Stamp Tax on Land for Construction Under Verba 28.1 TGIS: CAAD Arbitration 562/2016-T

ARBITRATION DECISION

I. Report

1. A…, S.A., a legal entity no. …, with registered office at Avenue of … no. …, …, …-… Lisbon, representing B… – Closed Real Estate Investment Fund, a legal entity no. …, (hereinafter referred to as "Claimant"), filed, on 15-09-2016, pursuant to Article 2, No. 1, subsection a) and Article 10, Nos. 1 and 2 of the Legal System of Tax Arbitration, provided for in Decree-Law No. 10/2011, of 20 January, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter briefly referred to as "RJAT") and Articles 1 and 2 of Ordinance No. 112-A/2011, of 22 March, a petition for arbitration in which it requests the declaration of illegality of the dismissal decision of the administrative appeal filed by the Claimant and the consequent annulment of the tax assessment acts for Stamp Tax, relating to the year 2014, with nos. 2015 …, 2015 … and 2015 …, and the consequent refund of the tax wrongfully assessed and paid in excess in the amount of € 58,233.11 (fifty-eight thousand two hundred and thirty-three euros and eleven cents).

2. The abovementioned assessments, issued pursuant to item 28.1 of the General Table of Stamp Tax (hereinafter "GTST"), relate to an urban property (land for construction) situated on Street …, in Lisbon, registered in the urban property cadastre of the parish of …, under the cadastral article ….

The Respondent is the Tax and Customs Authority (hereinafter referred to as "Respondent").

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority, on 30-09-2016.

2. Pursuant to subsection a) of No. 2 of Article 6 and subsection b) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council of CAAD appointed as arbitrator of the single arbitral tribunal His Excellency Dr. Olívio Mota Amador, who, within the applicable period, communicated acceptance of the appointment.

3. The parties were notified, on 16-11-2016, of the appointment of the arbitrator, and did not manifest any wish to challenge the designation of the arbitrator, in accordance with the combined provisions of Article 11, No. 1, subsections a) and b) of the RJAT and Articles 6 and 7 of the Code of Ethics.

4. In accordance with the provisions of subsection c) of No. 1 of Article 11 of the RJAT, as amended by Article 228 of Law No. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 02-12-2016.

5. The Respondent, duly notified through the arbitral ruling of 06-12-2016, filed, on 16-01-2017, its Response and remitted the Administrative Proceedings.

6. The Arbitral Tribunal, by ruling of 07-03-2017, dispensed with the holding of the meeting provided for in Article 18 of the RJAT, as no matters of exception were invoked, no request for additional evidentiary proceedings was made, and no issues that would impede the examination of the merits of the petition were raised, which it did in accordance with the principles of tribunal autonomy in the conduct of proceedings, and in order to promote speed, simplification and informality thereof (see Articles 19, No. 2, and 29, No. 2, of the RJAT).

Considering that the Respondent stated in its Response that it did not intend to submit arguments, the Tribunal ordered the Claimant to be notified to declare, within a period of 10 days, whether it intended to submit arguments.

The Claimant did not comment, and the Arbitral Tribunal, by ruling of 05-05-2017, dispensed with arguments and set 31-05-2017 as the deadline for rendering the arbitration decision.

1. The position of the Claimant, in accordance with the petition for constitution of the Arbitral Tribunal, is, in summary, as follows:

9.1. As appears from the property record of the property subject to the Stamp Tax assessments sub judice, it was registered in the cadastre as "land for construction".

9.2. Properties registered in the respective cadastre as land for construction cannot be subsumed under the concept of "properties with residential purpose" and, consequently, are not included within the scope of objective application of item 28.1 of the GTST. In this manner, the Claimant understands that the referred rules could never have been applied to the property sub judice – registered in the cadastre as "land for construction" – and the Stamp Tax assessments sub judice therefore lack legal basis.

9.3. Contrary to the understanding of the Tax and Customs Authority, the mere cadastral registration of the property as "land for construction" cannot, in itself, justify the application of item 28.1 of the GTST. Thus, for the application of item 28.1 of the GTST to be appropriate, it will always be necessary that there exists the entire administrative process associated with the construction and, finally, a (valid) construction license/authorization and an (approved) project – cf. Article 6, No. 3 of the IMI Code -, and that such shall be destined for housing.

9.4. The fact that a "land for construction" is situated in an area where – according to the respective Municipal Master Plan – it is possible to build and that such (permitted) constructions may be destined for housing, cannot, in itself, generate application of item 28 of the GTST.

9.5. In this context, it is evident that the mere expectation – or even the mere legal possibility, in force on a certain date – of a residential building possibly being erected on a "land for construction", could never be sufficient to tax the property under that item – nor would, moreover, the wording of the rule and its underlying purposes allow it.

9.6. In fact, in accordance with the express intention of the legislator, the special taxation provided for in item 28.1 of the GTST can only be applied to "land for construction" in situations where there exists an "authorized or planned building for housing".

9.7. Now, with respect to the property in question in the present petition, it did not have – and does not have – an "authorized or planned building" for "housing", as required by item 28.1 of the GTST. And, moreover, the Fund, as owner of this property, has no intention of dedicating this property to any type of construction or urban development project.

9.8. In these terms, the taxation provided for in item 28.1 of the GTST could not have been applied in this case, as its respective requirements for application were not met.

9.9. It is evident that the Stamp Tax assessments sub judice, issued on that property, appear manifestly illegal, due to error in the factual and legal premises, and should be promptly annulled.

9.10. In the alternative, and without prejudice to what was stated above, the Claimant understands that the special taxation provided for in item 28.1 of the GTST, when applied to "land for construction" is contrary to the fundamental principle of equality, enshrined in Article 13 of the Portuguese Constitution and, in parallel, contrary to the principle of tax equality and contributive capacity enshrined in Article 104, No. 3 of the same instrument.

9.11. Item 28 of the GTST and the special taxation resulting therefrom promote differentiated treatment and an unjustified inequality among taxpayers, in manifest violation of the principle of equality enshrined in Article 13 of the Portuguese Constitution.

9.12. The violation of the constitutional principle of equality stems, first of all, from the fact that the relevant tax fact is restricted only to a portion of the real property patrimony with value exceeding € 1,000,000.00 – i.e. on real property used for or destined for housing – while being excluded from the scope of taxation all remaining property of high (or very high) value that is used for or destined for other purposes.

9.13. Item 28.1 of the GTST thus distinguishes different uses and purposes, taxing only properties used for housing and land destined for construction for housing, excluding without further the properties with other purposes that, regardless of their VAT, are not subject to this taxation.

9.14. The legal solution adopted leads to different treatment of taxpayers owning real property patrimony of very high value, depending on whether such patrimonies are concentrated or dispersed.

9.15. The taxation provided for in item 28.1 of the GTST thus generates a manifest inequity, not being applied, inexplicably, to real estate – property of a single taxpayer – used for residential purposes which, despite individually considered having a VAT less than €1,000,000, together total a VAT exceeding (and sometimes even considerably exceeding) € 1,000,000.

9.16. Given the above, it must be concluded that the special taxation, under Stamp Tax, affecting properties with residential purpose of value exceeding € 1,000,000.00, introduced by Law No. 55-A/2012, violates, in the manner in which it was formulated, the constitutional principle of tax equality and its corollary reflected in the principle of contributive capacity.

9.17. Consequently, item 28 of the GTST should be disapplied, in the concrete case, due to manifest unconstitutionality, and the tax acts sub judice should consequently be annulled.

9.18. Item 28.1 of the GTST further collides with the constitutional principle of tax equality by determining the double taxation of the same tax fact – i.e. the ownership of a real right.

9.19. Thus, the taxation of item 28.1 of the GTST, by not delimiting the taxation of "land for construction" based on the VAT of the "authorized or planned" housing for the same, making its application depend only on the VAT of the land itself, fails to distinguish situations that should necessarily be distinguished.

9.20. There is thus an unjustified negative discrimination among "land for construction", and it must be concluded that item 28.1 of the GTST is materially unconstitutional, due to violation of the principle of equality, enunciated generically in Article 13 of the Portuguese Constitution.

9.21. There is no rational justification for taxing the ownership of rights over "land for construction", when it has a VAT equal to or exceeding € 1,000,000.00, and not taxing the ownership of the taxpayer's rights over the "already built property", when its respective portions individually have VAT less than that.

9.22. There is thus an unjustified negative discrimination between "land for construction" with VAT equal to or exceeding €1,000,000.00 whose buildings for housing "authorized or planned" have an individual VAT less than € 1,000,000.00 and "land for construction" with VAT equal to or exceeding €1,000,000.00 whose buildings for housing "authorized or planned" with VAT equal to or exceeding €1,000,000.00.

9.23. The Claimant, despite not being able to agree with the Stamp Tax assessments, made full and timely payment of the same, so that, the assessments in question being manifestly illegal, the Claimant should be reimbursed the amount of the tax assessed on the basis of the same, because not owed. Thus, and pursuant to subsection b) of No. 1 of Article 24 of the RJAT and Article 100 of the LGT, the Claimant requests that the Tax and Customs Authority be condemned to refund the tax assessed on the basis of the tax acts in question.

9.24. The Claimant requests that, if the arbitration decision now requested is found to be well-founded, compensatory interest be paid to the Fund, pursuant to Article 24, No. 1, subsection b) and No. 5 of the RJAT and Articles 43 and 100, both of the LGT, for the wrongful payment of part of the tax acts in question.

1. The position of the Respondent, expressed in its answer, can be summarized as follows:

10.1. Consulting the property records of the urban property that is the basis for the present assessments, it is found that the land for construction is dedicated to residential use.

10.2. Now, urban properties that are land for construction and to which residential purpose has been assigned within their respective valuations, with such purpose appearing in their respective cadastres, are subject to Stamp Tax.

10.3. The fact that, in the rule of incidence – item 28.1 of the GTST – the property with residential purpose has been emphasized in detriment of the residential property, appeals to the coefficient of purpose, cf. Article 41 of the IMI Code, which applies indiscriminately to all urban properties.

10.4. As there is no definition in Stamp Tax of what is understood by "urban property", "land for construction" and "residential purpose" it is necessary to resort subsidiarily to the IMI Code to obtain a definition that allows to assess whether such is subject to Stamp Tax, in accordance with the provision of Article 67, No. 2 of the Stamp Tax Code as amended by Law No. 55-A/2012, of 29/10.

10.5. In the property record of the property, the type of property is "plot of land for construction".

10.6. We cannot doubt that we are faced with "land for construction", more specifically, urban land development plots, with the areas of building implantation and construction perfectly defined and identified in the urban property records, as described above.

10.7. Fiscally the properties are land for construction, in such capacity they were acquired and thus are registered in the cadastre and, therefore, they are without doubt development land plots, more precisely urban properties with residential vocation.

10.8. The Claimant cannot be unaware that the property records are very clear in defining for the land development plots in question, the respective building implantation area and construction area, thus perfectly defined and identified. It is therefore evident the residential purpose of the buildings.

10.9. Note that the legislator does not refer to "properties destined for housing", having opted for the notion "residential purpose", an expression that is different and broader, whose meaning will be found in the need to integrate other realities beyond those identified in Article 6, No. 1, subsection a) of the IMI Code.

10.10. Item 28 of the GTST is a general and abstract rule, applicable indiscriminately to all cases in which the factual and legal requirements are met.

10.11. Furthermore, well-founded reasons also with constitutional foundation justified the creation of the contested rule, namely respect for the principles of proportionality and contributive capacity.

10.12. The very constitutional principle of equality enshrined in Article 13 of the Portuguese Constitution "requires that what is necessarily equal be treated equally and what is essentially different be treated as different, not preventing differentiation of treatment, but only arbitrary, unreasonable discriminations, that is, distinctions of treatment that do not have sufficient justification and material basis".

10.13. Taxation under Stamp Tax complies with the criterion of suitability, insofar as it aims at the taxation of wealth embodied in the ownership of properties of high value, arising in a context of economic crisis that cannot be at all ignored.

10.14. Thus, the choice of this mechanism for obtaining revenue is justified, which would only be censurable, in light of the principle of proportionality, if it resulted in being manifestly indefensible. We do not believe this to be the case insofar as such measure is applicable indiscriminately to all holders of properties with residential purpose of value exceeding € 1,000,000.00.

10.15. Therefore, we must necessarily conclude that the tax acts in question did not violate any legal principle and should thus be upheld.

10.16. Thus, briefly, from the above it follows that the Administration is subject to law and to right and its organs and agents must be the first to comply with it. It cannot therefore be required to render judgment on the options of the legislator, as these, once embodied in law, are the normative framework within which it exercises its powers in pursuit of the public interest.

10.17. Bound by the principle of legality, the Tax and Customs Authority cannot, by force of that, disapply rules based on the interpretation it makes as to their unconstitutionality.

10.18. Therefore, and in sum, the Tax and Customs Authority could not/cannot refuse to apply a rule or fail to comply with law by invoking or questioning its constitutionality, as it is subject to the principle of legality, as established in Articles 266, No. 2 of the Portuguese Constitution, 3, No. 1 of the Administrative Procedure Code and 55 of the LGT.

10.19. The right to compensatory interest derived from judicial annulment of a tax assessment act depends on being demonstrated in the proceedings that such act is affected by error imputable to the services from which resulted payment of tax debt in an amount exceeding what is legally owed.

10.20. The error that supports the right to compensatory interest is not any defect or illegality but that which is concretized in defective appraisal of relevant factuality or in incorrect application of the legal rules.

10.21. Since, at the date of the facts, the tax Administration made application of the law in the terms in which as an executive organ it is constitutionally bound, one cannot speak of error by the services within the terms of the provision of Article 43 of the LGT.

10.22. Consequently, to the services of the Tax and Customs Authority no error of fact or of law can be imputed, given the compliance with the law that informs all its activity. This, in turn, determines that there is no legal basis for the request for compensatory interest.

II. Clarification

1. The parties have legal personality and capacity, are shown to be legitimate and are regularly represented (Articles 4 and 10, No. 2, of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).

The tribunal is competent and is regularly constituted.

The proceedings are not affected by nullities.

No exceptions were raised.

No other circumstances are present that would prevent examination of the merits of the case.

In these terms, the Arbitral Tribunal is regularly constituted to examine and decide the subject matter of the proceedings.

III. Merits

III.1. Factual Matters

1. Established Facts

12.1. With relevance for the examination and decision of the matters raised, the following facts are accepted as established and proven:

A) B… – Closed Real Estate Investment Fund, represented by the Claimant, is the owner of the urban property situated on Street …, …-… Lisbon, registered in the property cadastre with cadastral article …, of the parish of …, municipality and district of Lisbon, with the taxable property value of € 5,823,311.33.

B) The property identified in the preceding subsection is described in the Property Record as "Land for construction".

C) With respect to the property identified in subsection A), the Finance Office of Lisbon-… issued, on 20-03-2015, the following Stamp Tax assessments, relating to the year 2014:

i) Assessment no. 2015 …, in the amount of €19,411.05;

ii) Assessment no. 2015 …, in the amount of €19,411.03;

iii) Assessment no. 2015 …, in the amount of €19,411.03.

D) The three Stamp Tax assessments identified in the preceding subsection, totaling € 58,233.11 are fully paid.

E) On 18-08-2015, the Claimant filed an administrative appeal directed to the Head of the Finance Office Lisbon…, which received no. …2016…, against the Stamp Tax assessment acts identified in subsection C).

F) The Head of the Finance Office Lisbon…, pursuant to delegation of powers, issued, on 22-04-2016, a ruling dismissing the administrative appeal identified in the preceding subsection.

12.2. There are no other facts with relevance for examination of the merits of the case that have not been proven.

12.3. Basis for the Factual Matters

As to the facts accepted as proven, the conviction of the Arbitral Tribunal was based on the free evaluation of the documentary evidence joined to the file, whose authenticity was not challenged, as well as on the analysis of the administrative proceedings remitted by the Respondent.

III.2. Legal Matters

1. The Claimant begins by contesting the Stamp Tax assessments, above identified, on the ground of the defect of violation of law due to error in the factual and legal premises.

This must be examined.

13.1. Law No. 55-A/2012, of 29 October, introduced various amendments to the Stamp Tax Code and, through Article 4, added item 28 to the GTST, with the following wording:

"28 — Ownership, usufruct or right to surface of urban properties whose taxable property value appearing in the cadastre, in accordance with the Real Estate Tax Code (IMI Code), is equal to or greater than € 1,000,000 - on the taxable property value used for the purposes of IMI:

28.1 — For property with residential purpose - 1%;

28.2 — For property, when the passive subjects that are not natural persons are resident in a country, territory or region subject to a regime clearly more favorable, appearing on the list approved by ordinance of the Minister of Finance - 7.5%."

Subsequently, Law No. 83-C/2013, of 31 December (State Budget Law for 2014), through Article 194, amended the wording of item 28.1 of the GTST, which now reads:

"28.1- For residential property or for land for construction whose building, authorized or planned, is for housing, in accordance with the provisions of the Real Estate Tax Code — 1%."

The new wording given to item 28.1 of the GTST, by Article 194 of Law No. 83-C/2013, of 31 December, broadens the scope of objective application of the rule by expressly including land for construction, provided it has authorized or planned building for housing.

The inclusion of land for construction in item 28.1 of the GTST presupposes that there exists a provision or expectation of building for housing that is concretized through the fulfillment of legal and administrative requirements necessary for such building. To this end, ANTÓNIO SANTOS ROCHA and EDUARDO JOSÉ MARTINS BRÁS (in Taxation of Property. IMI-IMT and Stamp Tax (Annotated and Commented), Almedina, 2015, pp. 44) state:

"With regard to land for construction, whether or not located within an urban agglomeration, as defined in art. 3/4 of this statute (IMI Code), such shall be considered as land for which has been granted:

· license for development operation,

· license for construction,

· authorization for development operation,

· authorization for construction,

· admitted favorable communication of development operation or construction,

· issued favorable prior information of development operation or construction, as well as

· those that have been so declared in the acquisition title, and it should be noted that, also for this purpose, only the acquisition title with the form required by civil law, that is, public deed or authenticated private document referred to in Article 875 of the Civil Code, shall be relevant."

The legal and administrative requirements, set forth above, constitute necessary requirements for the inclusion of land for construction in item 28.1 of the GTST.

The demonstration that a property has authorized or planned building for housing goes far beyond cadastral registration. Consequently, the mere cadastral registration of a property as "land for construction" does not, in itself, justify the application of item 28.1 of the GTST.

On the meaning of item 28.1 of the GTST, in the wording given by Article 194 of Law No. 83-C/2013, we agree with the position adopted in the CAAD Decision of 19 April 2016, rendered in proc. no. 578/2015-T, from which we quote (pp. 16):

"(…) the incidence of Stamp Tax on land for construction cannot be materialized with the mere registration of the same, as such, in the cadastre, but rather, and in a decisive manner, by verification of the effective potential for building in the referred land (which must be ascertained in this case and revealed through the existence of the documents described above). To say it in other words, the incidence of the tax, for the purposes of item 28.1, is only materialized with the verification of "effective purpose", to use the apt expression of JOSÉ MANUEL FERNANDES PIRES (op. cit., p. 507). Without such demonstration of the effective potential for building (…) the purposes underlying the new wording of item 28.1 of the GTST cannot be said to be fulfilled" (End of quote)

13.2. The wording of item 28.1 of the GTST resulting from the provision of Law No. 83-C/2013, of 31 December, is applicable ratione temporis to the situation sub judice.

The property record, joined to the file, confirms that the property in question is described as "land for construction".

Although the property in question in the present arbitration proceedings is cadastrally registered as "land for construction", according to the above exposition, this does not justify the automatic application of item 28.1 of the GTST, since the mere cadastral registration does not, in itself, constitute proof that a property has authorized or planned building for housing.

The Claimant asserts that the property in question "(…) did not have and does not have authorized or planned building for housing" and adds "(…) moreover, the Fund, as owner of this property, has no intention of dedicating this property to any type of construction or urban development project" (Cf., nos. 36 and 37 of the Petition for Arbitration)

Furthermore, there is not joined to the present file any documentary support proving that with respect to the property in question there exists an approved project for construction, construction license and authorization, prior communication or favorable prior information for conducting development operations or construction.

Thus, from the analysis of the present arbitration proceedings it appears that no demonstration was made that the property in question, described as land for construction, has authorized or planned building for housing.

13.3. In this sense, arbitral jurisprudence has also converged on the understanding of finding well-founded the petitions for declaration of illegality of Stamp Tax assessments under item 28.1 of the GTST regarding land for construction when there is only mere registration in the cadastre and effective potential for building is not proven (Cf., Arbitration Decisions rendered in proceedings nos. 467/2015-T, 578/2015-T and 524/2015-T).

13.4. Considering the factual situation in the present arbitration proceedings and in light of the above expositions, we conclude for the illegality of the Stamp Tax assessments made under item 28.1 of the GTST, which constitute the subject matter of the present petition for arbitration, due to error imputable to the Tax Administration.

1. The Claimant also alleges the unconstitutionality of item 28.1 of the GTST, with the wording given by Law No. 83-C/2013, of 31 December, due to violation of the constitutional principles of contributive capacity, tax equality and legality.

Considering the provision of Article 124 of the Administrative Court Procedure Code, subsidiarily applicable by force of the provision of Article 29, No. 1 of the RJAT, and due to the declaration of illegality of the tax assessment acts subject to the present proceedings, expressed in the preceding no., the examination of the constitutional defect invoked by the Claimant is prejudiced.

1. It now remains to proceed with examination of the Claimant's petition for payment of compensatory interest.

Based on Article 24, No. 5, of the RJAT, it has been understood that recognition of the right to compensatory interest is possible in arbitration proceedings.

Pursuant to Article 43, No. 1, of the LGT, compensatory interest is due when it is determined, in administrative appeal or judicial challenge, that there has been error imputable to the services from which results payment of tax debt in an amount exceeding what is legally owed.

The necessary condition for awarding compensatory interest consists in the demonstration of the existence of error regarding the factual or legal premises imputable to the services of the Tax Administration (see Administrative Supreme Court Decision of 10 April 2013, proc. 1215/12).

As referred to in point no. 13.4 of the present arbitration decision, there was error imputable to the services of the Tax Administration which determined the annulment of the tax acts in question and the consequent return of the amounts paid by the Claimant, in accordance with the provision of Article 173, No. 1, of the Administrative Court Procedure Code, ex vi Article 29, No. 1, subsection c), of the RJAT.

By the above, we conclude for the well-foundedness of the Claimant's petition for payment of compensatory interest.

IV. Decision

In light of the above, the Tribunal decides:

• To find well-founded the petition for arbitration and annul, with all legal consequences, the Stamp Tax assessments, relating to the year 2014, with nos. 2015…, 2015… and 2015….

• To find well-founded the petition for arbitration as to the part relating to recognition of the right to compensatory interest in favor of the Claimant.

V. Value of the Case

The value of the case is set at € 58,233.11 (fifty-eight thousand two hundred and thirty-three euros and eleven cents), in accordance with Article 32 of the Administrative Court Procedure Code and 97-A of the Administrative Court Procedure Code, applicable by force of the provision of Article 29, No. 1, subsections a) and b), of the RJAT, and Article 3, No. 2, of the Rules on Costs in Tax Arbitration Proceedings.

VI. Costs

Costs borne by the Respondent, in the amount of € 2,142.00 (two thousand one hundred and forty-two euros), in accordance with Table I of the Rules on Costs in Tax Arbitration Proceedings, and in fulfillment of the provisions of Articles 12, No. 2, and 22, No. 4, both of the RJAT, as well as the provision of Article 4, No. 4, of the cited Rules.

Let it be notified.

Lisbon, Administrative Arbitration Centre, 30 May 2017

The Arbitrator

Olívio Mota Amador

Text prepared by computer, in accordance with the provision of Article 131, No. 5, of the Code of Civil Procedure, applicable by referral of Article 29, No. 1, subsection e), of the RJAT.