Process: 556/2014-T

Date: December 7, 2014

Tax Type: Selo

Source: Original CAAD Decision

Summary

This landmark Portuguese tax arbitration case (Process 556/2014-T) addressed whether Stamp Tax (Imposto do Selo) under Item 28.1 of the General Stamp Tax Table (TGIS) applies to terrenos para construção (building land). The applicant, a construction company, challenged stamp duty assessments on eight properties classified as building land, arguing these cannot be considered 'properties with residential use' as required by the tax provision. The core dispute centered on interpreting whether undeveloped land intended for residential construction qualifies as residential property for stamp tax purposes. The applicant contended that the Real Property Tax Code (CIMI) clearly distinguishes building land as a separate category from residential properties under Article 6. They argued that 'residential use' only applies to actual constructed properties, not vacant land awaiting development. The company further claimed that even though building land may be destined for residential construction, such use only materializes upon actual building completion. Additionally, the applicant raised constitutional concerns, arguing the tax violates equality principles since companies acquiring other types of inventory or raw materials face no comparable taxation, while construction companies are penalized for holding land as productive assets. The Tax Authority countered that CIMI's valuation methodology, particularly Article 45's reference to 'authorized buildings' and the use coefficient (coeficiente de afetação) in Article 41, extends residential classification to building land based on intended future use. They maintained that 'properties with residential use' encompasses both completed buildings and undeveloped land, representing a broader concept than CIMI's strict property classifications. This case has significant implications for real estate developers and construction companies holding land portfolios, potentially affecting stamp tax liability on millions in property values and establishing precedent for whether tax incidence should focus on current property status or intended future development.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. Application

A – ..., with tax identification number …, legally represented by B, ..., S.A., with registered office at Rua … Lisboa, legal entity number …, filed, pursuant to Article 2, paragraph 1 of Decree-Law No. 10/2011 of 20 January, which established the Tax Arbitration Regime (RJAT) and Ministerial Order No. 112-A/2011 of 22 March, a request for an arbitral decision with a view to:

  • The declaration of illegality of Stamp Duty (IS) assessments, pursuant to Item 28.1 of the respective General Table (TGIS) relating to eight properties described as building land;

  • The condemnation of TA – Tax and Customs Authority to the restitution of the improperly paid tax and to the payment of the corresponding indemnity interest on the amounts paid by the Applicant relating to the contested assessments.

The Applicant alleges, in essence, the following:

  • The properties on which the Stamp Duty was assessed cannot be classified as properties with residential use, as required by Item 28.1 of the General Table of Stamp Duty (TGIS);

  • Given that neither the Stamp Duty Code (CIS) nor the TGIS define what is meant by property with residential use, it is necessary to resort to the Real Property Tax Code (CIMI) to find such definition;

  • In accordance with Article 6, paragraph 1 of the CIMI, building land constitutes a distinct type of urban property from residential properties;

  • The expression "residential use" used in Item 28.1 of the TGIS is found in Article 41 of the CIMI, where, regarding the determination of the tax base value of "urban properties for residential, commercial, industrial and service purposes..." (Article 38, paragraph 1) there is a use coefficient established in the said Article 41 stating that "the use coefficient (CA) depends on the type of use of built properties...", and one of such uses is precisely residential use. This means that there is no use, whether residential, commercial or for services, in building land.

  • Urban properties with residential use are, therefore, those which, in accordance with the respective construction process to which Articles 62 et seq. of the Legal Framework of Urban Buildings (LJEU, approved by Article 1 of Decree-Law No. 555/99 of 16/12) refer, have been, as such, licensed or by virtue of their physical characteristics, had residential use as their normal destination. In this manner, and as is evident, building land is not urban property for residential purposes;

  • The authorization or provision for building development, even if destined for residential use, in the area of implementation of building land, does not thereby make them properties with residential use. Even though the land is intended for the construction of properties devoted to residential use, such use only occurs with the actual construction of the property, with the consequent elimination of the property register entry of the building land and its replacement by a new property register entry of the constructed urban property or autonomous unit;

  • The fact that the provision for the buildings to be constructed influences the value of the land, in accordance with Articles 45 of the CIMI, does not transform the building land into property with residential use;

  • The taxation of building land through Item 28.1 of the TGIS is also not in accordance with the principle of taxpayers' capacity in that the said provision seeks to tax the wealth expressed in the ownership of high-value properties, when the properties held by the Applicant do not demonstrate wealth, insofar as they are merely and solely productive instruments;

  • Such taxation also violates the constitutional principle of equality, since a company that acquires for its assets, as merchandise or as raw material, other types of assets, is not subject to taxation, while a company that acquires properties as merchandise or raw material, namely building land, is subject to taxation;

  • In this manner, the assessments now contested are illegal, either by violation of Item 28 of the TGIS, or by unconstitutionality, as indicated, of the said provision.

  1. Reply

In its reply to the request for an arbitral decision, the Respondent TA - Tax and Customs Authority contends for the rejection of the application, alleging, in summary, the following:

  • Given that the CIS does not define what should be understood by urban property, building land or residential use, it is necessary to resort to the CIMI for this purpose, where the notion of the use of the urban property finds its basis in the part relating to the valuation of properties;

  • As results from the expression "...value of authorized buildings", contained in Article 45, paragraph 2 of the CIMI the legislator opted for determining the application of the valuation methodology of properties in general to the valuation of building land, and the use coefficient provided for in Article 41 of the CIMI is therefore applicable to them. Thus, the use of the property (capacity or purpose) is a coefficient that contributes to the valuation of the property, in the determination of the tax base value, applicable to building land;

  • Item 28 TGIS itself refers to the expression "properties with residential use", appealing to a classification that overlaps with the species provided for in paragraph 1 of Article 6 of the CIMI. Being a different and broader expression than that used in the CIMI, its meaning must be found in the need to integrate other realities beyond those identified in Article 6, paragraph 1, subparagraph a) of the CIMI;

  • The concept of "properties with residential use", for the purposes of Item 28 of the TGIS, comprises both built properties and building land, in particular having regard to the literal element of the provision;

  • Article 13 of the Constitution of the Republic "requires that what is necessarily equal be treated equally and what is essentially different be treated differently, not preventing differentiation of treatment, but only arbitrary or unreasonable discriminations, that is, distinctions of treatment that lack justification and sufficient material foundation", which is not the case with the provision of Item 28 of the TGIS;

  • Thus, the TA understands that the provision of Item 28 of the TGIS does not constitute any violation of the principle of equality of Article 13 of the CRP.

  1. Meeting provided for in Article 18 of the RJAT and submissions

With the agreement of the parties, the Court determined the dispensation of the holding of the meeting provided for in Article 18 of the RJAT as well as of the phase of final submissions.

II – QUESTIONS TO BE DECIDED

The following are the questions to be decided by the Court:

  • The applicability of Item 28.1 of the TGIS to urban properties in vertical ownership formed by parts capable of independent use considered as a whole, with the consequence that the tax base value to be taken into account for purposes of the incidence of the tax will be, in case of affirmative answer, the tax base value of the property;

  • In case of affirmative answer to the foregoing question, the constitutionality of the incidence provision contained in Item 28.1 of the TGIS, if interpreted in the sense of encompassing building land, in the light of the constitutional principle of equality.

III – PROCEDURAL MATTERS

The Court is competent and is regularly constituted, pursuant to Articles 2, paragraph 1, subparagraph a), 5 and 6, all of the RJAT.

The parties have legal personality and capacity, are entitled to be parties and are regularly represented.

The cumulation of claims is admissible, as all the prerequisites established in Article 3, paragraph 1 of the RJAT are satisfied.

No procedural defects were identified, and nothing prevents the examination of the merits of the application.

IV – REASONING

  1. PROVEN FACTS CONSIDERED RELEVANT

The following are the proven facts considered relevant to the decision:

  • At the date of the taxable event, the Applicant was the owner of the following properties (as per document 9 attached to the initial petition):

  • Urban property (hereinafter referred to as "property 1") described as building land entered in the urban property register of the parish of …, municipality of … under number …, with a tax base value of 2,024,380.00 euros;

  • Urban property (hereinafter referred to as "property 2") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 1,261,300.00 euros;

  • Urban property (hereinafter referred to as "property 3") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 5,392,170.00 euros;

  • Urban property (hereinafter referred to as "property 4") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 1,772,650.00 euros;

  • Urban property (hereinafter referred to as "property 5") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 1,527,300.00 euros;

  • Urban property (hereinafter referred to as "property 6") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 4,797,050.00 euros;

  • Urban property (hereinafter referred to as "property 7") described as building land entered in the urban property register of the parish of ..., municipality of ... under number …, with a tax base value of 4,070,180.00 euros;

  • Urban property (hereinafter referred to as "property 8") described as building land entered in the urban property register of the parish of …, municipality of … under number …, with a tax base value of 1,667,030.00 euros.

  • In April 2014, the Applicant was notified of the Stamp Duty assessments on the referenced properties, pursuant to Item 28.1 of the TGIS, for the year 2013.

  • Through the same documents, the Applicant was notified to make payment of the first instalment of the assessed tax, the amounts indicated for payment being as follows:

  • "Property 1": 6,747.94 euros, assessment No. 2014 …;

  • "Property 2": 4,204.34 euros, assessment No. 2014 …;

  • "Property 3": 17,973.90 euros, assessment No. 2014 …;

  • "Property 4": 5,908.84 euros, assessment No. 2014 …;

  • "Property 5": 5,091.00 euros, assessment No. 2014 …;

  • "Property 6": 15,990.18 euros, assessment No. 2014 …;

  • "Property 7": 13,567.28 euros, assessment No. 2014 …;

  • "Property 8": 5,556.78 euros, assessment No. 2014 ….

  • The Applicant made payment of the amounts corresponding to the first instalment of all contested assessments (document 10 attached to the initial petition).

There are no proven facts considered not proven that are relevant to the decision.

  1. LEGAL REASONING

(i) Question of the applicability of Item 28.1 of the TGIS to building land

On this question, and in the exact terms in which it is raised, the Supreme Administrative Court has repeatedly ruled, predominantly in a sense concordant with that advocated by the Applicant (see the decisions of that Court delivered on 24/9/2014, cases No.s 01533/13, 0739/14 and 0825/14; of 10/9/2014, cases No.s 0503/14, 0707/14 and 0740/14; of 9/7/2014, case No 0676/14; of 2/7/2014, case No 0467/14; of 28/5/2014, cases No.s 0425/14, 0396/14, 0395/14; of 14/5/2014, cases No.s 055/14, 01871/13 and 0317/14; of 23/4/2014, cases No.s 270/14 and 272/14; and on 9/4/2014, cases No.s 1870/13 and 48/14).

The same question was also addressed by tax arbitral courts, namely in cases No.s 151/2014-T, 42/2013-T, 48/2014-T, 49/2013-T, 53/2014-T, 75/2013-T, 144/2013-T, 158/2013-T, 180/2013-T, 189/2013-T, among others) and the arbitral case law is also predominantly to the effect that the provision of Item 28.1 of the TGIS, as drafted until 31 December 2013, did not encompass building land.

Among the many decisions rendered by the STA on this question, reference is made to the decision delivered in the case already mentioned above, in which it is stated:

"The concept of 'property (urban) with residential use' was not defined by the legislator. Neither in Law No. 55-A/2012, which introduced it, nor in the Real Property Tax Code, to which paragraph 2 of Article 67 of the Stamp Duty Code (equally introduced by that Law) refers as a subsidiary basis. And it is a concept that, probably owing to its imprecision – a fact all the more serious given that it is on the basis of it that the scope of the objective incidence of the new taxation is determined – had a short life, since it was abandoned when the Law of the State Budget for 2014 (Law No. 83-C/2013 of 31 December) came into force, which gave new wording to that Item No. 28 of the General Table, and which now determines its scope of objective incidence through the use of concepts that are legally defined in Article 6 of the Real Property Tax Code.

This alteration - to which the legislator did not attribute an interpretative character, nor do we think it did – only makes it clear for the future that building land whose building, authorized or provided for, is for residential purposes are encompassed within the scope of Item 28.1 of the General Table of Stamp Duty (provided that their tax base value is equal to or greater than 1 million euros), clarifying nothing, however, regarding past situations (assessments for 2012 and 2013), such as the one in question in the present proceedings.

Now, regarding these, it does not appear that the interpretation contended for by the appellant can be sustained, since it does not result unequivocally either from the letter or from the spirit of the law that its intention was, ab initio, to encompass within its scope of objective incidence building land for which the construction of residential buildings has been authorized or provided for, as clearly results today from Item 28.1 of the General Table of Stamp Duty.

Nothing unequivocal results from the letter of the law, moreover, since it itself, by using a concept that it did not define and that was also not defined in the instrument to which it referred as a subsidiary basis, unnecessarily lent itself to ambiguities, in a matter – of tax incidence – in which certainty and legal security should also be paramount concerns of the legislator.

And from its 'spirit', which can be apprehended in the explanatory memorandum of the bill proposal that is at the origin of Law No. 55-A/2012 (…) nothing more results than the concern to raise new tax revenue, from sources of wealth "more spared" in the past from the ravages of the Tax Administration than income from work, in particular income from capital, securities capital gains and property, reasons which bring no relevant contribution to the clarification of the concept of 'properties (urban) with residential use', since they take it as established, without any concern to clarify it. Such clarification is said to have emerged (…), when presenting and discussing in the National Assembly that bill proposal, in the words of the Secretary of State for Tax Affairs, who is reported to have stated explicitly, (…) that: "The Government proposes the creation of a special tax on high-value residential urban properties. This is the first time that Portugal has created a special taxation on high-value properties destined for residential use. This tax will be 0.5% to 0.8% in 2012 and 1% in 2013, and shall apply to properties with a value equal to or greater than 1 million euros" (…) from which it is gathered that the reality subject to taxation that was intended is, after all, and notwithstanding the terminological imprecision of the law, 'residential (urban) properties', in common language 'houses', and not other realities.

The fact that it may be considered that in the determination of the tax base value of urban properties classified as building land the destined use of the building development authorized or provided for it should be taken into account in determining the respective value of the ground area (cf. paragraphs 1 and 2 of Article 45 of the CIMI), does not determine that building land can be classified as 'properties with residential use', since 'residential use' is always in the Real Property Tax Code referred to 'buildings' or 'constructions', existing, authorized or provided for, since only these can be inhabited, which does not happen in the case of building land, which do not have, in themselves, conditions for this, and are not capable of being used for residential purposes unless and until buildings authorized and provided for are erected thereon (but in that case they will no longer be 'building land' but another species of urban property – 'residential', 'commercial, industrial or service' or 'other' – Article 6 of the CIMI).

It would be strange, moreover, if the determination of the scope of the provision on objective incidence of Item No. 28 of the General Table of Stamp Duty were found, in the end, in the provisions for determining the tax base value of the Real Property Tax Code, and that the terminological imprecision of the legislator in the wording of that provision were, after all, clarified and finally explained by way of an indirect and ambiguous reference to the use coefficient established by the legislator in relation to built properties (Article 41 of the Real Property Tax Code).

Thus, given that building land – whatever the type and purpose of the building that will be or may be erected thereon – does not satisfy, in itself, any condition for being licensed as such or for its normal destination being defined as residential use, and the provision on Stamp Duty incidence referring to urban properties with 'residential use', without any specific concept being established for that purpose, there cannot be extracted therefrom that it contains a future potentiality, inherent in a distinct property that may possibly be built on the land.

It is therefore concluded, in accordance with what was decided in the judgment under appeal that, as results from Article 6 of the Real Property Tax Code a clear distinction between urban properties 'residential' and 'building land', these cannot be considered as 'properties with residential use' for the purposes of Item No. 28.1 of the General Table of Stamp Duty, in its original wording, which was given to it by Law No. 55-A/2012 of 29 October.".

Relying on this case law, which is entirely accepted, it is concluded that the challenge of the illegality of the contested assessments is well-founded, due to error in the prerequisites for the application of the provision of Item 28.1 of the TGIS.

(ii) Question of the unconstitutionality of the incidence provision contained in Item 28.1 of the TGIS, if interpreted in the sense of encompassing building land, in the light of the constitutional principle of equality

Given that the challenge of the illegality of the contested assessments is well-founded due to error in the prerequisites for the application of Item 28.1 of the TGIS, it becomes superfluous to analyze the question of the unconstitutionality of the same provision when interpreted in the sense of encompassing building land, in the light of the constitutional principle of equality.

V. RIGHT TO INDEMNITY INTEREST

Given the illegality of the assessment acts contested, for the reasons stated, and the Applicant having paid in full the assessed tax, the Applicant is entitled, in accordance with Articles 24, paragraph 1, subparagraph b) of the RJAT and 100 of the General Tax Law (LGT), to the reimbursement of the improperly paid tax, in the amount of 225,120.60 euros.

As regards indemnity interest, Article 43 of the LGT provides that "indemnity interest is due when it is determined, through a request for administrative reconsideration or judicial challenge, that there was error attributable to the tax authorities from which results payment of tax debt in an amount greater than that legally due".

As regards the existence, in the present case, of error attributable to the tax authorities, this error is deemed to exist, according to uniform case law of the SAC (see, in this sense, the decisions of the SAC of 22-05-2002, Case No. 457/02; of 31.10.2001, Case No. 26167; of 2.12.2009, Case No. 0892/09) whenever they proceed with a request for administrative reconsideration or challenge of the assessment (likewise, the decision in arbitral process 218/2013-T, already cited).

Consequently, the Applicant is entitled to indemnity interest, in accordance with Article 43, paragraph 1 of the LGT and 61, paragraphs 2 and 5 of the Tax Procedure Code, calculated from the date of payment of the assessed tax until its full reimbursement.

VI. DECISION

For the reasons stated, the present Court decides:

  1. To annul the Stamp Duty assessment acts contested.

  2. To condemn the Tax and Customs Authority, pursuant to subparagraph b) of paragraph 1 of Article 24 of the RJAT, to restore the situation that would exist if the annulled assessment acts had not been carried out, adopting the acts and operations necessary for this purpose, through the restitution of the amounts of improperly paid tax and the payment of the corresponding indemnity interest.

Value of the case: The value of the case is set at 225,120.60 euros.

Costs: In accordance with Article 22, paragraph 4 of the RJAT, the amount of costs is set at 4,284.00 euros, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Respondent.

Let this arbitral decision be recorded and notified to the parties.

Lisbon, Centre of Administrative Arbitration, 7 December 2014.

The Arbitrator-President

José Pedro Carvalho

The Arbitrator-Member

Henrique Nogueira Nunes

The Arbitrator-Member-Rapporteur

Nina Aguiar

Frequently Asked Questions

Automatically Created

Is Stamp Tax (Imposto do Selo) under Verba 28.1 of the TGIS applicable to land classified as terrenos para construção?
The applicability of Stamp Tax under Verba 28.1 TGIS to terrenos para construção is the central dispute in this case. The applicant argues that building land cannot be classified as 'properties with residential use' because CIMI Article 6 establishes building land as a distinct property category separate from residential properties. They contend that residential use only applies to actual constructed properties, not undeveloped land, and that authorization for future residential construction does not transform land into residential property. The Tax Authority disagrees, interpreting 'properties with residential use' broadly to include building land based on CIMI's valuation methodology in Article 45 and the use coefficient system, arguing that intended future use justifies the tax application.
How does the CIMI distinguish between construction land and residential properties for Stamp Tax purposes?
The CIMI establishes a clear distinction between construction land and residential properties for tax classification purposes. Under Article 6, paragraph 1, building land (terrenos para construção) constitutes a distinct type of urban property, separate from residential properties. Article 41 of the CIMI defines the use coefficient (coeficiente de afetação - CA) which applies to 'built properties' with specific uses including residential, commercial, industrial, and services. The applicant argues this demonstrates that 'use' including residential use only exists in constructed properties, not in building land. However, the Tax Authority interprets Article 45's valuation methodology for building land, which references 'authorized buildings,' as extending use-based classifications to undeveloped land based on planned future development rather than current physical characteristics.
Can a taxpayer challenge Stamp Tax assessments on construction land through CAAD tax arbitration?
Yes, taxpayers can challenge Stamp Tax assessments on construction land through CAAD (Centro de Arbitragem Administrativa) tax arbitration proceedings. This case demonstrates the process under the Tax Arbitration Regime (RJAT) established by Decree-Law 10/2011. The applicant filed a request for arbitral decision pursuant to Article 2, paragraph 1 of the RJAT, seeking declaration of illegality of the stamp duty assessments and restitution of improperly paid tax plus compensatory interest. The arbitration tribunal confirmed its competence under Articles 2(1)(a), 5, and 6 of the RJAT to hear disputes concerning the legality of tax assessments, including stamp tax on properties. This avenue provides an alternative to judicial courts for resolving tax disputes, offering a faster and specialized forum for complex property tax issues.
What is the role of the coeficiente de afetação (CA) under Article 41 of the CIMI in determining housing allocation for Stamp Tax?
The coeficiente de afetação (CA) under Article 41 of CIMI plays a crucial role in this dispute regarding residential classification for Stamp Tax purposes. Article 41 establishes that the use coefficient depends on the type of use of built properties, with residential use being one specified category. The applicant argues this provision demonstrates that 'use' including residential use only applies to constructed properties (prédios construídos), not to building land which lacks any actual use. They contend that building land cannot have residential, commercial, or service use until actual construction occurs. Conversely, the Tax Authority argues that CIMI's valuation system, particularly Article 45 which applies valuation methodology to building land based on 'authorized buildings,' incorporates the use coefficient concept to building land based on intended future use rather than requiring actual physical construction.
Is a property owner entitled to a refund and compensatory interest if Stamp Tax was unlawfully levied on construction land?
Yes, if Stamp Tax was unlawfully levied on construction land, the property owner is entitled to both restitution of the improperly paid tax and payment of compensatory interest (juros indemnizatórios) on the amounts paid. The applicant in this case specifically requested the condemnation of the Tax Authority to refund the tax and pay corresponding indemnity interest relating to the contested assessments. Under Portuguese tax law, when a tax assessment is declared illegal through arbitration or judicial proceedings, the taxpayer has the right to full restitution of amounts paid, plus compensatory interest calculated from the date of payment until restitution, compensating for the improper deprivation of funds. This ensures taxpayers are made whole for both the principal tax amount and the time value of money lost during the period the funds were improperly held by the Tax Authority.