Stamp Tax on Construction Land: CAAD Ruling on Verba 28 TGIS Applicability (601/2015-T)

ARBITRAL DECISION

I. REPORT

1. The company A… Unipessoal, Lda., (hereinafter designated as the "Applicant"), with tax identification number…, with registered office at Rua…, n.º…, …-… Porto, filed on 16 September 2015, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, i.e., the Legal Regime for Arbitration in Tax Matters ("LRATM"), a request for the establishment of an Arbitral Tribunal in order to declare illegal the Stamp Duty ("SD") assessment no. 2015…, pursuant to Item no. 28 of the General Stamp Duty Table ("GSDT"), relating to the 2014 tax year, in the total amount of €12,687.60, against the Tax and Customs Authority ("Respondent" or "TCA").

A) Establishment of the Arbitral Tribunal

1. Pursuant to the provisions of paragraph a) of point 2 of Article 6 and paragraph b) of point 1 of Article 11 of the LRATM, the Ethics Committee of the Centre for Administrative Arbitration ("CAAD") appointed the undersigned as arbitrator of the sole arbitral tribunal, who communicated acceptance of the appointment within the applicable deadline, and notified the parties of this appointment on 19 November 2015.

2. Accordingly, in compliance with the provisions of paragraph c) of point 1 of Article 11 of the LRATM, and following notification by the President of the Ethics Committee of the CAAD, the Sole Arbitral Tribunal was constituted on 4 December 2015.

B) Procedural History

1. In the request for an arbitral decision, the Applicant petitioned for a declaration of illegality of the Stamp Duty assessment mentioned above, concerning an urban property in the nature of land for construction, indicating that it had already received and paid the assessment notices relating to the 1st and 2nd instalments (in the amount of €8,458.40).

2. The TCA presented its response, petitioning for the dismissal of the request for an arbitral decision, on the grounds that there was no breach of law, requesting that the tax act under analysis, as it did not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 15 April 2016, the Sole Arbitral Tribunal, pursuant to the provisions of paragraph c) of Article 16 of the LRATM, decided, without opposition from the parties, that it was not necessary to hold the hearing referred to in Article 18 of the LRATM, as a result of the simplicity of the issues at hand, as well as because it considered that it had at its disposal all the necessary elements to render a clear and impartial decision.

4. It also decided, in accordance with point 2 of Article 18 of the LRATM, that oral arguments were not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set the end of March 2016 as the deadline for rendering the arbitral decision.

5. In the context of the order, it also requested the parties to submit their final arguments. In this regard, it is important to note that both the Applicant and the Respondent chose not to present any submissions.

6. The Tribunal was duly constituted and has jurisdiction to hear the matters indicated (Article 2, point 1, paragraph a) of the LRATM), the parties have legal personality and capacity and have full standing (Articles 4 and 10, point 2 of the LRATM and Article 1 of Ministerial Order no. 112-A/2011, of 22 March). There are no nullities and no exceptions have been raised, therefore nothing prevents judgment on the merits.

7. The present case is therefore in a position for a final decision to be rendered.

II. ISSUE TO BE DECIDED

1. The central issue to be examined and decided regarding the merits of the case, as emerges from the parties' pleadings, is whether, in the present situation, the property in question is subject to Stamp Duty, pursuant to Item no. 28 of the General Stamp Duty Table.

III. DETERMINATION OF FACT AND REASONING

1. Having examined the documentary evidence produced, this Tribunal finds the following facts to be established, as relevant to the decision of the case:

I. The Applicant is the owner of an urban property, located in the parish of…, municipality of Porto, registered in the urban property register under the matrix article…, with a TAV of €1,268,760.

II. The Applicant, with respect to the 2014 tax year and as a result of the provisions of Item no. 28 of the General Stamp Duty Table, received the Stamp Duty assessment referred to above, in the total amount of €12,687.60, of which it had already paid the 1st and 2nd instalments, in the amount of €8,458.40.

III. The said urban property has, according to the attached documents, an express designation for residential use, notwithstanding the fact that no construction has yet been carried out.

1. This Tribunal's conviction regarding the facts found to be established resulted from the documents annexed to the case file and contained in the parties' request and submissions, which were not challenged, as specified in the factual points set out above.

2. For purposes of deciding the case, it is not found to be established that the property in question has, or will have, a designation other than residential.

IV. ON THE LAW

A) Legal Framework

1. Given that the legal issue to be decided in the present case requires interpretation of the relevant legal texts, it is first necessary to set out the provisions that comprise the relevant legal framework, as of the date when the facts occurred.

2. The subjection to Stamp Duty of properties designated for residential use resulted from the addition of Item no. 28 to the General Stamp Duty Table, effected by Article 4 of Law 55-A/2012, of 29 October, which defined the following taxable events:

"28 – Ownership, usufruct or right of superficies of urban properties whose tax-assessed patrimonial value registered in the property register, in accordance with the Municipal Property Tax Code (MPTC), is equal to or exceeds €1,000,000.00 – on the tax-assessed patrimonial value used for purposes of Municipal Property Tax:

28.1 – For property designated for 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 clearly more favourable tax regime, listed in a regulation approved by the Minister of Finance – 7.5%"

1. The aforementioned law also added to the Stamp Duty Code, point 7 of Article 23, regarding the assessment of Stamp Duty: "where the tax is due for situations provided for in Item no. 28 of the General Table, the tax is assessed annually, in relation to each urban property, by the central services of the Tax and Customs Authority, applying, with the necessary adaptations, the rules contained in the MPTC", and Article 67, point 2, which provides that "for matters not regulated in the present Code concerning Item 28 of the General Table, the MPTC applies, on a subsidiary basis".

2. Additionally, and taking into account the legislative amendment introduced by Law no. 83-C/2013, of 31 December, it is also important to transcribe the wording of the aforementioned Item as of 1 January 2014: "for residential property or for land intended for construction whose construction, authorized or planned, is for residential use, in accordance with the provisions of the Municipal Property Tax Code".

3. In this context, and taking into account the above indication, let us now focus on the Municipal Property Tax Code ("MPTC").

4. In the Municipal Property Tax Code, the types of properties are enumerated (in Articles 2 to 6) as follows:

"Article 2 - Definition of Property

1 – For purposes of the present Code, property is any portion of territory, comprising water, plantations, buildings and constructions of any nature incorporated into or situated on it, with a character of permanence, provided it forms part of the assets of a natural or legal person and, in normal circumstances, has economic value, as well as water, plantations, buildings or constructions, in the circumstances mentioned above, having economic autonomy in relation to the land where they are located, although situated on a portion of territory that constitutes an integral part of assets of a different nature or does not have a patrimonial character.

2 – Buildings or constructions, although movable in nature, are considered to have a character of permanence when dedicated to non-transitory purposes.

3 – The character of permanence is presumed when buildings or constructions are situated in the same location for a period exceeding one year.

4 – For purposes of this tax, each autonomous unit, under a condominium regime, is considered to constitute a property.

Article 3 - Rural Properties

1 – Rural properties are land situated outside an urban agglomeration that is not to be classified as land for construction, pursuant to point 3 of Article 6, provided that:

a) They are dedicated to, or, in the absence of a specific dedication, their normal intended use is for utilization generating agricultural income, such as those considered for purposes of income tax on natural persons;

b) Not having the dedication indicated in the preceding subparagraph, they are not built upon or have only buildings or constructions of an accessory character, without economic autonomy and of reduced value.

2 – Also rural properties are land situated within an urban agglomeration, provided that, pursuant to a legally approved provision, they cannot be used to generate any income or can only be used to generate agricultural income and are, in fact, having this dedication.

3 – Also rural properties are:

a) Buildings and constructions directly dedicated to the production of agricultural income, when situated on the land referred to in the preceding points;

b) Water and plantations in the situations referred to in point 1 of Article 2.

4 – For purposes of the present Code, urban agglomerations are considered, in addition to those situated within legally fixed boundaries, clusters with a minimum of 10 dwellings served by publicly used roads, with their boundary delimited by points distanced 50 m from the axis of the roads, in the transverse direction, and 20 m from the last building, in the direction of the roads.

Article 4 - Urban Properties

Urban properties are all those that should not be classified as rural, without prejudice to the provisions of the following article.

Article 5 - Mixed Properties

1 – Whenever a property has rural and urban parts, it is classified, in its entirety, according to the principal part.

2 – If neither part can be classified as principal, the property is deemed to be mixed.

Article 6 - Types of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Land for construction;

d) Other.

2 – Residential, commercial, industrial or for services are buildings or constructions licensed for such purposes or, in the absence of a license, that have as their normal intended use each of these purposes.

3 – Land for construction is considered to be land situated within or outside an urban agglomeration, for which a license or authorization has been granted, or prior notification has been accepted or a favorable prior information opinion has been issued for a subdivision or construction operation, and also land that has been declared as such in the title deed, except for land in which the competent entities prohibit any of those operations, namely land located in green zones, protected areas or which, in accordance with municipal land use plans, are dedicated to spaces, infrastructure or public facilities.

4 – Paragraph d) of point 1 applies to land situated within an urban agglomeration that is not land for construction nor is covered by the provisions of point 2 of Article 3, and also buildings and constructions licensed or, in the absence of a license, that have as their normal intended use other purposes than those referred to in point 2, and also those referred to in the exception of point 3."

1. It is thus, in the present legal framework, that it is important to examine whether the land for construction in question, which already has construction planned for residential use, is subject to Stamp Duty, pursuant to Item no. 28 of the General Stamp Duty Table.

B) Arguments of the Parties

1. The Applicant argued, in summary, that "the basis of the assessment is exhausted in the invocation of Item 28.1 of the General Stamp Duty Table, which, however, only with flagrant unconstitutionality became applicable to the ownership of the property in question (…)".

2. In this regard, the Applicant questions the constitutionality of the aforementioned tax rule, bringing to the discussion the decision relating to arbitral case no. 292/2014-T, in which it was established that "(…) with this differentiation, a true perversion of values is introduced in the Portuguese tax system, in disregard of the general orientation that can be obtained from the CRP, which is that of greater burden imposed on taxpayers who own property with residential designation at the expense of other destinations or uses that are not as valuable in light of constitutional values and principles (…)".

3. The Applicant, in the context of its initial petition, reminds us that "the property that was the subject of the Stamp Duty assessment under challenge is not a residence, it is land for construction. Notwithstanding its capacity to have residences built on it – as with other types of buildings – it is not, in itself, a property capable of being inhabited (…) in which, given its area and high tax capacity, buildings exclusively intended for residential use will not be built".

4. The Applicant also maintains that the property in question "constitutes mere raw material of a production process aimed at the production of new goods – it is, unquestionably, a factor of production. Thus, even if one conceives that ownership of the property in question constitutes evidence of a certain tax capacity (…) it is not that tax capacity which Law no. 55-A/2012 – even if unconstitutional – aimed to reach through the addition of Item 28.1 of the General Stamp Duty Table, because… it would be taxing productive investment, rather than taxing luxury goods".

5. The Applicant emphasizes that it was under the new wording of the previously mentioned rule, provided by Law no. 83-C/2013, of 31 December, "that the tax assessment now being challenged was made, notwithstanding the fact that the property (…) does not currently have construction, authorized or planned, exclusively intended for residential use".

6. In this context, the Applicant recalls that "this unequal treatment is truly arbitrary, because, regardless of the purpose of the construction, later and contingent, intended by each owner, no difference exists in the current intended use that each one gives to their land".

"If the legislator aims at the tax capacity revealed by the holding of land for construction, it cannot tax those intended for the construction of buildings for residential use and spare those intended for the construction of buildings for commerce and services (…)".

1. The Applicant concludes, stating that "the wording of Article 194 of Law no. 83-C/2013, Item 28.1 of the General Stamp Duty Table is irredeemably unconstitutional and must be refused application. Being certain that already in the previous wording (…) it was marred by unconstitutionality (…) in assessing Stamp Duty on the ownership of the aforementioned property (…) the TCA committed flagrant illegality", requesting that the tax assessment in question be annulled, with all its legal consequences.

2. For its part, the Respondent, after being duly notified to do so, presented its response in which it began by stating, with respect to the property in question, that the same "…has a residential designation, as appears from the assessment record and the MPTC Form 1 now attached (…)".

3. Now, although it is land for construction, in the opinion of the Respondent, with the entry into force of Law no. 83-C/2013, of 31 December, that type of property began to be considered within the scope of Item 28 of the General Stamp Duty Table.

4. "(…) now expressly including land for construction as an objective element of the tax rule, for which reason any attempt to raise any interpretive question regarding the wording of the law necessarily fails".

5. In parallel, and with respect to the unconstitutionality of the assessment, as raised by the Applicant, the Respondent understood that, regarding the principle of tax capacity, "(…) the tax legislator considered that ownership, usufruct or right of superficies of residential property or of land for construction whose construction, authorized or planned, was for residential use, with a tax-assessed patrimonial value equal to or exceeding €1,000,000.00 represented a manifestation of wealth and was capable, in itself, of revealing significant tax capacity, therefore making Item 28.1 of the General Stamp Duty Table applicable to the holding of a certain type of property, as opposed to income from work and pensions (…)".

6. On the other hand, and with respect to the discrimination found between properties with residential designation and with a designation other than residential, the Respondent considered that "the fact that the legislator establishes a value (…) as a criterion delimiting the incidence of the tax, below which the provisions of the tax rule are not met, constitutes a legitimate choice by the legislator regarding the definition of the material scope of 'luxury residential properties' that is intended to be taxed more heavily, since any other value of similar magnitude would likewise assume an artificial character that is inherent to any quantitative fixing of a level or limit".

7. In conclusion, the Respondent concluded that the assessment now being challenged constitutes "a correct interpretation and application of the law to the facts, not suffering from any unconstitutionality, and consequently, the claim made should be dismissed and the Respondent Entity should be absolved of the request".

C) Tribunal's Examination

1. As a preliminary matter, it should be noted that, in the view of this Arbitral Tribunal, the issue to be decided concerns determining, for purposes of applying the aforementioned Item, whether the property in question, land for construction, has a residential designation, and, accordingly, is subject to Stamp Duty, as previously stated.

2. Now, first of all, it should be noted that the property in question has a tax-assessed patrimonial value exceeding €1,000,000, namely €1,268,760.

3. In this regard, one of the necessary criteria for the application of Item 28 of the General Stamp Duty Table is already met, which is that the property has a tax-assessed patrimonial value exceeding €1,000,000.

4. In parallel, it is important to note that, with the entry into force of Law no. 83-C/2013, of 31 December, the text of the aforementioned Item was substantially amended, beginning to apply to "residential property or land for construction whose construction, authorized or planned, is for residential use, in accordance with the provisions of the Municipal Property Tax Code".

5. In this way, and since that Law entered into force on 1 January 2014, land for construction began to be considered, from that date onwards, within the scope of application of the aforementioned Item, provided that its construction, authorized or planned, was for residential use, in accordance with the Municipal Property Tax Code.

6. This reference becomes particularly important because the CAAD has always ruled in favor of taxpayers who argued for the exclusion of land for construction from the scope of application of Item no. 28 of the General Stamp Duty Table, until the legislative amendment indicated above took effect.

7. Since then, it is necessary to conduct an examination to ascertain whether the land for construction in question meets the requirement in dispute, i.e., whether its construction, authorized or planned, is for residential use, in accordance with the Municipal Property Tax Code.

8. Now, in the case sub judice, and taking into account the elements attached to the initial petition by the Applicant, the property at issue has a residential designation.

9. In effect, pursuant to the assessment carried out on the property in January 2014, a residential designation was assigned to the property.

10. Indeed, it is important to note that the Applicant itself referred, when submitting the initial petition, to this fact: "A… (…) is the owner of urban property, composed of land for construction, registered under article … in the urban property register of the parish of..., of the city of Porto (…) property intended for the construction of building(s) to be held in condominium, for later sale of its units…".

11. While it is true, in the view of this Tribunal, that until 2013 (inclusive), land for construction did not fall within the concept of property with residential designation, it is also true that from 2014 onwards, and unless contrary evidence is provided, land for construction, for which construction with residential purposes is planned or authorized, should, if they have a tax-assessed patrimonial value exceeding €1,000,000, be subject to Stamp Duty, as previously stated.

12. It should be noted that this Tribunal cannot, naturally, rule on the constitutionality of the aforementioned provision, since that function is not within its range of competencies.

13. In effect, it is the sole responsibility of this Tribunal to determine whether the assessment issued by the TCA, with respect to the property in question, is, or is not, marred by illegality.

14. And, in that way, this Tribunal understands that the Applicant, contrary to what was incumbent upon it, was not able to demonstrate that the land for construction, of which it is the owner, would fall outside the scope of application of Item no. 28 of the General Stamp Duty Table.

15. Now, given the express reference to the dedication of the land for construction to residential purposes and, additionally, given that the Applicant failed in its task of demonstrating the contrary to what was argued by the Respondent (note that the same, as previously demonstrated, even came to acknowledge that the property would be intended "for the construction of building(s) to be held in condominium, for later sale of its units…"), it is considered that the assessment in question is in accordance with what results from Item no. 28 of the General Stamp Duty Table.

16. Differently, had the Applicant succeeded in demonstrating that the land for construction was not exclusively dedicated to residential use, contradicting what is the interpretation that results from the documents attached to the case, this Tribunal could, possibly, rule on the illegality of the assessment in question.

17. However, in the opinion of this Tribunal, the above-mentioned did not occur.

18. Thus, and based on the reasons set out above, this Tribunal understands that the Applicant was not able to demonstrate that the property in question falls outside the concept of "land for construction whose construction, authorized or planned, is for residential use", for which reason it is concluded, a contrario sensu, that the legal prerequisite for application is met.

19. Finally, it should be noted that, taking into account the foregoing, this Tribunal considers that it is not necessary to examine the remaining arguments raised by the Applicant and the Respondent, since the conditions are met to render the arbitral decision and, moreover, the same, notwithstanding their merit, do not contribute to the issue to be examined by this Tribunal.

V. DECISION

1. Therefore, this Arbitral Tribunal decides:

A) To dismiss the request for an arbitral decision; and

B) To condemn the Applicant for the costs of the proceedings.

VI. VALUE OF THE CASE

1. The value of the case is fixed at €12,687.60, pursuant to Article 97-A, point 1, paragraph a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of point 1 of Article 29 of the LRATM and point 2 of Article 3 of the Regulation on Costs in Tax Arbitration Proceedings ("RCPAT").

VII. COSTS

1. In accordance with the provisions of Article 22, point 4, of the LRATM, the value of the arbitration fee is fixed at €918, pursuant to Table I of the aforementioned Regulation, to be borne by the Applicant, given the complete dismissal of the request.

Notify accordingly.

Lisbon, CAAD, 13 May 2016

The Arbitrator

(Sérgio Santos Pereira)