Stamp Tax Verba 28.1 on Vertical Property: VPT Threshold per Unit vs. Whole Building (CAAD 575/2014-T)

ARBITRAL DECISION

Claimant: A..., Real Estate Company, S.A

Respondent: Tax and Customs Authority

I. REPORT

1. On 29 July 2014, A..., Real Estate Company, S.A, taxpayer number ..., hereinafter identified as the Claimant, submitted a request for arbitral decision, in accordance with the provisions of Article 10 of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters);

2. In the aforementioned request for arbitral decision, the Claimant seeks that the Arbitral Court declare:

a) The illegality of the Stamp Duty assessment acts Nos. 2014..., 2014..., 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014… and 2014… and Nos. 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014.., 2014…, 2014… and 2014…, in the total amount of € 32,181.70;

b) The condemnation of the Tax and Customs Authority to reimburse the amount unduly paid – in the amount of € 10,727.23 – relating to the first instalment of the contested assessments, plus compensatory interest;

c) And if applicable, the reimbursement of amounts unduly paid relating to the second and third instalments of the contested assessments or of costs arising from the provision of guarantees within the scope of tax enforcement proceedings that may be initiated for collection of the respective amount.

1. The request for constitution of the arbitral tribunal was accepted on 30 July 2014 and was subsequently notified to the Tax and Customs Authority (hereinafter identified as the Respondent).

2. The Claimant did not appoint an arbitrator, therefore, pursuant to Article 6, No. 1, of the Legal Framework for Arbitration in Tax Matters, the undersigned was designated to form part of the present singular Arbitral Court, with the appointment being accepted in accordance with legal provisions.

3. After hearing the parties, it was decided not to hold the first meeting of the Arbitral Court, nor was there any presentation of arguments.

4. The Claimant bases its request, in summary, on the understanding that it is not subject to Stamp Duty, pursuant to item 28.1 of the General Table of Stamp Duty, in respect of a building composed of storeys or divisions capable of independent use intended for residential purposes, whose separately determined tax property values are less than € 1,000,000, but which in total equal or exceed that value.

5. For the Claimant, the said item 28.1 of the General Table of Stamp Duty is only applicable when the requirement of tax property value exceeding € 1,000,000 is met for the building as a whole and not for each of the divisions that comprise it.

6. Since the concept of "Property with residential use whose tax property value shown in the matrix, in accordance with the Municipal Property Tax Code, is equal to or greater than € 1,000,000" is not defined in the Stamp Duty Code, the Claimant invokes the necessity of resorting to the Municipal Property Tax Code to determine whether the divisions in question fall within the concept of property for purposes of this Legislation, in particular whether they meet the three requirements considered by the Claimant as necessary for this concept of property, namely, physical structure, property ownership and economic value.

7. Having verified these requirements with reference to autonomous units, the Claimant argues that divisions capable of independent use of a property in full ownership are materially identical to autonomous units, since both fulfil the requirements provided in Article 1415 of the Civil Code, namely, they are independent units, distinct and isolated from each other and with direct access to a common part of the property or to public right of way and, furthermore, that the creation of horizontal property ownership involves merely a legal alteration of the property without even requiring a new valuation.

8. Concluding that both autonomous units and divisions capable of independent use meet all the criteria for their qualification as property for tax purposes, since both (i) have a permanent connection to the territory - "physical element"; (ii) are part of the property of their holder "property ownership"; and (iii) allow their separate use, either directly by their holder or through the transfer of its use to a third party, which confers upon them autonomous economic significance - "economic value".

9. The Claimant further states that, given that divisions of a property in full ownership are capable of independent use, it is unquestionable that – as with autonomous units – their use must be assessed division by division; and that if, in light of the Municipal Property Tax Code, each autonomous part of the property has its own tax property value, constituting the taxable value for purposes of this tax, it should be that value that is considered for purposes of item 28.1 of the General Table of Stamp Duty.

10. Finally, the Claimant further argues that item 28.1 of the General Table of Stamp Duty, in accordance with which the contested assessments were issued, violates the principle of equality, provided for in Articles 13 and No. 3 of Article 104 of the Constitution of the Portuguese Republic and the prohibition of double legal taxation, arising from the principle of equality and the principle of contributory capacity.

11. For the Claimant, item 28.1 of the General Table of Stamp Duty violates the principle of equality, not only because it taxes properties intended for residential use (with advantage over others) without any basis in the principle of contributory capacity, but even within that category of properties, it treats situations that indicate the same economic capacity differently, without founding such treatment on a constitutionally relevant value.

12. The Claimant concludes that the taxation introduced by item 28.1 of the General Table of Stamp Duty bears upon wealth or economic capacity that has already been subjected to taxation under Municipal Property Tax, through the application of a rate to the totality of the tax property value of properties.

13. And, given that this duplication of taxation is directed solely and exclusively at a category of taxable persons, without such distinction having any basis in the principle of contributory capacity, the Claimant believes that the right to equality of these taxpayers is irremediably compromised.

14. In its Response, the Respondent invoked, in summary, that the tax property value equal to or exceeding € 1,000,000 on which the application of Item 28 of the General Table of Stamp Duty depends is, as expressly results from its wording, the tax property value of each property and not of its distinct parts, even though capable of independent use.

15. The Respondent contends that a property in full ownership with storeys or divisions capable of independent use is unequivocally different from a property under horizontal property regime, constituted by autonomous units, that is, by several properties. In this way, and by interpretation a contrario sensu, the Respondent concludes that divisions of the latter that are not subject to the horizontal property regime do not constitute urban properties.

16. The Respondent further argues that the thesis defended by the Claimant lacks legal support, for although the assessment of Stamp Duty in the situations provided for in item 28.1 of the General Table of Stamp Duty is carried out in accordance with the rules of the Municipal Property Tax Code, the truth is that the legislator reserves aspects that require appropriate adjustments, namely those in which, as is the case with properties in full ownership, even though with storeys or divisions capable of independent use (although Municipal Property Tax is assessed in relation to each part capable of independent use), for purposes of Stamp Duty the property in its entirety is relevant since divisions capable of independent use are not considered as property, but only autonomous units under the horizontal property regime.

17. The Respondent further contends that there is no unequal treatment, nor identity of situations, since unequal treatment only occurs when, faced with substantially identical realities, substantially different treatment is given, without there being a legitimate basis for such treatment, and in the case at hand it contends that one is faced with distinct realities since horizontal property determines the division/splitting of full ownership and the independence or autonomy of each of the units that constitute it, for all legal purposes, whereas a property in full ownership constitutes, for all purposes, a single legal-tax reality.

18. Finally, the Respondent contends that there is no double taxation since what is taxed under Stamp Duty is the special contributory capacity that is revealed by the holders of these properties, which is justified constitutionally in accordance with No. 1 of Article 103 of the Constitution of the Portuguese Republic, in light of the higher interests underlying the existence of a Democratic State governed by the rule of law.

II. PRELIMINARY RULING

1. The Court is materially competent and is regularly constituted, in accordance with paragraph a) of No. 1 of Article 2, and Articles 5 and 6, all of the Legal Framework for Arbitration in Tax Matters.

2. The parties have legal personality and capacity, are legitimately positioned and are represented, in accordance with Articles 4 and 10 of the Legal Framework for Arbitration in Tax Matters and Article 1 of Ordinance No. 112-A/2011, of 22 March.

3. No nullities and preliminary matters affecting the entire proceedings are found, therefore it is necessary to decide on the merits of the claim.

III. SUBJECT MATTER OF THE ARBITRAL DECISION

1. The following issues are placed before the Court, in accordance with the description above:

a) Whether the tax property value relevant for purposes of determining the applicability of item 28.1 of the General Table of Stamp Duty, when a property not constituted as horizontal property is in question, is that of each unit considered autonomously or the sum of the tax property value assigned to each of these units;

b) Recognition of the right to interest on the amount of tax paid relating to the first instalment and reimbursement of that same amount;

c) Recognition of the right to interest and reimbursement or to possible costs owed for the provision of guarantee with reference to the amount of tax relating to the remaining instalments.

IV. FACTUAL MATTERS

Proven Facts

1. The Claimant is a commercial company whose corporate purpose is "a) The promotion, management and commercialization in any form, in particular in multi-owner systems, of urban development, tourist and hotel enterprises and sports and leisure complexes; b) The preparation of studies and urban planning projects, tourist, sports complexes, civil construction and connected equipment and technologies; c) Acquisition, construction, promotion and direct commercialization and resale of properties and property management." (cf. Doc. 25, attached to the initial petition);

2. The Claimant is the owner of the property registered in the urban property matrix of the parish of ... under article U-1... and of the property registered in the urban property matrix of the same parish, under article U-2… (cf. Docs. 1 to 24 attached to the initial petition);

3. The property registered in the urban property matrix of the parish of ... under article U-1... corresponds to a property in full ownership composed of 14 storeys or divisions capable of independent use, each with a tax property value determined separately, ranging between € 7,410 and € 188,460, totalling € 2,082,180 (cf. Doc. 26, attached to the initial petition);

4. The property registered in the urban property matrix of the parish of ... under article U-2… corresponds to a property in full ownership composed of 13 storeys or divisions capable of independent use, each with a tax property value determined separately, ranging between € 52,950 and € 99,320, totalling € 1,208,930 - (cf. Doc. 27, attached to the initial petition);

5. The Claimant was notified of the Stamp Duty assessment acts Nos. 2014..., 2014..., 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014.. and 2014… and Nos. 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014… and 2014…, in the total amount of € 32,181.70 (cf. Docs. 1 to 24 attached to the initial petition);

6. On 30 April 2014, the Claimant proceeded to payment of the above-indicated Stamp Duty assessments, in the total amount of € 10,727.23 (Docs. 1 to 24 attached to the initial petition).

7. The factual matters given as proven are based on documentary evidence presented, not contested by the parties.

Unproven Facts

1. No essential facts with relevance to the assessment of the merits of the case were found that were not proven.

V. LEGAL MATTERS

1. As identified above, in the request for arbitral decision the Claimant, essentially, argues that the application of item 28.1 of the General Table of Stamp Duty is illegal in considering that a property composed of "storeys or divisions intended for residential use" whose separate tax property values are less than € 1,000,000 should be considered jointly for purposes of this taxation.

2. It further adds that this interpretation of the rule in question violates the constitutional principles of equality and the prohibition of double legal taxation.

3. It therefore requests the annulment of the contested assessments.

4. For its part, the Respondent argues for the legality of the assessment, considering that it translates into objective elements of direct application of the legal rule, contending that the Claimant seeks, incorrectly, to assimilate full ownership to horizontal property.

5. In the interpretation that the Claimant makes of the determination of item 28.1 of the General Table of Stamp Duty, it considers that in the case of properties in full ownership, even though with storeys or divisions capable of autonomous use, the property should be considered in its entirety for purposes of Stamp Duty.

6. It therefore defends not only the legality of the assessment, but the unconstitutionality of the position defended by the Claimant for violation of the principles of tax legality and equality.

7. With respect to the merits of the case, the question that is the subject of the present proceedings is whether the contested tax acts suffer from a defect of violation of law due to error in the legal presuppositions by considering the sum of the tax property value of areas with residential use of urban property in full ownership, to the detriment of the tax property value of each storey or division capable of independent use, with residential use, for purposes of Stamp Duty incidence (provided for in item 28.1 of the General Table of Stamp Duty).

8. It is now necessary to pay attention to what is established in the tax legislation. On the one hand, No. 1 of Article 1 of the Stamp Duty Code determines that "Stamp Duty is levied on all acts, contracts, documents, titles, papers and other facts or legal situations provided for in the General Table, including gratuitous transfers of assets."

9. No. 1 of Article 9 of the Stamp Duty Code provides that the taxable value to be considered is that which results from the General Table of Stamp Duty.

10. In that sense, one must pay attention to the fact that item 28.1 of the General Table of Stamp Duty has the following wording:

28 "Ownership, usufruct or right of superficies of urban properties whose tax property value shown in the matrix, in accordance with the Municipal Property Tax Code, is equal to or greater than (euro) 1,000,000 - on the tax property value used for purposes of Municipal Property Tax:

28.1 For property with residential use: 1%".

1. The underlining is intended to draw attention to the relevance of what is provided in the Municipal Property Tax Code with regard to the determination of tax property value.

2. Moreover, No. 2 of Article 67 of the Stamp Duty Code reinforces this relevance when it expressly provides that "To matters not regulated in the present Code relating to item No. 28 of the General Table, the provisions of the Municipal Property Tax Code shall apply, subsidiarily".

3. Thus, it is convenient to pay attention to the determination of Article 2 of the Municipal Property Tax Code that, as to the determination of the concept of property, provides in No. 1: "For purposes of the present Code, property is any portion of territory, including waters, plantations, buildings and structures of any nature incorporated or situated thereon, with a character of permanence, provided that it forms part of the assets of a natural or legal person and, under normal circumstances, has economic value, as well as waters, plantations, buildings or structures, in the circumstances aforesaid, endowed with economic autonomy in relation to the land on which they are located, although situated within a portion of territory that constitutes an integral part of assets of a different owner or does not have a property nature."

4. For its part, in Article 3 of the said Code is determined what is understood by rural properties:

"1 – Rural properties are lands situated outside an urban centre that should not be classified as land for construction, in accordance with No. 3 of Article 6, provided that:

They are allocated to, or, in the absence of concrete allocation, have as their normal purpose a use generating agricultural income, as such are considered for purposes of Personal Income Tax (IRS);

Not having the allocation indicated in the preceding subparagraph, they are not constructed or have only buildings or structures of an ancillary nature, without economic autonomy and of reduced value.

2 – Lands situated within an urban centre are also rural properties, provided that, by virtue of legally approved disposition, they cannot be used to generate any income or can only be used to generate agricultural income and are in fact being allocated to this use.

3 – The following are also rural properties:

Buildings and structures directly allocated to the generation of agricultural income, when situated on the lands referred to in the preceding numbers;

Waters and plantations in the situations to which No. 1 of Article 2 refers.

4 – For purposes of the present Code, urban centres are considered, in addition to those situated within legally fixed perimeters, nuclei with a minimum of 10 dwellings served by publicly accessible roads, with their perimeter delimited by points spaced 50 m from the axis of the roads, in the transversal sense, and 20 m from the last building, in the direction of the roads."

1. In accordance with Article 4 of the Municipal Property Tax Code "Urban properties are all those that should not be classified as rural, without prejudice to the provisions of the following article."

2. Already in Article 5 of the Code it is determined with regard to urban properties:

"1. Whenever a property has rural and urban parts, it is classified in its entirety in accordance with the main part.

2 - If none of the parts can be classified as main, the property is deemed to be mixed."

1. In accordance with Article 6 of the Municipal Property Tax Code,

"1 - Urban properties are divided into:

Residential;

Commercial, industrial or for services;

Land for construction;

Other.

2 – Residential, commercial, industrial or for services are buildings or structures licensed for such purpose or, in the absence of a licence, that have as their normal purpose each of these ends."

1. Beyond these classifications, one must pay attention to the provisions of Article 7 of the Municipal Property Tax Code in accordance with which:

"1 – The tax property value of properties is determined in accordance with the present Code.

2 – The tax property value of urban properties with parts that can be classified under more than one of the classifications in No. 1 of the preceding article is determined

(...)

b) If the different parts are economically independent, each part is assessed by application of the corresponding rules, and the value of the property is the sum of the values of its parts."

1. Still with regard to Municipal Property Tax, No. 3 of Article 12 provides that "Each storey or part of property capable of independent use is considered separately in the property registration, which also distinguishes the respective tax property value."

2. Beyond these provisions, one must pay attention to Article 11 of the General Tax Law which as to interpretation provides that "In determining the meaning of tax rules and in the qualification of the facts to which they apply, the general rules and principles of interpretation and application of laws are observed."

3. It is also convenient to pay attention to the fact that it is equally necessary to resort to the general principles of interpretation of laws that are established in Article 9 of the Civil Code, which establishes the following:

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

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

2. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most correct solutions and was able to express its intent in adequate terms."

3. Having considered the arguments of the parties, the description of the fundamental issue and the legal framework, it is necessary to underline that the problem at stake is limited to understanding whether the tax property value corresponds to that attributed to each of the parts or storeys, or to their total.

4. In substance, to understand whether in cases of full ownership and for purposes of determining the value relevant to ascertaining the Stamp Duty incidence one must consider the property, as the Tax Authority does, as a whole despite being constituted by various autonomous parts intended for residential use, with independent use.

5. If so, there are various situations in which the limit of one million euros can be exceeded.

6. The resolution of the question that is posed must begin by taking into account the fact that the registration of properties in full ownership in the matrix obeys, in accordance with the Municipal Property Tax Code, the same rules as registration when faced with horizontal property (No. 3 of Article 12).

7. This has as consequence that the assessment, in accordance with the same Code, is also made individually for each of the parts.

8. If this is so, only by pure criterion of expediency can one accept the idea of the Respondent that there might exist for this situation a difference between the incidence rule and the assessment rule.

9. It would have been better for the law, in this case – by cross-reference to the legislation relating to Stamp Duty – the Municipal Property Tax Code – to expressly provide for this difference.

10. It happens that the letter of the law does not determine it in any circumstance.

11. For that reason, a taxation in light of item 28.1 of the General Table of Stamp Duty of a property in full ownership, whose tax property value of each division is less than €1,000,000 violates the principle of legality, since the legal presupposition for incidence is not verified.

12. It is further convenient to pay attention to the fact that the legislator considered as decisive element and incidence the ownership of urban properties with residential use of high value (luxury) on which it introduced a special rate.

13. This very conclusion is drawn from the discussion of proposed law 96/XII, available in the Journal of the Assembly of the Republic, Series I, No. 9/XII/2 of 11 October 2012, in which the measure is designated as "a special rate on urban residential properties of higher value".

14. Upon returning to the situation under analysis, there is no doubt whatsoever that we are legally faced with an urban property, with residential use in the regime of full ownership.

15. This does not result in the possibility of the Respondent being able to determine the concrete assessment without applying the rules of the Municipal Property Tax Code (applicable by express cross-reference in item 28 of the General Table of Stamp Duty).

16. The Respondent cannot distinguish where the legislator did not, under penalty of violating the coherence of the tax system.

17. In this way, the assessment sub iudice whose declaration of illegality is requested suffers from a defect of violation of item 28.1 of the General Table of Stamp Duty due to error regarding the legal presuppositions, which justifies the declaration of its illegality and annulment.

18. In function of the resolution given by legal means to the present case, the consideration of arguments of a constitutional nature is prejudiced.

VI. DECISION

1. In light of the above, the decision is:

a) To judge the claim for annulment well-founded with all legal effects, of the assessment acts whose legality was contested;

b) To judge the claim for reimbursement of tax paid well-founded, and likewise the recognition of compensatory interest in accordance with the provisions of Articles 43 of the General Tax Law and 61 of the Code of Tax Procedure and Process.

c) The claim relating to reimbursement of amounts relating to the second and third instalments of the contested assessments or costs arising from the provision of guarantees in tax enforcement proceedings that may be initiated for collection of that value is not recognized, as no such circumstances were demonstrated.

1. The value of the proceedings is fixed at € 32,181.70 (thirty-two thousand one hundred eighty-one euros and seventy cents), in accordance with Article 32 of the Code of Procedure of Administrative Courts and Article 97-A of the Code of Tax Procedure and Process, applicable by force of the provisions of Article 29, No. 1, paragraphs a) and b), of the Legal Framework for Arbitration in Tax Matters, and Article 3, No. 2, of the Regulation of Costs in Tax Arbitration Proceedings.

2. Costs to be borne by the Respondent, in the amount of € 1,836, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, given that the present claim was judged well-founded, and in compliance with the provisions of Articles 12, No. 2, and 22, No. 4, both of the Legal Framework for Arbitration in Tax Matters, and the provisions of Article 4, No. 4, of the cited Regulation.

The parties are to be notified,

Lisbon, 23 March 2015

The Arbitrator,

(Diogo Feio)

[Text prepared by computer, in accordance with Article 131, No. 5 of the Code of Civil Procedure, applicable by cross-reference of Article 29, No. 1, paragraph e) of the Legal Framework for Arbitration in Tax Matters, with blank verses and revised by the undersigned arbitrator].