Stamp Tax on Vertical Property Buildings: CAAD Ruling on Verba 28 TGIS Annulment (576/2014-T)

ARBITRAL DECISION

THE PARTIES

Claimant: "A, S.A.", NIPC ..., with registered office at Rua ... Lisbon
Respondent: Tax and Customs Authority

Matter: Urban property under vertical ownership regime - Stamp Duty - Item 28 of the General Stamp Duty Table

ARBITRAL DECISION

I - Object of the Request and Procedural Handling

On 29 July 2014, the Claimant submitted a request for arbitral ruling, requesting:

i) The declaration of illegality and consequent annulment of the following tax assessment acts for Stamp Duty relating to the year 2013:

· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...;
· No. 2014 ...; and

ii) Indemnification for costs arising from the issuance of a bank guarantee, which would be presented for the purpose of suspending tax enforcement proceedings.

The aforementioned Stamp Duty assessment notices, totaling 12,495.50 €, relate to residential urban properties "1-107", "1D", "1E", "2D", "2E", "2.º", "3D", "3.º", "4D", "4E", "4.º", "AFD", "AFE", "AFURT", which form part of a property constituted under vertical ownership regime, registered in the urban land registry of the parish of ..., municipality of Lisbon, under article ....

By decision of the President of the Deontological Council (No. 1 of article 6 of the Tax Arbitration Regulations) the undersigned was appointed as sole arbitrator. The singular arbitral tribunal was constituted on 1 October 2014.

The Tax and Customs Administration (hereinafter referred to, in short, as TA) submitted its Reply on 31 October. Additionally, the TA requested exemption from the first arbitral meeting provided for in article 18 of the Tax Arbitration Regulations, as well as the examination of the witnesses identified by the Claimant, given the absence of exceptions and stability of the factual matter and respective probative elements.

Furthermore, the factual matter supporting the Claimant's request was not contested by the TA. And there are no unproven facts.

For which reason the arbitral tribunal considered that the conditions were met for the immediate consideration of the merits of the case. Having, on 10 November, notified the parties of the exemption both from the arbitral meeting provided for in article 18, and from the production of witness evidence and final submissions.

In that same notification, the arbitral tribunal requested from the Claimant the submission of documentation supporting the request for reimbursement of costs arising from the issuance of a bank guarantee.

On 12 November, the arbitral tribunal again notified the Claimant, pursuant to paragraph (c) of No. 1 of the Tax Arbitration Regulations, this time inviting it to complete the initial petition. Specifically, the Claimant had fixed the value of the request for arbitral ruling at 4,165.26 €, an amount corresponding to the first installment of Stamp Duty.

However, the arbitral tribunal considered that the economic value should refer to the Stamp Duty assessment (12,495.50 €), regardless of the corresponding payment modality.

Moreover, the object of the request for arbitral ruling consists of the Stamp Duty assessment (2013 collection), which encompasses the 3 installments. And to which the arbitral decision will refer.

On 21 November the Claimant clarified that the bank guarantee had not been provided, with the Stamp Duty assessments continuing to be unpaid and unsecured.

On 5 December the Claimant informed that it had corrected the economic value of the request to 12,495.50 €, paying the differential of the arbitral fee owed.

In these terms, the tribunal notified the parties that the arbitral decision would be prepared by 23 December.

The parties have legal capacity and legitimacy.
The Arbitral Tribunal was regularly constituted and is competent.
The proceedings do not suffer from any nullity. No exceptions were raised by the parties that would prevent consideration of the merits of the case.

II - Factual Framework and Summary of the Legal Grounds Alleged by the Parties

a) The Claimant is the owner of the urban property ..., located in the parish of ... (Lisbon) and constituted under vertical ownership regime;

b) In January 2011 the property was valued, for purposes of IMI [Municipal Property Tax], as an urban property composed of 19 units capable of independent use and allocated to commerce (5 units) and housing (remaining 14 units);

c) Each of these 19 units is, functionally and materially, capable of individual and independent use separate from the others, meeting the concept of property as established in No. 3 of article 12 of the Municipal Property Tax Code;

d) Annually, the Claimant is notified of the IMI assessment relating to the property in question, which itemizes the taxable property value and the collection applicable to each of the 19 urban properties;

e) In the context of Stamp Duty, the TA added the taxable property values of the 14 units with residential allocation;

f) In 2013 the TA issued 14 Stamp Duty assessment notices, under item 28.1 of the corresponding General Table, which were levied on the 14 residential properties, according to the following table:

g) The Claimant did not make payment of the aforementioned assessment notices and did not provide suitable guarantee aimed at suspending tax enforcement proceedings.

These facts are proved, as documented in the documents attached to the request for arbitral ruling. The TA did not contest the factual matter. There remain no disputed or unproven facts.

The Claimant contends that:

· The Stamp Duty assessment is based on a duality of criteria on the part of the TA. Because if for purposes of IMI 19 properties were considered, for Stamp Duty the property was treated as unique and indivisible;

· Under IMI the 19 properties were classified as "residential" and "commerce" (pursuant to No. 1 of article 6 of the Municipal Property Tax Code). Whereas for purposes of Stamp Duty incidence the property was "unified" with respect to its residential portions;

· From which resulted a "new" urban property with a taxable property value equal to or greater than 1 million Euros;

· This Stamp Duty is aimed at taxing the "wealthy", owners of "luxury" residences, which is not the case in the dispute at hand;

· The interpretive path of the tax rule is not limited to the letter of the law, requiring the reconstruction of legislative intent based on the context and circumstances that presided over the legislative creation (No. 1 of article 9 of the Civil Code, by reference from No. 1 of article 11 of the General Tax Law);

· And in case of doubt as to the content and scope of the tax rule, No. 3 of article 11 of the General Tax Law provides that the economic substance revealed by the tax facts be observed;

· The TA takes advantage of the letter of the law, interpreting it in its narrowest sense, so as to tax an economic reality outside the legislative scope;

· On the plane of material truth, it is indisputable that the property, although not constituted in horizontal ownership (there being, strictly speaking, no autonomous units), is substantively and functionally divided into independent portions. Each of which constitutes an urban residential property or for commerce;

· This fact must be harmonized with the principles of equality and tax capacity, which preclude the adoption of disparate criteria by the TA;

· Being the various properties independent, to the point that each one meets the concept of property embraced in the Municipal Property Tax Code, the TA is not permitted to proceed with their unification for purposes of Stamp Duty incidence;

· The taxable property value remains unique and individual for each of the urban properties. It cannot be added so as to feign the existence of a single property and, thereby, subsum it under a new tax fact subject to Stamp Duty;

· There is a manifest breach of the principle of tax capacity, which is founded on the command of equality, both of which principles benefit from constitutional protection;

· Precisely because the TA only adds the taxable property values of the holders of properties under vertical ownership regime. Not extending the same interpretation to owners of individual urban properties or under horizontal ownership regime;

· Whereby two taxpayers holding two identical properties find themselves within or outside the rule for Stamp Duty incidence, depending on whether, respectively, the properties are constituted in vertical or horizontal ownership;

· The same economic, material and functional reality is, thus, subject to discriminatory tax treatment. Given that the taxpayer holding independent units of a property under vertical ownership regime, whose aggregate taxable property value reaches or exceeds 1 million Euros, is subject to Stamp Duty. A tax that would be avoided if such units constituted autonomous units of a property under horizontal ownership regime (since, in that case, the taxable property values remain individualized);

· In sum, the same economic reality - autonomous and independent urban properties - should correspond to identical tax treatment, namely, with respect to meeting the rules of objective incidence of Stamp Duty;

· There is a line of case law that embraces this position, namely, the arbitral decisions 48/2013-T, 50/2013-T, 132/2013-T and 218/2013-T.

In its reply, the TA argues that:

· The property being constituted under vertical ownership regime, it does not have autonomous units to which tax law attributes the qualification of property;

· The Claimant, for purposes of IMI and also of Stamp Duty, is not the owner of 19 autonomous units, but rather the holder of a single property;

· The TA cannot consider the existence of analogy between vertical and horizontal ownership regimes, inasmuch as it is civil legislation that distinguishes and autonomizes these regimes;

· It is prohibited to the interpreter to apply analogy between regimes endowed, by force of law, with different content and scope;

· Furthermore, these regimes were imported into tax law, whereby the corresponding tax interpretation must respect the meaning originally conferred by civil law (pursuant to No. 2 of article 11 of the General Tax Law);

· Each floor or part of property capable of independent use is considered separately in matriculation registration, but always in the same matrix;

· The individualization of IMI is compatible with the aggregation of Stamp Duty, on pain of incompatibility with the normative text;

· The principle of equality is not shown to be violated, given that it is permitted to the legislator to discriminate between vertical and horizontal ownership regimes, provided it does not do so, as is the case, in an arbitrary manner;

· The matriculation registration of the various portions capable of independent use is not autonomous, but rather appears in a single matrix, in which the property is identified in its entirety;

· In sum, item 28 of the General Table of Stamp Duty is levied on the total taxable property value of a given urban property. And not on the taxable property value of each of the portions that compose it, as results from the notion of property embraced in article 2 of the Municipal Property Tax Code and the species of property enumerated in article 6 of the same Code.

III - On the Law

The crux of the disputed issue can be enclosed in the following question: what is the scope and content of the concept of urban property for purposes of Stamp Duty incidence?

From the answer will result the identification of the taxable property value of that urban property, as an essential requirement for meeting the tax fact stated in item 28 of the General Table of Stamp Duty.

This implies the analysis of a set of preliminary and concurrent issues:

i) Is the concept of urban property embraced in the Municipal Property Tax Code and Stamp Duty Code divergent or coincident?

ii) Can the matriculation registration of a given property contribute to the fulfilment of its content and be relevant for the concomitant definition of the tax fact?

iii) Does the principle of tax capacity oppose a given urban property meeting the rule of subjection to Stamp Duty, depending on its insertion in the formal legal regimes of vertical or horizontal ownership?

Item 28.1 of the General Stamp Duty Table - in the version in effect in 2013 to which the disputed Stamp Duty assessments refer - presents the following tenor:

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

28.1 - For property with residential allocation - 1%";

(the underlines are ours)

The Stamp Duty Code completes the rule of incidence by defining territoriality (properties located in Portuguese territory, in accordance with No. 6 of article 4 of the Stamp Duty Code).

The subjective incidence is defined by reference to the Municipal Property Tax Code (in accordance with No. 4 of article 2 of the Stamp Duty Code).

The same reference to the Municipal Property Tax Code appears as to:

i) The moment of birth of the tax event of the obligation (paragraph (u) of No. 1 of article 5);

ii) The objective exemption as a function of taxable property value (No. 6 of article 7);

iii) The rules of assessment, collection and payment (No. 7 of article 23, No. 5 of article 44 and No. 5 of article 46);

iv) Guarantees of taxpayers (No. 3 of article 49); and

v) The rule of subsidiarity of the Municipal Property Tax Code with respect to "matters not regulated in this Code regarding item No. 28", ex vi of No. 2 of article 67.

Note that item 28 itself - in the version to which the 2013 Stamp Duty applies and assessed in 2014 - used concepts specific to IMI, namely, those of "urban property", "taxable property value", "matrix" and "residential allocation".

The State Budget for 2014 (Law No. 83-C/2013, of 31 December) modified the wording of item 28.1, moving away from the nomenclature of concepts of the Municipal Property Tax Code, by virtue of the subjection to Stamp Duty of "building land whose construction, authorized or provided, be for housing".

There is no doubt that, were it not for the aforementioned modification made by the 2014 State Budget, the Stamp Duty Code would be totally and closely dependent on the Municipal Property Tax Code, with respect to the definition of the concepts that fill the tax fact and subsequent assessment and collection operations.

For which reason - and by way of anticipation of the final conclusion - the concepts of urban property and taxable property value contained in the Stamp Duty Code cannot be other than those whose content and scope are embraced in the Municipal Property Tax Code.

Whereby the assessment of Stamp Duty cannot reflect any other reality than the taxable property value of each urban property under IMI.

The addition of the various taxable property values cannot give rise to a new urban property that the Municipal Property Tax Code and, by reference, the Stamp Duty Code, do not embrace.

Under pain of the tax fact, created via the sum of taxable property values, preceding the very concept of urban property (which is, in truth, the tax fact itself subject to IMI and Stamp Duty). Which occurs when the taxable property values of various properties are added, as if "giving birth" to a new urban property with a taxable property value equal to or greater than 1 million Euros.

However, substantive reality must always prevail over formal legal reality.

It is not the matriculation registration that identifies and fulfills the concept of urban property (if only by the fact that the existence of the latter is outside and independent of the land matrix, as occurs with omitted properties).

It is the urban property, as defined in the Municipal Property Tax Code, that originates and provides content to a given matriculation registration. Not the reverse.

Furthermore, the form of ownership of urban property, horizontal or vertical, cannot influence the tax fact. Namely, by creating it anew, and assigning to it a taxable property value corresponding to the sum of that which conforms a set of already existing properties.

In effect, the taxable property value is singular and is defined in the Stamp Duty Code, as that is the sense of the express reference it makes to the concepts of urban property and taxable property enshrined in the Municipal Property Tax Code.

It will not be too much to insist that, by express reference from the Stamp Duty Code, there is only one urban property: that which is defined in the Municipal Property Tax Code. And to that urban property corresponds one single taxable property value: that which appears in the Municipal Property Tax Code.

It is by this individualized concept of urban property that the assessment of IMI is governed. The same does not naturally occur with collection given that this results from the tax obligation of payment attributed to a given taxpayer.

Whereby, once more by force of the aforementioned express reference made in the Stamp Duty Code, the assessment of this tax is governed by the rules established in the Municipal Property Tax Code.

In truth, it was this procedure of individualization of Stamp Duty assessment to which the TA adhered, having issued 14 assessment notices. One for each urban property.

It happens that the hermeneutical rules do not permit the TA to create a new urban property for purposes of Stamp Duty, corresponding to the sum of taxable property values of other properties.

Simply, because the letter of the law, by reserving the concepts of urban property and taxable property value for the Municipal Property Tax Code, prevents any conceptual divergence between both taxes.

And the literal tenor of the tax rule (item 28) is unequivocal, in determining that Stamp Duty is levied on "(…) the taxable property value used for purposes of IMI").

In view of the foregoing, it would not be necessary to consider - as a main ground - the possible breach of the principle of material equality as an expression of tax capacity. Particularly in the objective situation in which two taxpayers find themselves confronted or not with a Stamp Duty assessment, depending on whether their urban properties are, respectively, constituted in vertical or horizontal ownership.

Insofar as, as we have seen, the concept of urban property encompasses a substantive reality, as it includes any floor or unit capable of independent use in the economic, material and functional perspectives.

What is not compatible with the legal title designation by which that ownership is revealed.

In any event, it may always be said that material equality opposes that urban properties conformed by the same economic, functional and material realities be subject to differentiated treatment depending on their matriculation registration as an autonomous unit of a property in vertical ownership or independent portion of a property in horizontal ownership.

In conclusion, in the case at hand, the property is constituted under vertical ownership regime, being composed of 19 units with independent use, of which 14 were valued and registered as a residential urban property.

The Municipal Property Tax Code constitutes subsidiary law as to the definition of urban property, land matrix and taxable property value.

No. 2 of article 7 and No. 3 of article 12 of the Municipal Property Tax Code converge in the definition of urban property as an economically and functionally independent portion of a given building or construction. To that urban property corresponds an autonomous matriculation registration, which identifies the corresponding taxable property value.

Substantively, an autonomous unit of a property under horizontal ownership regime is equivalent to independent portions of a building under vertical ownership regime. Both constitute urban properties, endowed with matriculation registration and autonomized taxable property values.

That autonomy necessarily encompasses assessment, given that this presents itself as the operation of application of the tax rate to the previously defined taxable matter. Which, in turn, results from the verification of a preceding tax fact.

Whereby each of the 14 urban properties in question possesses an individual and autonomous taxable property value. Which is below the minimum threshold of 1 million Euros. Whereby in none of the 14 urban properties does the tax fact molded in item 28 of the General Table of Stamp Duty occur.

Finally, it should not be forgotten that this disputed issue has already been the subject of several arbitral decisions.

Those decisions are uniform in their content, allowing the conclusion of the existence of a clear line of case law. To the effect that the assessment of Stamp Duty of item 28.1 of the General Table is not applicable to floors or portions capable of independent use of a property in vertical ownership, when only by means of the sum of each of those floors or portions can a taxable property value equal to or greater than 1 million Euros be achieved.

With respect to the claim for indemnification for the bank guarantee that would be presented, the arbitral tribunal requested the submission of the corresponding supporting documentation. Having the Claimant clarified that the guarantee was not presented. A fact which, naturally, prevents the consideration of the request.

IV - Decision

In the terms and with the grounds set forth, the arbitral tribunal decides:

i) To sustain the request for arbitral ruling, with the consequent annulment of the Stamp Duty assessment notices relating to the tax year 2013; and

ii) Not to consider the claim for indemnification for the presentation of undue guarantee.

The economic value of the request is fixed at 12,495.50.

Costs to the account of the Respondent.

Notify the parties.

Lisbon, 23 December 2014

Singular Arbitral Tribunal

José Luís Ferreira

[i] Among others, proceedings No. 48/2013-T, No. 50/2013-T, No. 132/2013-T, No. 181/2013, No. 182/2013, No. 183/2013, No. 185/2013, No. 218/2013-T, No. 14/2014-T, No. 26/2014, No. 30/2014, No. 72/2014, No. 88/2014, No. 177/2014, No. 193/2014-T, No. 194/2013-T, No. 206/2014 and No. 248/2013.