Process: 583/2014-T

Date: March 10, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

This arbitral decision addresses whether construction land (terrenos para construção) falls within the scope of Stamp Tax under Item 28.1 of the General Stamp Tax Table (TGIS), which taxes property with residential use at 1% annually. The claimant, a real estate development company, challenged a €41,796.50 Stamp Tax assessment on construction land valued at €4,179,650. The central dispute concerns whether undeveloped land designated for construction can be classified as 'property with residential use' subject to this tax. The taxpayer argued that construction land, by its nature, is raw material for development and lacks any actual residential use, thus falling outside Item 28.1's scope. Additionally, the claimant raised constitutional concerns, alleging the tax violates principles of taxable capacity by taxing production inputs rather than wealth, and equality by discriminating against real estate businesses. The Tax Authority countered that Article 67(2) of the Stamp Tax Code requires reference to the Municipal Property Tax Code (CIRS) for defining property concepts. Since the construction land was assigned a residential use coefficient when determining its taxable property value under MPTC rules, the Tax Authority argued this residential classification must apply for Stamp Tax purposes as well. The case also involved a claim for compensatory interest on amounts already paid. This decision is significant for real estate developers and investors holding construction land, as it clarifies whether undeveloped plots intended for residential construction are immediately subject to annual Stamp Tax or only upon actual residential use after development.

Full Decision

ARBITRAL DECISION[1]

  1. Report

A – General

1.1. … – Empreendimentos Imobiliários, Lda., a company with registered address in …, with unique identification number and collective person number … (hereinafter designated "Claimant"), filed on 30.07.2014, a request for constitution of an arbitral tribunal in tax matters, aiming at: (i) the declaration of illegality of a Stamp Tax assessment act concerning the year 2013, in the amount of € 41,796.50 (forty-one thousand seven hundred ninety-six euros and fifty cents), relating to construction land of which it is the owner, registered in the property registry of the Union of Parishes of ... and ..., municipality of ..., under article ... (hereinafter designated "Property") and (iii) the recognition of the right to compensatory interest for wrongful payment of tax.

1.2. The said assessment, a copy of which was attached to the request for arbitral ruling, was based on article 1 of the Stamp Tax Code (hereinafter the "STC"), on item 28.1 of the respective General Table (the "GTT"), amended by article 4 of Law No. 55-A/2012, of 29 October, and was duly notified to the Claimant.

1.3. Pursuant to the provisions of paragraph a) of article 2 and paragraph b) of article 1 of Decree-Law No. 10/2011, of 20 January, in the wording given to it by article 228 of Law No. 66-B/2012, of 31 December, the Ethics Council of the Administrative Arbitration Centre designated Nuno Pombo as arbitrator, and the Parties, after being duly notified, did not raise any objection to this designation.

1.4. By order of 08.08.2014, the Tax and Customs Authority (hereinafter designated "Respondent") appointed Ms. Dr. … and Mr. Dr. … to intervene in this arbitral proceeding, on behalf and in representation of the Respondent.

1.5. In accordance with the provisions of paragraph c) of article 1 of Decree-Law No. 10/2011, of 20 January, in the wording given to it by article 228 of Law No. 66-B/2012, of 31 December, the arbitral tribunal was constituted on 01.10.2014.

1.6. On 02.10.2014, the highest official of the Respondent's service was notified to attach to the proceedings the administrative file that may exist, and, if so desired, submit a reply and request the production of additional evidence within 30 days.

1.7. On 03.11.2014, the Respondent submitted its reply.

B – Claimant's Position

1.8. The Claimant bases its request on the erroneous qualification of the tax event, arguing, in summary, that no construction land can be subsumed under the concept of "property with residential use", since, naturally, construction land is destined for construction itself, and the land cannot be recognized as having any residential use.

1.9. Consequently, the Property is not included in the objective scope of application of item 28.1 of the GTT.

1.10. The Claimant further contends that, if item 28.1 of the GTT were deemed applicable to the present case, it must be concluded that it is unconstitutional, particularly for violation of the principles of taxable capacity, since it considers as an expression of wealth the ownership of raw materials available to the economic agent for its production process and, moreover, of equality, since "a company that acquires for its assets, as goods or raw materials, other types of goods, is not subject to this taxation".

1.11. Finally, the Claimant contends it is entitled to receive compensatory interest, given that it made the payment that was required by the Respondent, and it is clear that the tax is not due.

C – Respondent's Position

1.12. As a preliminary matter, the Respondent clarifies that it cannot be ordered to refund amounts (and to pay compensatory interest) that did not enter the State's coffers, which, at the date the reply was submitted, was the case with the third installment of the Stamp Tax on the Property concerning 2013.

1.13. The Respondent contends that the Property has the "legal nature of property with residential use", and consequently defends the maintenance of the assessment act that is the subject of the request for arbitral ruling.

1.14. The Respondent's understanding results from the circumstance that there is no definition, in the context of Stamp Tax, of the concepts of "urban property", "construction land" and "residential use", which makes it necessary to resort to the Municipal Property Tax Code (the "MPTC"), in accordance with the provisions of article 67(2) of the STC, in the wording given to it by Law No. 55-A/2012, of 29 October, resulting in the necessary conclusion that the notion of use of an urban property "is based on the section relating to the evaluation of real property" and if for purposes of determining the taxable property value of construction land the application of the use coefficient is clear in the evaluation process, then "its consideration for purposes of applying item 28 of the GTT cannot be ignored".

1.15. The Respondent likewise rejects the alleged unconstitutionality of item 28.1, on the grounds that this provision does not establish any arbitrary or unreasonable discrimination.

D – Conclusion of the Report

1.16. By order of 23.12.2014, the arbitral tribunal decided to waive the hearing provided for in article 18 of the Legal Framework for Tax Arbitration (LFTA), in the absence of objection from the Parties, considering there to be no procedural utility in holding said hearing, since the parties had already provided the necessary and sufficient factual elements for the issuance of the decision.

1.17. The parties have legal personality and capacity and have standing in accordance with article 4 and article 2 of the Legal Framework for Tax Arbitration (LFTA), and article 1 of Ordinance No. 112-A/2011, of 22 March.

1.18. The joinder of claims made in this request for arbitral ruling, in deference to the principle of procedural economy, is justified because article 3 of the LFTA expressly admits the possibility of "joinder of claims even if relating to different acts", which accommodates, without hermeneutical abuse, the consideration of a request that flows, in necessary terms, from the judgment that the arbitral tribunal reaches regarding the validity of the assessment under challenge.

1.19. The proceeding does not suffer from any nullity, and the Parties have not raised any exceptions that would prevent consideration of the merits of the case, so the conditions are met for the issuance of the arbitral decision.

  1. Factual Matters

2.1. Proven Facts

2.1.1. The Claimant is the sole owner of the Property (doc. no. 2 attached with the request for arbitral ruling, the contents of which are given as reproduced).

2.1.2. The Property is described as construction land (doc. no. 2 attached with the request for arbitral ruling).

2.1.3. The Property was assigned the following taxable property value: €4,179,650.00 (four million one hundred seventy-nine thousand six hundred fifty euros) (docs. nos. 1 and 2 attached with the request for arbitral ruling).

2.1.4. For purposes of determining its respective taxable property value, the Property was assigned residential use (doc. no. 2 attached with the request for arbitral ruling).

2.1.5. The Claimant was notified of the tax assessment act for Stamp Tax No. 2014 …, in the amount of € 41,796.50, concerning the Property (doc. no. 1 attached with the request for arbitral ruling, the contents of which are given as reproduced).

2.1.6. The Claimant made voluntary payment of the amounts relating to the first and second installments of Stamp Tax concerning the Property (doc. no. 3 attached with the request for arbitral ruling, the contents of which are given as reproduced).

2.2. Unproven Facts

There are no facts relevant to the consideration of the merits of the case that have been determined as unproven.

  1. Legal Matters

3.1.1. Issue to be Decided

It results from what has been stated above that the issues to be decided are, fundamentally:

a) Whether the Property, which is construction land, is a property "with residential use" for purposes of applying article 1 of the STC and item 28.1 of the GTT, amended by article 4 of Law No. 55-A/2012, of 29 October; and

b) To clarify whether, if the request for declaration of illegality is upheld and the contested assessment consequently annulled, the Claimant, within the scope of this arbitral proceeding, may obtain the condemnation of the Respondent to pay compensatory interest regarding the amounts it delivered for satisfaction of the tax illegally demanded.

3.1.2. Item 28.1 of the GTT

Law No. 55-A/2012, of 29 October, among various amendments it made to the STC, added, by its article 4, item 28 to the GTT, which has the following wording:

"28 - Ownership, usufruct or right of superficies of urban properties whose taxable property value contained in the registry, in accordance with the Municipal Property Tax Code (MPTC), is equal to or exceeding € 1,000,000 - on the taxable property value used for purposes of IMI:

28.1 - For property with residential use - 1%;

28.2 - For property, when the taxpayers who are not natural persons are resident in a country, territory or region subject to a regime clearly more favorable, listed in the list approved by ordinance of the Minister of Finance - 7.5%."

As can be seen, item 28.1 refers to "properties with residential use". However, not only is this concept not defined in any provision of the STC, but nor is it used in the MPTC, a statute to which article 67(2) of the STC expressly refers when matters not regulated in the STC regarding item 28 are at issue.

3.1.3. The Meaning and Scope of the Concept of "Property with Residential Use"

The meaning and scope of the concept of "property with residential use" cannot be fixed without bearing in mind the meaning of the word "use" itself. And this must be found in dictionaries, taking from them the benefit of the careful study of lexicographers. Thus, "use" (afectação), according to the Dictionary of Contemporary Portuguese Language of the Academy of Sciences of Lisbon, is the action of assigning something to a certain use, and "assign to a use" (afectar), consequently, is synonymous with assigning to a specific use or function.

a) The Rules of Interpretation of Tax Norms

The first of the issues to be considered does not waive, rather it requires, that the meaning and scope of the concept of "property with residential use" to which item 28.1 of the GTT appeals be understood. In the absence of a legal definition, either in the STC or in any other statute, the interpreter-applicator of this provision has the duty to invoke the norms that govern the necessary hermeneutical exercise.

There is not truly a special regime for the interpretation of tax norms. Article 1 of the General Tax Law orders that "in determining the meaning of tax norms and in qualifying the facts to which they apply", "the general rules and principles of interpretation and application of laws" be observed.

The general principles of interpretation and application of laws are those established in article 9 of the Civil Code:

ARTICLE 9
(Interpretation of Law)

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

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

  3. In fixing the meaning and scope of the law, the interpreter shall presume that the legislator enshrined the most correct solutions and knew how to express his thought in adequate terms.

It should be noted, however, that the interpretation of norms, also of tax norms, does not exhaust itself in a lexical exercise. It does not involve only, and not even mainly, the dissection of words. It is not therefore a question of knowing exactly what "property with residential use" means, but rather of understanding the meaning and scope of this concept within the scope of item 28.1 of the GTT. The same is to say, and this should be emphasized, that there will only be procedural utility to the hermeneutical effort, within the scope of this specific request for arbitral ruling, if it is directed at discovering whether the legislator, with the wording chosen for item 28.1 of the GTT, intended to include therein urban properties classified as construction land.

b) "Residential Use" - Residential Properties and Properties with Residential Use

The Respondent contends that the use of the property is a coefficient that contributes to its evaluation, which we believe to be indisputable. However, what is now at issue is whether item 28 of the GTT encompasses both built properties and construction land.

Article 6(1) of the STC, with taxonomic concern, distinguishes "residential properties" from "construction land". The former shall be, in accordance with article 6(2) of the same provision, buildings or constructions licensed for that purpose or, in the absence of such license, those that have that purpose as their normal destination. Construction land, on the other hand, as clarified in article 6(3) of the provision to which we have been referring, are those for which a license or authorization has been granted, an initial communication admitted, or favorable preliminary information issued for subdivision or construction, and also those so declared in the acquisition title, with some exceptions.

It is clear, therefore, that construction land is not, according to this classification, a residential property. The question now is whether "property with residential use", a concept used by item 28.1 of the GTT, corresponds, notwithstanding the literal diversity, to "residential property", a notion employed in the classification just visited.

Use, as we have learned from lexicographers, convokes the purpose given to a certain asset. "Residential", on the other hand, is relative to housing, which is, in turn, according to the Dictionary we have been using, a place or house in which one lives or resides. Now, residential use cannot suggest any other meaning than the action of giving to a certain asset - in this case the Property, which is, recall, construction land - the purpose of a house or place where one resides.

It is known that the MPTC makes use of the expression "use" in various provisions. It does so, for example:

  • In article 3, when it refers, regarding rural properties, to use generating agricultural income;
  • In article 9, when it imposes on taxpayers the duty to communicate to the tax authorities that construction land has come to appear in the inventory of a company whose purpose is the construction of buildings for sale or that a property has come to appear in the inventory of a company whose purpose is its sale;
  • In article 27, when it relates certain buildings and constructions to the generation of agricultural income.

In all the situations presented, as can be seen, use is not referred to in potential terms, of vocation or expectation. It is quite the opposite. It suggests an actual or direct purpose, to use an expression to which the legislator appeals in article 27.

However, the MPTC also makes abundant use of the expression "use" when it states the rules that should apply to the determination of the taxable property value of urban properties (articles 38 et seq. of the MPTC). It is important, then, to see whether we can extract from the rules of determination of property value any useful element that allows us to understand the meaning and scope of the concept of "property with residential use".

c) The Relevance of the Rules for Determining Taxable Property Value

The Respondent contends that the "notion of use of the urban property is based on the section relating to the evaluation of real property" and, moreover, that "for purposes of determining the taxable property value of construction land the application of the use coefficient is clear in the evaluation process, so its consideration for purposes of applying item 28 of the GTT cannot be ignored".

It is true that for the determination of the taxable property value of construction land, attention has been given, not without difficulties, to the "use" of what may be built on it.

However, as the Respondent rightly points out, "the mere constitution of a right of potential construction immediately increases the value of the property in question", as a function, precisely, of what may be built on it. Therefore, as the Respondent very well explains, article 45 of the MPTC "orders the separation of the two parts of the land": on the one hand, we must consider "the part of the land where it will be established [or rather, where it may come to be established] the building to be constructed, and on the other the area of free land. Once the amount of the first part is determined, the value determined is reduced to a percentage between 15% and 45% (...), because construction has not yet been effected". It is easy to see that the application of that percentage allows precisely for the circumstance that there is no construction yet, but it does not authorize the legislator to ignore that the economic, or market, value of construction land is related to its constructive capacity.

To state the above does not mean, however, that the legislator feels the need to impose automatic and necessary taxation, in the context of Municipal Property Tax, on all construction land. It suffices to read what is provided in paragraph d) of the aforementioned article 9 of the MPTC:

ARTICLE 9
(Beginning of Taxation)

  1. The tax is due from:
    (...)
    d) The 4th year following, inclusive, that in which construction land has come to appear in the inventory of a company whose purpose is the construction of buildings for sale;
    (...)

That is, even if the legislator deems it reasonable, as it seems to, to determine the taxable property value of construction land taking into account its constructive capacity and, let us grant for argument's sake, the nature or vocation of what may be built on it, it remains symptomatic that it has opted, at the same time, to suspend that taxation in cases in which such construction land appears in the inventory of a company whose purpose is the construction of buildings for sale. In cases in which, one could also say, such urban properties are integrated into a productive process that tends to continue and to produce, downstream, fruits that are also themselves taxable.

If the primary meaning of "use", as we have stated, suggests an actual, direct purpose given to a certain asset, we do not see how this understanding can be refuted by the finding that the legislator, within the scope of the evaluation of construction land, authorizes (assuming it does authorize) the use of the use coefficient, having in view what may come to be built on it. In truth, it does not seem reasonable to admit in this scenario the recourse to norms of determination of taxable matter to broaden the forecast of norms of taxation.

d) Position Adopted

In view of the above, the arbitral tribunal judges that the understanding is necessary, in the interpretation of the provision of item 28.1 of the GTT, according to which residential use of an urban property suggests that it be given that actual purpose, or that it can be directly given that purpose. Given what appears to us, construction land is not included in that item, in terms of objective scope. It therefore seems to us that construction land, by its very nature, cannot be associated with a residential use such as that suggested by item 28.1 of the GTT.

Let it not be said that this judgment collides with the possibility of seeing applied to construction land the use coefficient referred to in Section II of Chapter VI of the STC. In truth, one thing is the rules that the legislator imposes to determine the taxable property value of construction land, it not being strange that attention be given to its constructive capacity and the nature and vocation of what may be built on it, another, quite different, is to claim that these rules be invoked to delimit the field of the normative forecast of the rules of taxation.

Indeed, the interpretation adopted here is in harmony with what appears to have been the intention of the Government, author of the proposal that resulted in this poorly drafted legislative intervention.

When presenting and discussing, in Parliament, legislative proposal No. 96/XII (2ª), the Secretary of State for Tax Affairs expressly stated[2]:

"The Government proposes the creation of a special tax on high-value urban residential properties. This is the first time in Portugal that a special taxation on high-value properties intended for housing has been created. This tax will be 0.5% to 0.8% in 2012 and 1% in 2013, and will apply to houses with a value equal to or exceeding 1 million euros."

Now, the Secretary of State for Tax Affairs presents this legislative proposal referring to the expressions "urban residential properties", which are those contained in article 6(1)(a) of the STC and "houses", and it is manifest that, in both cases, construction land, referred to in article 6(1)(c) of the cited provision, is not included in these concepts.

Thus, notwithstanding the infelicity of the legislative technique, it results with meridian clarity that item 28.1 of the GTT cannot be interpreted to mean that construction land is encompassed therein, for the reasons set out above. Rather it appears that the meaning and scope of the concept of "properties with residential use" is the equivalent of "residential properties" mentioned in article 6(1)(a) of the STC.

3.1.4. Compensatory Interest

Paragraph b) of article 1 of article 24 of the LFTA provides that "the arbitral decision on the merits of the claim for which no appeal or challenge is available binds the tax administration from the end of the period provided for appeal or challenge, and the latter must, in the exact terms of the success of the arbitral decision in favor of the taxpayer and until the end of the period provided for the voluntary execution of sentences of tax court decisions, restore the situation that would have existed if the tax act that is the subject of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose".

It is not ignored that the legislative authorization granted to the Government by article 124 of Law No. 3-B/2010, of 28 April, on the basis of which the LFTA was approved, determines that the tax arbitral process constitutes an alternative procedural means to the judicial challenge procedure and to the action for recognition of a right or legitimate interest in tax matters. Although paragraphs a) and b) of article 2(1) of the LFTA base the competence of arbitral tribunals on "declarations of illegality", it seems reasonable to understand that it comprehends the powers that in the judicial challenge procedure are attributed to tax courts, and it is certain that in judicial challenge procedures, in addition to the annulment of tax acts, claims for compensation can be considered, particularly regarding compensatory interest.

Indeed, the principle of cognizability of claims for compensation, in administrative recourse or in judicial proceedings, is justified whenever the damage that is sought to be redressed results from a fact attributable to the Tax and Customs Authority. Manifestations of this principle are found in article 43(1) of the General Tax Law and in article 61 of the Code of Tax Procedure and Process.

Thus, having the Claimant paid tax installments that were demanded of it by the contested assessment, it has the right to compensatory interest calculated from the date of payment(s) until their complete reimbursement.

3.1.5. Unconstitutionality

The Claimant raised the question of the unconstitutionality of item 28.1 of the GTT, for violation of the principles of equality and taxable capacity.

Since the arbitral tribunal does not find this item applicable to the present case, consideration of this question is moot and procedurally useless.

  1. Decision

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

a) To uphold the request for arbitral ruling with the consequent annulment of the contested assessment, with all legal consequences;

b) To uphold the request for condemnation of the Respondent to pay compensatory interest, at the legal rate, being calculated from the date of payment(s) of the tax installments now declared to be undue until their complete reimbursement.

  1. Value of the Proceeding

In accordance with the provisions of article 315(2) of the Code of Civil Procedure, article 97-A(1)(a) of the Code of Tax Procedure and Process, and article 3(2) of the Costs Regulation in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 41,796.50 (forty-one thousand seven hundred ninety-six euros and fifty cents).

  1. Costs

For the purposes of the provisions of article 12(2) and article 22(4) of the LFTA and article 4(4) of the Costs Regulation in Tax Arbitration Proceedings, the amount of costs is fixed at € 2,142.00, in accordance with Table I attached to said Regulation, to be borne entirely by the Respondent.

Lisbon, 10 March 2015

The Arbitrator

(Nuno Pombo)

[1] The wording of this arbitral decision does not follow the new Orthographic Agreement
[2] See DAR I Series No. 9/XII -2, of 11 October, p. 32.

Frequently Asked Questions

Automatically Created

Is building land (terreno para construção) subject to Stamp Tax under Verba 28.1 of the TGIS?
Building land (terreno para construção) may be subject to Stamp Tax under Verba 28.1 of the TGIS depending on its classification for property valuation purposes. The Tax Authority's position is that if construction land is assigned a residential use coefficient when determining its taxable property value under the Municipal Property Tax Code (CIRS), it qualifies as 'property with residential use' subject to the 1% annual Stamp Tax. However, taxpayers argue that undeveloped land lacks actual residential use and represents raw material for development, not finished residential property, thus falling outside the scope of Item 28.1.
Can building land be classified as residential property for Stamp Tax purposes in Portugal?
The Tax Authority takes the position that building land can be classified as residential property for Stamp Tax purposes based on Article 67(2) of the Stamp Tax Code, which references the Municipal Property Tax Code for property definitions. If the land receives a residential use coefficient (coeficiente de afetação) during the property valuation process under CIRS rules, the Tax Authority considers this sufficient to classify it as property with residential use under Item 28.1. Taxpayers dispute this interpretation, arguing that construction land by definition lacks actual residential use until developed.
What are the legal grounds to challenge a Stamp Tax assessment on building land before CAAD?
To challenge a Stamp Tax assessment on building land before CAAD (Centro de Arbitragem Administrativa), taxpayers must file a request for constitution of an arbitral tribunal under the Legal Framework for Tax Arbitration (RJAT). Legal grounds include: (1) erroneous qualification of the taxable event, arguing construction land does not constitute 'property with residential use' under Item 28.1 of the TGIS; (2) incorrect application of Article 67(2) of the Stamp Tax Code and improper reference to MPTC valuation rules; (3) unconstitutionality of Item 28.1 for violating principles of taxable capacity and equality; and (4) claims for compensatory interest on amounts wrongfully paid.
How does Verba 28.1 of the Tabela Geral do Imposto do Selo apply to undeveloped land plots?
Verba 28.1 of the Tabela Geral do Imposto do Selo establishes a 1% annual Stamp Tax on 'property with residential use' (prédios para habitação). Its application to undeveloped land plots is contested. The Tax Authority interprets this provision broadly, arguing that if undeveloped land is assigned a residential use coefficient during the CIRS property valuation process, it qualifies as residential property subject to taxation. Taxpayers argue for a narrower interpretation, contending that undeveloped plots lack actual residential use and should only be taxed after construction is completed and residential use commences. The dispute centers on whether the tax should apply based on intended future use or current actual use.
Are taxpayers entitled to compensatory interest when contesting unlawful Stamp Tax assessments on building land?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when contesting unlawful Stamp Tax assessments on building land, pursuant to Article 43 of the General Tax Law (LGT). If the arbitral tribunal declares the assessment illegal and the taxpayer has already made payment, compensatory interest accrues from the date of payment until the date of refund. However, the Tax Authority noted in this case that it cannot be ordered to refund amounts (or pay compensatory interest) that have not actually entered State coffers, such as unpaid installments. Compensatory interest compensates taxpayers for the wrongful deprivation of funds due to illegal tax assessments.