Stamp Tax on High-Value Properties: CAAD Ruling on Verba 28.1 TGIS for Real Estate Investment Fund (2019)

ARBITRAL DECISION

I – Report

A..., S.A. (hereinafter, "Claimant"), with Tax Identification Number..., with registered office at ..., ..., ..., ...-... Porto Salvo, in its capacity as managing company and in representation of B... – Special Closed Real Estate Investment Fund, with Tax Identification Number..., filed an application for the constitution of a Collective Arbitral Tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter "RJAT"), in which the Tax and Customs Authority (hereinafter "AT" or "Respondent") is the respondent.

The Claimant seeks, in cumulative requests, an arbitral pronouncement on the illegality of the tacit rejection of the request for official review and consequent annulment of the acts of assessment in Stamp Duty (hereinafter "IS") under Article 1(1) of the Stamp Duty Code (hereinafter "CIS") and Item 28.1 of the General Table of Stamp Duty (hereinafter "TGIS"), relating to properties with articles ... and ..., located in the parish of ..., municipality of Amadora, district of Lisbon, of which the Claimant was then the owner, and formalized in assessments Nos. 2015..., No. 2015..., No. 2015... (U-...) and No. 2015..., No. 2015... and No. 2015... (U-...), in the total amount of €198,549.50.

Pursuant to the provisions of subparagraph a) of Article 6(2) and subparagraph b) of Article 11(1) of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council appointed the arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the appointment within the applicable period, and notified the parties of such appointment on 03-01-2019.

The Collective Arbitral Tribunal was constituted on 23-01-2019; it was regularly constituted and is materially competent, in light of the provisions of Articles 2(1)(a), 5, 6(1), and 11(1) of the RJAT (as amended by Article 228 of Law No. 66-B/2012, of 31 December).

Pursuant to Articles 17(1) and (2) of the RJAT, the AT was notified on 23-01-2019 to submit its Reply.

The AT submitted its Reply on 21-02-2019.

In that reply, the AT contends, in summary, for the total rejection of the Claimant's request.

The Arbitral Order of 24-02-2019 dispensed with the holding of the meeting referred to in Article 18 of the RJAT and afforded the parties the opportunity to submit written submissions, which they did, commenting on the evidence produced and reiterating and developing their respective legal positions.

The proceedings do not suffer from any nullities and no further preliminary or subsequent questions prejudicial to or of exception remain that would prevent appreciation of the merits of the case, with the conditions thus gathered for a final decision to be rendered.

The AT proceeded with the appointment of its representatives in the proceedings and the Claimant submitted a power of attorney, with the Parties thus being duly represented.

The Parties have legal personality and capacity and have standing, pursuant to Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

II – Grounds: Factual Matters

II.A. Facts Considered Proven and With Relevance to the Decision

The "Fund," represented here by the Claimant, is a closed real estate investment fund, whose constitution is framed within the General Framework of Collective Investment Undertakings.

The "Fund" is, in the context of its activity, the owner of various properties, including residential properties, commercial properties, and land for construction, acquired by it.

In 2014, the "Fund" was the owner of the following urban properties:

• Urban property ("land for construction") with article number ..., of the parish of ..., municipality of Amadora, district of Lisbon, with VPT of €1,937,790.00;

• Urban property ("land for construction") with article number ..., of the parish of ..., municipality of Amadora, district of Lisbon, with VPT of €17,917,160.00.

In 2014, the aforementioned urban properties were registered in the property matrix as "land for construction."

In the year 2014, in the respective property records of the urban properties in question here, in the item "Type of location coefficient: Housing."

In 2015, the "Fund" was notified of the following assessments of Stamp Duty relating to the year 2014 (and corresponding to the apportionment of IS in three installments):

The assessments resulted from the application of Article 1(1) of the CIS, combined with item 28.1 of the TGIS and Article 6 of Law No. 55-A/2012, of 29 October.

The "Fund" proceeded, in a timely manner, to payment of the aforementioned assessments of Stamp Duty.

The Claimant submitted a request for official review, which had as its object the aforementioned assessments of Stamp Duty.

The Claimant was not notified, until the date of the submission of the arbitral application, of the decision on the official review request submitted.

II.B. Facts Considered Not Proven

• That, in relation to the urban property with article number ..., of the parish of ..., municipality of Amadora, district of Lisbon, there existed, at the date of the tax event, a subdivision permit or building license permit, or an approved project, or prior notice, or favorable prior information or document evidencing construction viability, which foresaw as possible construction housing.

• That, in relation to the urban property with article number ..., of the parish of ..., municipality of Amadora, district of Lisbon, there existed, at the date of the tax event, a subdivision permit or building license permit, or an approved project, or prior notice, or favorable prior information or document evidencing construction viability, which foresaw as possible construction housing.

II.C – Grounds of Proven and Unproven Facts

With respect to factual matters, the Tribunal need not pronounce upon everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between proven and unproven matters (see Article 123(2) of the Portuguese Code of Tax Procedure and Article 607(3) of the Portuguese Code of Civil Procedure, applicable ex vi Article 29(1), subparagraphs a) and e), of the RJAT).

In this manner, the facts pertinent to the judgment of the case are chosen and selected in function of their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former Article 511(1) of the Code of Civil Procedure, corresponding to the current Article 596, applicable ex vi Article 29(1), subparagraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110/7 of the Portuguese Code of Tax Procedure, the documentary evidence and the procedural file joined to the proceedings, the facts listed above were considered proven, with relevance to the decision.

The facts given as unproven are due to the absence or insufficiency of evidence relating to them.

Effectively, notwithstanding the documents forming part of the procedural file (evaluation sheets and property records) showing that the lands in question constitute plots and, therefore, it may be presumed the existence of a subdivision permit, one is left without knowing whether such possible subdivision provides for, or does not provide for, and to what extent, the construction of building intended for housing.

On the other hand, although the same aforementioned documents show that the location coefficient used for evaluation purposes was that of housing, this does not allow, with sufficient certainty, the conclusion that the possible existing subdivision permit provides, in its entirety, or even in its greater part, that that is the purpose provided for the authorized construction.

Thus, although as the Respondent refers, "the property record is very clear in defining for the land for construction plots in question, the respective building footprint and construction area," from this one cannot conclude, as stated, beyond any reasonable doubt, whether, and to what extent, the possible subdivision permit provides that the land for construction plots in question, in the building footprint and construction area, have authorized construction intended for housing.

III – Grounds: Legal Matters

III.A. Position of the Claimant

The Claimant begins by alleging that the objective scope of item 28.1 of the TGIS cannot encompass properties that, while registered in the matrix as "land for construction," are not subsumable under the concept of "properties with residential allocation," that concept which is included in the legal provision.

Analyzing the context of the introduction of item 28 of the TGIS, the Claimant emphasizes that, even after the amendments introduced by Law No. 83-C/2013, of 31 December, and which entered into force on 1 January 2014, taxation continues to be limited to situations in which actual construction on the land has been authorized or foreseeable, and that such construction is intended for "housing."

Thus, it argues, it will not be sufficient that the mere registration in the property matrix of a property identifies it as "land for construction," being necessary, additionally, that, case by case, and concretely, it be determined whether there exists the entire administrative process associated with construction and, finally, a valid construction license/authorization and an approved project.

The Claimant alleges that the assessments now contested suffer from illegality due to error regarding the factual assumptions, since they rest on the incorrect assumption that the urban properties had, in 2014, authorized or foreseeable construction for "Housing."

The Claimant therefore understands that the three cumulative legal assumptions upon which item 28.1 of the TGIS depends are not satisfied.

The Claimant further notes that the properties in question are not used in its usual activity, such that ownership of the right of property over these properties does not evidence greater contributory capacity.

The Claimant alleges that the special taxation provided for in item 28.1 of the TGIS, when interpreted so as to be applied to "land for construction," is contrary to the principle of equality enshrined in Article 13 of the Constitution of the Portuguese Republic and, in parallel, contrary to the principle of tax equality and contributory capacity, enshrined in Article 104(3) of the Constitution of the Portuguese Republic.

The Claimant finally alleges that it has paid in full the amounts assessed, asking therefore to be reimbursed and to be awarded indemnification interest for having made this improper payment and an error being identifiable as attributable to the services.

III.B. Position of the Respondent

In its Reply, the Respondent alleges that the assessments disputed are legal and that no error by the services occurred in subjecting the property in question to the norm of Item 28.1 of the TGIS.

The Respondent alleges that, for purposes of determining the tax patrimonial value of land for construction, the application of the allocation coefficient in the course of evaluation is clear, which is symptomatic that its consideration for purposes of applying item 28.1 of the TGIS cannot be ignored.

The Respondent recalls that the Claimant cannot be unaware that the property record is very clear in defining for the land for construction plots in question the respective building footprint and construction area, such that the residential allocation of the building is evident.

With respect to the question of the unconstitutionality of Item 28.1 of the TGIS raised by the Claimant, the Respondent contends that the legislator defined an economically valid constitutional assumption, as a manifestation of the contributory capacity required for payment of this tax, and therefore no violation of the principle of equality or contributory capacity is verified.

With respect to the indemnification interest requested by the Claimant, the Respondent understands that the assessments in question here were made based on applicable law, to which the Tax Administration is bound by virtue of the principle of legality, such that no error by the services occurred, within the terms of Article 43 of the General Tax Law (LGT).

III.C. Questions to be Decided

III.C.1 – On the Merits of the Case

The sole question to be settled in the present arbitral tax proceedings concerns the application of item 28.1 of the table appended to the CIS (General Table of Stamp Duty) to the urban properties ("land for construction") with article number ... and ..., both of the parish of ..., municipality of Amadora, district of Lisbon.

At issue, therefore, is the definition of the scope of application of item No. 28.1 of the TGIS, in the wording given by Law No. 83-C/2013, of 31 December, more specifically to determine whether the land for construction in question in the present proceedings may be subsumed under the concept of "land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code" to which the said item refers, taking into account that the patrimonial value is greater than €1,000,000.00.

The question arises by virtue of the taxation in terms of stamp duty of the ownership, usufruct or right of superficies of urban properties whose tax patrimonial value, appearing in the matrix, is equal to or greater than €1,000,000, in which case tax is due, at the rate of 1%, on the tax patrimonial value used for purposes of IMI, per property with residential allocation.

This question is not novel, having been the subject of appreciation both in arbitral jurisdiction and in the jurisprudence of the Supreme Administrative Court; it being that, within the scope of the wording of the CIS given by Law No. 55-A/2012, of 29 October, the decisions rendered were always in a sense contrary to what the Tax Administration sought.

The situation sub iudice, however, arises in a differentiated legal framework, insofar as the facts should be appreciated in light of the wording of the CIS introduced by the State Budget for 2014, Law No. 83-C/2013, of 31 December (Article 194, under the heading - Amendment to the General Table of Stamp Duty), pursuant to which item 28.1 of the General Table of Stamp Duty, appended to the Stamp Duty Code, approved by Law No. 150/99, of 11 September, came to have the following wording:

"28.1 — Per residential property or per land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code — 1%."

In this new legal framework, decisions have already been rendered in arbitral proceedings, likewise in a sense unfavorable to what the AT sustained.

The referred jurisprudence is based on the understanding that the following should be considered as fulfilling the assumptions of the new item 28.1 of the TGIS:

"with respect to land for construction, whether or not located within an urban agglomeration, as defined in Article 3(4) of this instrument [IMI Code], should, as such, be considered the lands with respect to which there has been granted: - subdivision license; - building license; - authorization for subdivision operation; - building authorization; - admitted favorable prior notice of subdivision operation or of construction; issued favorable prior information of subdivision operation or of construction, as well as; - those that have been thus declared in the acquisition title, it being necessary to note that, also for that purpose, only the acquisition title with the form prescribed by civil law should be relevant, that is, the public deed or the authenticated private document referred to in Article 875 of the Civil Code."

Also in the decision rendered in arbitral proceedings 142/2016T, already cited, which likewise concluded for the merit of the request made there, the following can be read:

"There is no indication in these norms of the TGIS and IMI Code of what should be understood by 'foreseeable construction,' but, having regard to the documents required to be presented for the evaluation of land for construction, indicated in Article 37(3) of the IMI Code, it is concluded that one can only speak of authorized or foreseeable construction when the 'building to be constructed,' to which Article 45(1) refers, is defined in a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior information or document evidencing construction viability."

We fully subscribe here to the understanding of the aforementioned decisions, as to what, in light of the new wording of the CIS, should be understood by "land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code."

Indeed, in accordance with the IMI Code, land for construction, which, according to Article 6(1)(c) of such Code, constitutes a type of urban property, may have as its allocation housing, as follows from Article 41 thereof as well, an allocation which, as results, furthermore, expressly from Article 45(5) of the IMI Code, shall be determined on the basis of the elements to which Article 37 of the same Code refers, it being that paragraph 3 of this article provides that:

"In relation to land for construction, a photocopy of the subdivision permit must be presented, which must be replaced, if no subdivision exists, by a photocopy of the building license permit, approved project, prior notice, favorable prior information or document evidencing construction viability."

The reference in item 28.1 of the TGIS under analysis should thus be read as referring to the material content of what, in light of the IMI Code, constitutes "land for construction whose construction, authorized or foreseeable, is for housing," it not being sufficient merely that the AT – rightly or wrongly – in application of the norms of that Code (IMI Code), has qualified for property record purposes a certain property as having such allocation, since if that were the legislator's intention, within the presumption of reasonableness underlying it, surely it would have used the expression "land whose location coefficient type used for purposes of determining VPT is housing," or some similar expression.

What is thus not at issue is any defect in the procedure for evaluating the properties, since that procedure is intended exclusively to establish the patrimonial value thereof, which is not being contested, but solely the verification of the satisfaction of the assumptions of item 28.1 of the TGIS, and among these does not manifestly appear "Type of location coefficient" in the property records.

It is concluded, thus, here, as in the jurisprudence cited above, that those should be considered as "land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code," those lands in which the "building to be constructed" is defined as intended for housing in a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior information or document evidencing construction viability.

This same understanding was recently ratified by the STA in its Decision of 28-11-2018, rendered in proceedings 0829/15.5BELLE 01065/16, where it can be read, among other things, that:

"Thus, with respect to land for construction, whether or not located within an urban agglomeration, should, in accordance with Article 6(3) of the IMI Code, be considered as such the lands with respect to which there has been granted: - subdivision license; - building license; - authorization for subdivision operation; - building authorization; - admitted favorable prior notice of subdivision operation or of construction; issued favorable prior information of subdivision operation or of construction, as well as those that have been thus declared in the acquisition title."

Now, in the case at hand, it was not ascertained that there existed, at the date of the tax event, a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior information or document evidencing construction viability, which foresaw as possible construction housing, with respect to the urban properties with article numbers ... and ..., of the parish of ..., municipality of Amadora and district of Lisbon.

Recall the wording of Item 28.1 of the TGIS in force at the date of the facts, which determined the following: "28.1 — Per residential property or per land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code — 1%." From this, it is immediately concluded that, given that the lands in question, to which correspond article numbers ... and ... a VPT, respectively, of €1,937,790.00 and €17,917,160.00, the objective scope is satisfied.

However, it was not demonstrated through the evidence produced in the proceedings that, at the date of the facts, there existed for the properties in question a subdivision permit or building license permit, or approved project, or prior notice, or favorable prior information or document evidencing construction viability, which foresaw as possible construction housing.

It should be noted that, although the purpose of the foreseeable construction should be exclusive, as the STA has already clarified, in proceedings 080/18, by decision of 06-06-2018, where it refers that:

"I - In the present situation in which a subdivision permit was granted in accordance with which the properties are intended 'for collective housing and commerce/services,' what is not at issue is a property whose purpose is solely housing.

II - Item 28 in question establishes no criterion or necessity for weighing the percentage to which the property is intended for housing or for commerce/services so that we can consider that the legislator took such reality into account and, nothing having been said about it, conclude that it intends to dissolve it in the allocation for housing.

III - Law 83-C/2013, of 31 December clarified that what the legislator previously called properties with residential allocation were, in fact, urban properties or land for construction whose construction, authorized or foreseeable, is for housing.

IV - For the present properties to be included in this normative, it was absolutely necessary that there be indication of whether they are also taxed in this respect as urban properties or land for construction whose construction, authorized or foreseeable, is predominantly for housing."

It is further stated in the decision referred to that:

"In the present situation we know that a subdivision permit was granted by Subdivision Permit No. 5/2006, in accordance with which the properties are intended 'for collective housing and commerce/services,' which is different from being intended for housing. Item 28 in question establishes no criterion or necessity for weighing the percentage to which the property is intended for housing or for commerce/services(...).

Also unknown is what the frequency and specific weight in the volume built for the real estate market of the allocation of certain parts of buildings, particularly of the respective ground floor, to purposes other than housing, namely, commerce and services, precisely due to economic reasons, financial strategy, pertaining to profitability and enjoyment of all available spaces, of which the norm in question gives any note or emphasis. It exists, but we do not know if it is significant and we cannot consider that the legislator took such reality into account and, nothing having been said about it, conclude that it intends to dissolve it in the allocation for housing.

Rather, we believe that it is a reality that was not taken into account by the legislator, as previously he had not duly considered that the law establishes a clear distinction between urban properties that are "residential" and "land for construction," which Law 83-C/2013, of 31 December clarified that what it previously called properties with residential allocation were, in fact, urban properties or land for construction whose construction, authorized or foreseeable, is for housing. For the present properties to be included in this normative, it was absolutely necessary that there be indication of whether they are also taxed in this respect as urban properties or land for construction whose construction, authorized or foreseeable, is predominantly for housing under pain of lacking an extensive interpretation of the norm of incidence entirely at odds with the provisions of Article 103(2) and (3) of the Constitution of the Portuguese Republic."

Also in this sense the Decision 305/2017-T of 18 January 2018 of the CAAD (available at www.caad.org.pt).

In light of the foregoing, it cannot be considered demonstrated that, with respect to the lands in question in the present proceedings, they constitute "land for construction whose construction, authorized or foreseeable, is for housing, as provided in the IMI Code," and it is thus not demonstrated that the provision of item 28.1 of the Table appended to the CIS, in the applicable wording, is satisfied with respect to them, such that the tax acts questioned that have them as their object will suffer from error regarding the factual assumptions and consequent error of law, and should, as such, be annulled, with the arbitral request thus succeeding in that respect, and knowledge of the other questions raised by the Claimant being moot.

With respect to the request for indemnification interest formulated by the Claimant, Article 43(1) of the LGT establishes that indemnification interest is due when it is determined that there has been error attributable to the services from which results payment of the tax debt in an amount higher than legally due.

In the case at hand, the error affecting the annulled assessments is attributable to the Tax and Customs Authority, which performed the assessment acts on its own initiative, without the necessary factual and legal support.

The Claimant thus has the right to be reimbursed of the amounts that it paid (pursuant to the provisions of Articles 100 of the LGT and 24(1) of the RJAT) by force of the annulled acts and, furthermore, to be indemnified for improper payment through the payment of indemnification interest by the Respondent, from the date of payment of the amounts until reimbursement, at the legal subsidiary rate, pursuant to Articles 43(1) and (4) and 35(10) of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

IV. Decision

In light of all the foregoing, the arbitral request filed in the present proceedings is judged to be well-founded and, in consequence:

a) The assessments Nos. 2015..., No. 2015..., No. 2015... (U-...) and No. 2015..., No. 2015... and No. 2015... (U-...) are annulled, as well as the tacit rejection of the official review request that had the aforementioned assessments as its object;

b) The Respondent is condemned to the restitution of the amounts improperly paid, by force of the annulled assessments, as well as to the payment of the corresponding indemnification interest, from the date of improper payment of the amounts until their reimbursement, as determined above.

c) The Respondent is condemned to the costs of the proceedings as fixed below.

V. Case Value

The case value is set at €198,549.50 pursuant to the provisions of Article 97-A of the Portuguese Code of Tax Procedure, applicable ex vi Article 29(1), subparagraph a), of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

VI. Costs

The arbitration fee is set at €3,672.00, pursuant to Table I of the Regulation of Costs of Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely well-founded, pursuant to Articles 12(2) and 22(4) of the RJAT and Article 4(4) of the aforementioned Regulation.

Lisbon, 12 April 2019.

The Arbitrators

José Pedro Carvalho
(President)

José Coutinho Pires
(Member)

Henrique Nogueira Nunes
(Member)