Stamp Tax on Vertical Property: CAAD Rules Each Unit Valued Separately Under Verba 28 TGIS

ARBITRAL DECISION

I. REPORT

A, taxpayer no. …, head of the indivisible estate opened by the death of B, with address at Avenue … Lisbon (hereinafter referred to only as "Claimant"), filed a request for constitution of a sole arbitral tribunal, under the provisions of paragraph a) of no. 1 of article 2 and article 10, both of Decree-Law no. 10/2011, of January 20 (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as "RJAT"), with a view to declaring null and void the tax assessment acts for Stamp Tax ("IS") issued by the Tax and Customs Authority ("AT" or "Respondent Entity"), in the total amount of 6,837.75 euros, on the basis of item 28.1 of the General Table of Stamp Tax ("TGIS"), dated March 17, 2014 and relating to the year 2013, contained in the payment collection documents attached to the request for arbitral ruling under documents nos. 1 to 27 which affected the urban property that forms part of the indivisible estates.

To this effect, it alleges, in summary, that:

1. The Stamp Tax assessment acts are illegal, as they are vitiated by error in the appreciation of the legal presuppositions because:

i. The assessment of Stamp Tax must comply with the rules provided for in the Real Estate Tax Code ("CIMI"), by referral of no. 2 of art. 67 of the Stamp Tax Code ("CIS") and in the absence of a specific rule for the taxation of fractions of a property within the scope of CIS, the legal criterion for defining the incidence of IS shall correspond to that which is established in CIMI;

ii. In accordance with the provisions of no. 3 of art. 12 of CIMI, each floor or part of property capable of independent use is evaluated individually and to each is assigned its own tax property value. The assessment of Real Estate Tax falls on that tax property value of each of those fractions, functioning individually, independently of whether the property of which they form part is subject to the regime of horizontal property ownership;

iii. The tax property value ("VPT") that determines the subjection to IS is the VPT of each floor, part or fraction and not the sum of those property values;

iv. The IS assessments fell specifically on each of the fractions of the property, object of the ruling, independently registered in the property roll, reflecting the VPT of each of them, which is below €1,000,000.00;

1. The IS assessments are also unconstitutional, by violation of the principle of equality, proportionality and the confidence of a State of Law.

The arbitral tribunal was constituted on October 1, 2014, in accordance with the provisions of paragraph c) of no. 1 of article 11 of RJAT.

Notified for this purpose, the Respondent Entity filed its answer, in which it invokes, in summary:

The situation of the urban property falls under item 28.1 of TGIS, as the property is subject to the regime of full ownership and what the Claimant seeks is that there be analogy between the regime of full ownership and the regime of horizontal property ownership;

The VPT relevant for the purposes of item 28 of TGIS is the total property value of the urban property and not the property value of each of the parts that compose it, even if capable of independent use, this interpretation not excluding the fact that the assessment of Real Estate Tax is calculated based on the tax property value of each of those parts;

The unit of an urban property in vertical ownership composed of various floors or divisions is not affected by the fact that they are capable of independent economic and independent use, continuing to be a single property, and therefore its distinct parts cannot legally be equated to the autonomous fractions of a property constituted in horizontal property ownership;

Any other interpretation would violate the principle of legality provided for in art. 103 of the Constitution;

The taxation in question did not violate the principle of equality, as vertical ownership and horizontal property ownership are distinct legal institutions, the latter implying a mere legal modification, not giving rise to a new evaluation, and the legislator may subject properties in regimes of horizontal and vertical ownership to a distinct and discriminatory tax treatment, "without this discrimination necessarily being considered arbitrary";

It concludes by supporting the legality and maintenance of the IS assessment acts.

As this is a matter strictly of law, the Arbitral Tribunal decided to waive the holding of the meeting provided for in article 18 of RJAT, likewise dispensing with the presentation of arguments, by proposal of the Respondent Entity and with the consent of the Claimant, as it did not object to this.

By order of March 19, 2015, the value of the present arbitral process was set at 10,336.42 euros.

Pursuant to no. 2 of art. 22 of RJAT, it was reasonedly decided to extend by two months the period for rendering the arbitral decision.

The Arbitral Tribunal was regularly constituted and is materially competent, in accordance with the provisions of art. 2, no. 1, paragraph a) of RJAT.

The parties are endowed with legal personality and capacity, are legitimate and the respondent entity is regularly represented, in accordance with the provisions of articles 4 and 10, no. 2 of RJAT and art. 1 of Ordinance no. 112-A/2011, of March 22.

The proceedings are not subject to any nullities and there are no exceptions that it is necessary to consider or that prevent consideration of the merits of the case.

II. REASONING

2.1. On the Facts

Based on the elements contained in the proceedings and with interest for the decision, the following facts are found to be proven:

1. The indivisible estate opened by the death of C includes an urban property subject to the regime of full ownership, registered in the property roll under article 4 of the parish of … (former article … of the parish of …), of the municipality of Lisbon (cf. Documents nos. 1 to 27 attached to the request for arbitral ruling and documents nos. 1 to 4 attached by subsequent request to that arbitral request, the content of which is deemed reproduced);

2. By the death of B, the above urban property is likewise included in the indivisible estate opened by that person (cf. documents nos. 1 to 4 attached by subsequent request to the arbitral request, the content of which is deemed fully reproduced);

3. The identified property in full ownership is composed of right ground floor, left ground floor and six floors, with right and left, totaling fourteen floors or divisions with independent use, all intended for housing (cf. Documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced, likewise proven by agreement);

4. The VPT assigned to each of the fourteen floors or divisions with independent use intended for housing of the above identified urban property is below €1,000,000.00, ranging between €31,952.48 and €88,785.37 (cf. Documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

5. In the payment collection documents for Stamp Tax for the year 2013 is listed as Property Value of the Property – total subject to Tax: 1,033,642.92 (cf. Documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

6. The Claimant was notified of the Stamp Tax assessment acts for the year 2013, with the assessment date of March 17, 2014, contained in the payment collection documents for payment of the first installment of the tax assessed for each floor or division with independent use allocated to housing of the mentioned urban property, at the rate of 1%, with the payment deadline in April 2014, as follows:

(cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

1. On April 29, 2014, the Claimant proceeded to pay the first installment of the assessed Stamp Tax, in the total amount of €3,498.84 (cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

2. The Claimant was notified of the Stamp Tax assessment acts for the year 2013, with the assessment date of March 17, 2014, contained in the payment collection documents for payment of the second installment of the tax assessed for each floor or division with independent use allocated to housing, at the rate of 1%, with the payment deadline in July 2014, as follows:

(cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

1. On July 25, 2014, the Claimant proceeded to pay the second installment of the assessed Stamp Tax, in the total amount of €3,338.91 (cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

2. The Stamp Tax assessments contained in the above identified payment collection documents were made by reference to item 28.1 of TGIS (cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced);

3. From the assessment acts contained in the identified payment collection documents resulted a total tax (assessment) of 10,336.42 euros (cf. documents nos. 1 to 27 attached to the request for arbitral ruling, the content of which is deemed reproduced).

Given the positions adopted by the parties and given that the issue to be resolved by this arbitral tribunal is strictly legal (identified below), the proven facts were based on the official documents attached to the proceedings and indicated in each of the points of the statement of facts, which were not contested.

There are no other facts not proven with interest for the decision of the case.

2.2 On the Law

The issue to be decided in the present arbitral proceedings is whether the tax assessment acts for Stamp Tax are illegal, due to erroneous interpretation and application of item no. 28.1 of TGIS, amended by Law no. 55-A/2012, of October 29, by considering that the tax property value ("VPT") of an urban property constituted under the regime of full ownership, with floors or divisions of independent use allocated to housing which is relevant for purposes of incidence of that item is constituted by the value resulting from the sum of the VPT attributed to each of those floors or divisions. Whether the Stamp Tax assessments also suffer from the vice of unconstitutionality, by violation of the principle of equality, proportionality and confidence.

On the issue object of the present proceedings, this Arbitral Tribunal has already ruled, specifically in the decisions handed down in proceedings nos. 50/2013-T; 132/2013-T and 194/2014-T, the arbitral jurisprudence of which we follow.

As results from the established facts, the AT services assessed Stamp Tax to the indivisible estate at the rate of 1%, by considering that the VPT of the urban property constituted under the regime of full ownership, which forms part of that estate is above €1,000,000.00, taking into account the sum of the VPT of each of the fourteen floors or divisions with independent use allocated to housing that compose that property.

The Claimant argues that AT wrongly assessed Stamp Tax as the presuppositions on which the application of item no. 28.1 of TGIS depends are not met, since AT cannot consider the total VPT of the fourteen floors or divisions with independent use of the urban property in question, when the legislator itself determined different rules under the Real Estate Tax Code and it is this Code that is applicable to matters not regulated concerning the item in question.

The Respondent, in turn, maintains, in summary, that the VPT relevant for purposes of incidence of item 28.1 of TGIS is the total VPT of the urban property and not the VPT of each of the parts that compose the property in vertical ownership, even if capable of independent use.

Let us examine this.

Article 4 of Law no. 55-A/2012, of October 29 added to TGIS item no. 28, with the following wording (in its original version):

"28 — Ownership, usufruct or right of superficies of urban properties whose tax property value contained in the property roll, under the terms of the Real Estate Tax Code (CIMI), is equal to or greater than €1,000,000 — on the tax property value used for the purpose of Real Estate Tax:

28.1 — For property with housing allocation — 1%;

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

(italics ours)

With no. 2 of art. 6 of the above cited Law providing that, as of the year 2013, "the assessment of stamp tax provided for in item no. 28 of the respective General Table shall fall on the same tax property value used for the purpose of assessing real estate tax to be made in that year."

At the date of the facts, the presuppositions of incidence of item 28.1 of TGIS are therefore urban properties, with housing allocation, whose VPT contained in the property roll and used for purposes of assessing Real Estate Tax is equal to or greater than €1,000,000.00.

Law no. 55-A/2012, of October 29, by reference to item 28 of TGIS further established various amendments to CIS, namely regarding its assessment and payment, expressly referring to the rules provided for in CIMI (cf. art. 23, no. 7, art. 44, no. 5, art. 46, no. 5, art. 49, no. 3 of CIS) with the necessary adaptations, providing in no. 2 of art. 67 of CIS that, "For matters not regulated in this Code concerning item no. 28 of the General Table, the provisions of CIMI shall apply subsidiarily."

From the aforementioned rules, it is found that the concept of "property with housing allocation" provided for in the above item no. 28, no. 1 is not defined in CIS, nor in the cited Law, nor in CIMI, whose rules are of subsidiary application, as provided for in no. 2 of art. 67 of CIS.

On this matter, this Arbitral Tribunal has already ruled in the decision handed down in proceedings no. 53/2013-T, which we follow, upon considering that a "property with housing allocation" shall "be a property that already has actual allocation to that purpose".

It is unequivocal that a property in full ownership or under the regime of vertical ownership constitutes an urban property, under the terms of the provisions of no. 1 of article 2 and 4 of CIMI, applicable subsidiarily by force of the provisions of art. 67 of CIS, and it is also certain that, both for purposes of incidence of item 28.1 of TGIS, and for purposes of classification of urban properties, under the terms of the provisions of art. 6 of CIMI (also of subsidiary application), the legislator makes no distinction between properties constituted in vertical ownership and under the regime of horizontal property ownership (as mentioned in the arbitral decisions handed down in proceedings nos. 50/2013-T and 132/2013-T), the presupposition for taxation of item 28.1 being urban properties that are actually already allocated to housing, as what is relevant is the effective and current use of each of the properties.

What shall then be the tax property value relevant in the case of urban properties under the regime of full ownership composed of floors or divisions capable of independent use with "housing allocation", for purposes of incidence of item 28.1 of TGIS?

In accordance with the provisions of item 28.1 itself of TGIS (in its original wording) and of no. 2 of art. 6 of Law no. 55-A/2012, of October 29, Stamp Tax shall be charged on the VPT used for purposes of Real Estate Tax.

Let us then examine what the VPT used for purposes of Real Estate Tax is.

The tax property value of each property is determined under the terms of art. 38 and following of CIMI, in accordance with the provision of no. 1 of art. 7 of CIMI. In the case of a property under the regime of full ownership or vertical ownership, each floor or division with independent use that forms part of it is likewise subject to evaluation, with a tax property value being assigned to each of those floors or divisions, in accordance with the provisions of articles 12 and 38 and following of that normative.

Indeed, no. 1 of art. 12 of CIMI establishes that "property rolls are records which contain, in particular, the characterization of properties, their location and tax property value, the identification of owners (…)", providing in its no. 3 that, "Each floor or part of property capable of independent use is considered separately in the property roll registration, which also separately identifies the respective tax property value", and, in accordance with the provisions of no. 1 of art. 119 of CIMI, it is on that property value separately considered that Real Estate Tax shall be calculated and assessed in relation to each floor or part with independent use that form part of an urban property under the regime of vertical or full ownership, given the autonomy of each of those units.

As written by Silvério Mateus and Freitas Corvelo, in "Real Estate Property and Stamp Tax, Commented and Annotated", 1st Edition, Engifisco, pages 159 and 160, "Another aspect that should be highlighted in the property roll concerns the need to make the autonomy relevant that, within the same property, can be attributed to each of its parts, functionally and economically independent. In these cases, the property roll registration not only must make reference to each of these parts but must also make express reference to the tax property value corresponding to each of them.

An example that can illustrate this situation is the case of an urban property, not constituted under the regime of horizontal property ownership and that is composed of several floors. (…) However, as each of these units may be subject to lease or any other use by the respective holder, the property roll must highlight those units and must assign tax property value to each of them." (italics ours)

As evidenced in the Arbitral Award handed down in proceedings no. 194/2014-T, which we follow, "the Real Estate Tax Code provides, both with regard to property roll registration and the discrimination of the respective tax property value, and with regard to tax assessment, the autonomization of parts of urban property capable of independent use and the segregation/individualization of the VPT relating to each floor or part of property capable of independent use.

Thus each property, under the terms conceptually defined by article 2 of CIMI, corresponds to a single article in the property roll (no. 2 of article 82 of CIMI) but, according to no. 3 of art. 12 of the same Code, referring to the concept of property roll (…), "each floor or part of property capable of independent use is considered separately in the property roll registration, which also separately identifies the respective tax property value (…).

That is, the rule is autonomization, the characterization as "property" of each part of a building, provided it is functionally and economically independent, capable of independent use, in accordance with the concept of property defined in no. 1 of article 2 of CIMI: property is any fraction (of land, including waters, plantations, buildings and constructions of any kind incorporated into or situated on it, with a character of permanence) provided it forms part of the patrimony of a natural or legal person and, in normal circumstances, has economic value, as well as waters, plantations, buildings or constructions, in the above circumstances, endowed with economic autonomy."

Considering that in light of CIMI, the floors or divisions with independent use that compose an urban property under the regime of full or vertical ownership are taxed autonomously, as Real Estate Tax is assessed individually on the VPT attributed to each of those floors or divisions with independent use, given the relevance of their autonomy, necessarily, the principles and rules must be the same under Stamp Tax (namely, as regards registration in the property roll and assessment of Real Estate Tax), both because item 28.1 of TGIS so requires in fine, and by subsidiary application, by force of the provisions of no. 2 of art. 67 of the Stamp Tax Code.

In conformity, and, under the assumption that the legislator in question "established the most correct solutions and was able to express its thinking in appropriate terms" (in accordance with the provision of no. 3 of art. 9 of the Civil Code ("CCv"), by referral of art. 11 of the General Tax Law), only the floors, parts or divisions with independent use with housing allocation, whose VPT is equal to or greater than €1,000,000.00, are covered by the provision of incidence of item 28.1 of TGIS.

As emphasized in the arbitral decision handed down in proceedings no. 132/2013-T, "The uniform criterion that is imposed is, therefore, the one that determines that the incidence of the rule in question only takes place when any of the parts, floors or divisions with independent use of property in horizontal or full ownership with housing allocation, possesses a VPT exceeding €1,000,000.00" (italics ours) and not when this value results from the sum of the VPT attributed to each floor or division with independent use.

As also mentioned in the arbitral decision handed down in proceedings no. 50/2013-T "The criterion sought by AT, of considering the value of the sum of the VPT attributed to the parts, floors or divisions with independent use, with the argument that the property is not subject to the regime of horizontal property ownership, finds no legal support and is contrary to the criterion applicable under CIMI and, by referral, under IS.

To which is added the fact that the law itself expressly establishes, in the final part of item 28 of TGIS, that IS to be charged on urban properties of value equal to or greater than €1,000,000.00 – "on the tax property value used for the purpose of Real Estate Tax."

Given the foregoing, one cannot agree with AT when it states that the Claimant seeks to apply the regime of horizontal property ownership to the regime of full ownership as the recourse to analogy would imply that there was a gap in the law, which does not even occur in the present case.

Rather, the provision itself disposed in item 28.1 of TGIS in fine determines that Stamp Tax is charged "on the tax property value used for the purpose of Real Estate Tax", whereby, what is relevant for tax incidence purposes is the tax property value individualized for each of the parts, floors or divisions with independent use on which Real Estate Tax is assessed annually, that is, the assessment of Stamp Tax complies with the rules provided for in CIMI, by express referral of the mentioned item 28 and no. 2 of art. 67 of the Stamp Tax Code.

So much so that AT, in order to assess item 28.1 of TGIS in question here, starts from each of those floors or divisions with independent use, applying the rate of 1% to the tax property value attributed to each of those divisions with housing allocation, in accordance with CIMI rules, and then sums that tax property value.

The interpretation to the effect that what is relevant in the provision of incidence of item 28.1 of TGIS is the VPT attributed to each of the autonomous parts, floors or divisions with independent use with housing allocation and not the value resulting from the sum of those tax property values is the one that equally results from its ratio legis, as required by no. 1 of art. 9 of CCv, applicable by force of the provisions of art. 11 of the General Tax Law.

Indeed, in the presentation and discussion of Bill no. 96/XII/2nd (which can be consulted in the Journal of the Assembly of the Republic, I Series no. 9/XII/2012, of October 11, 2012) in the Assembly of the Republic, the Secretary of State for Tax Affairs stated at one point the following:

"It is the first time in Portugal that a special taxation is created on high-value properties intended for housing. This rate will be 0.5% to 0.8% in 2012, and 1% in 2013, and will fall on houses valued at equal to or greater than 1 million euros. With the creation of this additional tax, the tax effort required of these owners will be significantly increased in 2012 and 2013".

(emphasis and italics ours)

In this regard, we follow the arbitral decision handed down in proceedings no. 50/2013-T in stating that "The legislator in introducing this legislative innovation considered as the determining element of contributive capacity urban properties, with housing allocation, of high value (luxury), more precisely, of value equal to or greater than €1,000,000.00, on which a special rate of stamp tax was then charged, intending to introduce a principle of taxation on wealth expressed in the ownership, usufruct or right of superficies of high-value urban properties with housing allocation. Therefore, the criterion was the application of the new rate to urban properties with housing allocation, whose VPT is equal to or greater than €1,000,000.00.

This same conclusion is reached from the analysis of the discussion of Bill no. 96/XII in the Assembly of the Republic, available for consultation in the Journal of the Assembly of the Republic, I series, no. 9/XII/2, of October 11, 2012.

The justification for the measure designated as "special rate on the highest-value urban residential properties" is based on the invocation of the principles of social equity and fiscal justice, calling to contribute in a more intense manner the holders of high-value properties intended for housing, applying the new special rate to "houses valued at equal to or greater than 1 million euros."

Clearly the legislator understood that this value, when attributed to a residence (house, autonomous fraction or floor with independent use) reflects a contributive capacity above average and, as such, capable of determining a special contribution to ensure fair distribution of tax effort." (italics ours)

In accordance with the established facts, the VPT of each of the fourteen floors or divisions with independent use allocated to housing, which form part of the property constituted in full ownership that belongs to the indivisible estates, and which was determined according to CIMI rules, is below €1,000,000.00, thus the presuppositions for taxation of item 28.1 of TGIS are not met.

Therefore, the Stamp Tax assessment acts, object of the present arbitral ruling proceedings, in the total amount of €10,336.42 (ten thousand, three hundred and thirty-six euros and forty-two cents), suffer from the vice of violation of the provisions of item 28.1 of TGIS and of no. 2 of art. 67 of the Stamp Tax Code, due to error as to their legal presuppositions, thus declaring the illegality of those assessment acts, with the consequent annulment of the same (art. 135 of the former Code of Administrative Procedure, by subsidiary application ex vi art. 29, no. 1, paragraphs a) and d) of RJAT) and not the declaration of nullity as sought by the Claimant.

Indeed, the vices alleged by the Claimant – error in the appreciation of legal presuppositions – are grounds for annulability and not nullity in accordance with the provisions of art. 135 of the (former) Code of Administrative Procedure, as in harmony with the provision of no. 1 of art. 133 of the same normative "Acts are null and void which lack any of the essential elements or for which the law expressly provides that form of invalidity".

The consideration of the other issues raised by the Claimant is thus rendered moot, in particular the alleged vice of unconstitutionality, as the illegality of the above assessments has been declared, due to a substantive vice that prevents the renewal of the acts, effectively ensuring the protection of the rights of the Claimant, in harmony with the provision of art. 124 of the Code of Tax Procedure, subsidiarily applicable by force of the provisions of paragraph a) of no. 1 of art. 29 of RJAT.

III. DECISION

In these terms and in the reasoning hereinabove set forth, the present Arbitral Tribunal decides to find merit in the request for declaration of illegality of the Stamp Tax assessment acts, contained in the identified payment collection documents, in the total amount of 10,336.42 euros (ten thousand, three hundred and thirty-six euros and forty-two cents), with the consequent annulment of the same.

The value of the proceedings is set at €10,336.42 (ten thousand, three hundred and thirty-six euros and forty-two cents), in accordance with the provisions of paragraph a) of no. 1 of art. 97-A of the Code of Tax Procedure and no. 2 of art. 3 of the Regulation of Costs in Tax Arbitration Proceedings, as well as art. 306 of the Code of Civil Procedure.

Costs charged to the Respondent Entity, in the amount of 918.00 euros, in accordance with the provisions of no. 4 of art. 22 of RJAT and no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and Table I attached to the same Regulation.

Let notice be given.

Lisbon, June 1, 2015.

The Arbitrator,

Conceição Pinto Rosa