of the IMI Code).

In legal doctrine, Silvério Mateus and Freitas Corvelo emphasize that one of the aspects that must be evidenced in the register relates to the need to highlight the autonomy that, within each property, can be attributed to each of its parts, functionally and economically independent[5].

The IMI Code enshrines tax relevance – at the level of registration entry, determination of taxable patrimonial value, discrimination of taxable patrimonial value, assessment, grounds for complaint – to the autonomization in the register of each part of a property, capable of independent use.

It results from the IMI Code that the parts of a property in full ownership endowed with autonomy, that is, self-sufficient for the purpose to which they are intended, are subject to individual and separate evaluation, are individualized in the respective registration entry, possess their own taxable patrimonial value recorded in the register and are subject to individualized assessments (all as results from Articles 7, n. 2, letter b), 13, n. 2 and 119, n. 1 of the IMI Code), that autonomy must be respected and is relevant for purposes of application of item 28 of the GTSD.

Item 28 of the GTSD makes reference to "urban properties with taxable patrimonial value recorded in the register, pursuant to the Municipal Property Tax Code" and to "taxable patrimonial value used for purposes of IMI".

In turn, Article 12, n. 3 of the IMTC provides that "each floor or part of property capable of independent use is considered separately in the registration entry, which also discriminates its respective taxable patrimonial value". From which to floors capable of independent use – as is the case herein – a specific and own taxable patrimonial value is attributed that is subject to autonomous registration in the respective real estate register. There is thus an autonomization for purposes of IMI of floors capable of independent use that are subject to a specific evaluation, pursuant to Article 7, n. 2, letter b) of the IMTC, of individual registration entry and with taxable patrimonial value for purposes of IMI that is autonomous.

In the case of properties in vertical or full ownership with floors or divisions capable of independent use, but without being constituted in horizontal property, there is clear tax autonomy that is evidenced by the different units (evaluated with distinct parameters depending on the specific use of each unit), indication of the floor/story, including with specification of the private gross area and the dependent gross area, all as if they were true autonomous fractions, as is the case at hand.

There being, therefore, no reason – in the scope of Stamp Duty, provided for in item 28.1 of the GTSD – to give to the floors/divisions capable of independent use (integrated in properties in vertical ownership) a treatment distinct from that granted in the IMTC.

Thus, for purposes of the scope of Stamp Duty, specifically for purposes of application of item 28.1 of the GTSD, "the taxable patrimonial value recorded in the register" and "the taxable patrimonial value used for purposes of IMI" corresponds to the taxable patrimonial value that is recorded in the register in relation to each floor or part of property capable of independent use, as results from the provision of Article 12/3 of the IMI Code.

In light of the foregoing, it is reiterated, in line with the decisions already rendered, that the application in casu of item 28.1 of the GTSD, with respect to the properties of which the Claimant is owner, is illegal because the said item must be interpreted to mean that the relevant taxable patrimonial value is the one corresponding to each of the floors capable of independent use and not the taxable patrimonial value that results from the arithmetic sum of all the floors that compose the property, that is, the partial taxable patrimonial values, attributed to each of the floors intended for residential use, in cases where only from the sum of the taxable patrimonial values results the determination of a taxable patrimonial value equal to or greater than 1,000,000.00. Since none of the floors that compose the properties have a taxable patrimonial value greater than one million euros, item 28.1 of the GTSD does not apply.

The Claimant also raised the question of unconstitutionality of item 28.1. Since the Arbitral Tribunal did not accept the understanding of the applicability of item 28.1 of the GTSD, the appreciation of the question of unconstitutionality of the provision in question becomes moot and procedurally unnecessary.

Decision:

For the grounds set forth, the arbitral tribunal decides to judge the claim well-founded and, consequently, to declare illegal the Stamp Duty assessments, by application of Item 28.1 of the GTSD, year 2014, concerning the urban properties located at Ave. … n.º…, in Lisbon, registered in the urban real estate register of the parish of…, under registration number … and Street … n.º…, registered in the urban real estate register of the parish of…, municipality of Lisbon, under registration number….

Case Value:

Pursuant to the provision of n. 2 of Article 315 of the Code of Civil Procedure, combined with letter a) of n. 1 of Article 97-A of the Code of Tax Procedure and n. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the case is assigned a value of € 23,427.50, which constitutes the total amount of the duty resulting from the assessments challenged whose annulment was sought.

Costs:

For the purposes of the provision of n. 2 of Article 12 and n. 4 of Article 22 of the Regulation of Tax Arbitration Proceedings and of n. 4 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 1,224.00, pursuant to Table I annexed to the regulation, to be borne by the Respondent.

Lisbon, 6 May 2016

The Arbitrator,

(Alexandra Gonçalves Marques)

[1] Available at www.dgsi.pt.

[2] All available in the CAAD database (www.caad.org.pt).

[3] Available at www.dgsi.pt

[4] Cf. Parliamentary Records Series I n. 9/XII-2, of 11 October, p. 32.

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