Stamp Tax on Building Land (Verba 28 TGIS) – CAAD Arbitration 646/2016-T

ARBITRAL DECISION

I. REPORT

1. The company A…, S.A., (hereinafter referred to as "Claimant"), with tax identification number…, with registered office at Rua…, …, …, Porto, filed on 27 October 2016, 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 ("RJAT"), a petition for the constitution of an Arbitral Tribunal in order to declare illegal the tax assessment act for Stamp Duty ("IS"), pursuant to Item 28 of the General Table of Stamp Duty ("TGIS"), relating to the tax year 2014, in the amount of €10,538.90, identified by number 2015…, corresponding to the first instalment, number 2015…, corresponding to the second instalment, and number 2015…, corresponding to the third instalment, with the Tax and Customs Authority ("Respondent" or "AT") being the defendant.

A) CONSTITUTION OF THE ARBITRAL TRIBUNAL

1. Pursuant to the provisions of paragraph (a) of Article 6, paragraph 2, and paragraph (b) of Article 11, paragraph 1, of the RJAT, the Ethics Council of the Administrative Arbitration Centre ("CAAD") appointed the undersigned as arbitrator of the sole arbitrator tribunal, who communicated acceptance of the engagement within the applicable period, and notified the parties of this appointment on 28 December 2016.

2. Thus, in accordance with the provisions of paragraph (c) of Article 11, paragraph 1, of the RJAT, and by means of the communication from the President of the Ethics Council of CAAD, the Sole Arbitral Tribunal was constituted on 12 January 2017.

B) PROCEDURAL HISTORY

1. In the petition for arbitral pronouncement, the Claimant petitioned for a declaration of illegality of the tacit dismissal of the Gracious Complaint filed against the aforementioned IS assessment act, broken down into three instalments, relating to a plot of land for construction registered in the urban property register, under number…, of the parish…, of the municipality of Maia.

2. The AT presented its response, petitioning for the dismissal of the petition for arbitral pronouncement, on the grounds that no breach of law occurred, requesting that the tax act in question, as it did not violate any legal or constitutional provision, be maintained in the legal order.

3. By order of 16 March 2017, the Sole Arbitral Tribunal, pursuant to the provisions of paragraph (c) of Article 16 of the RJAT, decided, without opposition from the parties, that it was not necessary to convene the meeting referred to in Article 18 of the RJAT, as a result of the simplicity of the matters in question, as well as considering that it had at its disposal all the elements necessary to make a clear and impartial decision.

4. It also decided, in accordance with Article 18, paragraph 2, of the RJAT, that oral arguments were not necessary, as the positions of the parties were clearly defined in their respective pleadings, and set 21 April 2017 as the deadline for the arbitral decision.

5. In the context of the order, it also requested the parties to present their final arguments, which they refrained from doing.

6. The Tribunal was regularly constituted and is competent to appraise the matters indicated (Article 2, paragraph 1, paragraph (a) of the RJAT), the parties have legal personality and capacity and have full standing (Articles 4 and 10, paragraph 2 of the RJAT and Article 1 of Regulation No. 112-A/2011, of 22 March). No nullities have occurred and no exceptions were raised, so nothing prevents the judgment on the merits.

7. The present case is thus in a position for the 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 procedural documents of the parties, is whether, in the case in question, the plot of land for construction falls within the scope of Item 28.1 of the TGIS, in its wording at the date relevant to the facts, namely whether it is a "plot of land for construction whose building, authorized or planned, is intended for housing, in accordance with the provisions of the Property Tax Code".

III. DETERMINATION OF FACTS AND REASONING THEREFOR

1. Having examined the documentary evidence produced, this tribunal finds as proven, with relevance to the decision of the case, the following facts:

I. The Claimant incorporated, on 18 December 2015, part of the assets of company B…, S.A., through a spin-off-dissolution-merger operation, thus acquiring, among other things, the plot of land for construction in question;

II. This plot of land for construction is registered in the urban property register, under number…, of the parish…, of the municipality of Maia, with a Tax Property Value ("VPT") of €1,053,890;

III. The urban property in question is part of a lot of 6 plots of land, having, pursuant to the subdivision permit presented, an area of 560 m² intended for the construction of a building for collective housing, with an implantation area of 560 m², construction area of 5,040 m² and parking with basement with an area of 1,680 m², consisting of 40 units, with 3 floors below the threshold elevation and 9 floors above the threshold elevation;

IV. In its property register, the location coefficient assigned to the property was that of housing;

V. B…, S.A., with respect to the tax year 2014 and as a result of the foregoing in Item 28.1 of the TGIS, received the aforementioned AT assessment acts, in the total amount of €10,538.90, which were paid in full by the now Claimant.

VI. The Claimant filed, on 29 March 2016, a Gracious Complaint in order to obtain a declaration of illegality of the aforementioned assessment, with tacit dismissal being formed on 29 July 2016.

1. The conviction of this tribunal regarding the facts found as proven resulted from the documents attached to the case file and contained in the petition and the non-contested allegations of the parties, as specified in the points of the factual matter enumerated above.

2. There is no relevant factuality for the decision of the case found as not proven.

IV. LAW

A) LEGAL FRAMEWORK

1. Since the legal issue to be decided in the present case requires the interpretation of the relevant legal texts, it is first important to set forth the provisions that make up the relevant legal framework, at the date of the occurrence of the facts.

2. The subjection to IS of properties with residential use resulted from the addition of Item 28 to the TGIS, effected by Article 4 of Law 55-A/2012, of 29 October, which typified the following tax facts:

"28 – Ownership, usufruct or right of surface of urban properties whose tax property value contained in the register, in accordance with the Property Tax Code ("CIMI"), is equal to or greater than €1,000,000.00 – on the tax property value used for the purpose of IMI:

28.1 – For a property with residential use – 1%

28.2 – For a property, where the taxpayers 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 regulation of the Minister of Finance – 7.5%".

1. The aforesaid law also added, to the IS Code, paragraph 7 of Article 23, relating to the assessment of IS: "in the case of tax due for the 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 CIMI", and Article 67, paragraph 2, which provides that "to matters not regulated in this Code relating to item 28 of the General Table, the CIMI shall apply, on a subsidiary basis".

2. Additionally, and having regard to the legislative amendment introduced by Law No. 83-C/2013, of 31 December, it is also important to reproduce the wording of the aforesaid item from 1 January 2014, "for a residential property or for a plot of land for construction whose building, authorized or planned, is intended for housing, in accordance with the provisions of the Property Tax Code".

3. In this context, and having regard to the foregoing indication, let us now focus on the Property Tax Code ("CIMI").

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

"Article 2 - Concept of Property

1 – For the purposes of this Code, a property is any parcel of land, including waters, plantations, buildings and constructions of any nature incorporated or based thereon, with a character of permanence, provided that it forms part of the assets of a natural or legal person and, in normal circumstances, has economic value, as well as waters, plantations, buildings or constructions, in the circumstances aforesaid, endowed with economic autonomy in relation to the land where they are located, although situated on a parcel of land that constitutes an integral part of a different asset or does not have a patrimonial nature.

2 – Buildings or constructions, even if movable by nature, are deemed to have a character of permanence when assigned to non-transitory purposes.

3 – The character of permanence is presumed when buildings or constructions have been in place at the same location for a period exceeding one year.

4 – For the purposes of this tax, each autonomous unit, under the horizontal property regime, is deemed to constitute a property.

Article 3 - Rural Properties

1 – Rural properties are lands situated outside an urban agglomeration that cannot be classified as plots of land for construction, pursuant to paragraph 3 of Article 6, provided that:

a) They are assigned to or, in the absence of concrete assignment, have as their normal destination a use generating agricultural income, such as those considered for the purposes of personal income tax (IRS);

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

2 – Also rural properties are lands situated within an urban agglomeration, provided that, by force of legally approved provision, they cannot have use generating any income or can only have use generating agricultural income and are actually having this use.

3 – Also rural properties are:

a) Buildings and constructions directly assigned to the production of agricultural income, when situated on the lands referred to in the preceding paragraphs;

b) Waters and plantations in the situations referred to in paragraph 1 of Article 2.

4 – For the purposes of this Code, urban agglomerations are considered, in addition to those situated within legally fixed perimeters, nuclei with a minimum of 10 units served by public use streets, with their perimeter delimited by points distanced 50 m from the axis of the streets, in the transversal direction, and 20 m from the last building, in the direction of the streets.

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 main part.

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

Article 6 - Types of Urban Properties

1 – Urban properties are divided into:

a) Residential;

b) Commercial, industrial or for services;

c) Plots of 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 destination each of these purposes.

3 – Plots of land for construction are considered those lands situated within or outside an urban agglomeration, for which a license or authorization has been granted, prior notification admitted or favorable prior information issued for subdivision or construction operations, and also those thus declared in the deed of acquisition, with the exception of lands where the competent entities prohibit any of those operations, namely those located in green areas, protected areas or which, according to municipal land use plans, are assigned to spaces, infrastructures or public facilities.

4 – Falls within the provision of paragraph (d) of paragraph 1 the lands situated within an urban agglomeration that are not plots of land for construction nor are covered by the provision of paragraph 2 of Article 3, and also buildings and constructions licensed or, in the absence of a license, that have as their normal destination other purposes than those referred to in paragraph 2, and also those from the exception of paragraph 3".

1. Finally, attention should also be paid to the rules on the interpretation of laws.

2. Article 11 of the General Tax Law ("LGT") establishes the essential rules for the interpretation of tax laws as follows:

"Article 11 – Interpretation

1. In determining the meaning of tax provisions and in qualifying the facts to which they apply, the general rules and principles of interpretation and application of laws are observed.

2. Whenever tax provisions employ terms specific to other branches of law, they should be interpreted in the same sense as they have therein, unless otherwise results directly from the law.

3. If doubt persists about the meaning of the rules of incidence to be applied, account should be taken of the economic substance of the tax facts.

4. Gaps resulting from tax provisions covered by the reservation of law of the Assembly of the Republic are not susceptible to analogical integration".

5. The general principles of the interpretation of laws, to which paragraph 1 of Article 11 of the LGT refers, are set forth in Article 9 of the Civil Code, which establishes the following:

"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 intent, taking especially into account the unity of the legal system, the circumstances under which the law was drawn up and the specific conditions of the time at which it is applied.

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

3. In determining the meaning and scope of the law, the interpreter shall presume that the legislator adopted the most appropriate solutions and knew how to express his intent in adequate terms".

4. Thus, it is within this legal framework that it is important to examine whether the plot of land for construction in question has, or does not have, authorized or planned building intended for housing, in accordance with Item 28.1 of the TGIS, and is thus subject to IS.

B) ARGUMENTS OF THE PARTIES

1. In its presentation, the Claimant alleged, in summary, that "given the letter of the law, it is found that the rule of incidence, for plots of land for construction, restricts the tax event to plots of land for construction whose authorized or planned building is (exclusively) for housing".

2. Thus, in the understanding of the Claimant, "it cannot result from the analysis of the Permit that the land will be affected exclusively to housing and with units of VPT exceeding €1,000,000.

Notwithstanding, the AT, in violation of the interpretation of the rule, contrary to the explicit restriction provided for "building for housing purposes", proceeded to issue the assessment that is the subject of this petition, an interpretation that is absolutely out of step with the sense that the legislator intended to give to the rule".

1. For the Claimant, in light of the new wording of Item 28 of the TGIS, "it is found that the subjection to the rate of 1% (…) depends on the cumulative fulfillment of the following requirements (…): i) the VPT contained in the register, in accordance with the Property Tax Code, is equal to or greater than €1,000,000; ii) it is a plot of land for construction; and also iii) the authorized or planned building for it being exclusively for housing, in accordance with the Property Tax Code, and it should be excluded from this purpose collective housing, as will be demonstrated below".

2. Thus, the Claimant sought to demonstrate that, unlike the first two requirements (which, in its understanding, are met), the third requirement was not met. "So the question remains to ascertain the subjection of the property to the third requirement: that the building, authorized and planned, be exclusively for housing, in accordance with the Property Tax Code, excluding collective housing.

Furthermore, in accordance with the decision rendered in arbitral proceedings No. 580/2014-T, «(…) it constitutes unanimous jurisprudence of this Arbitration Centre, especially in the reasons explained in the aforementioned Arbitral Award rendered in Proceeding 50-T/2013, of 29/10/2013, (…), the interpretation proposed by the AT for taxing properties of collective housing (mixed or not), composed of several units not in a horizontal property regime also suffers from legal error (…)».

Moreover: (…) there is no doubt in this specific case: even if it is considered that the subdivision permit allows the property to be provided for the construction of a building, the fact is that, in this case, the subdivision permit states that the purpose of the land is collective housing.

Therefore, having been demonstrated, in the case in question, especially by virtue of the jurisprudential understanding, that the cumulative requirements on which the rule of incidence of Item 28.1 of the TGIS makes its application dependent are not met, there is a breach of law and, consequently, the taxation in question should be considered undue, and the IS assessment acts in question should be annulled due to the illegality from which they suffer".

1. From another perspective, the Claimant invoked the unconstitutionality of Item 28.1 of the TGIS, namely for violating the principles of contributory capacity and equality.

"In these terms, the principle of equality, embodied in Article 13 of the Constitution of the Portuguese Republic, has as its corollary, in the tax field, the principle of contributory capacity.

(…)

In fact, Stamp Duty assumes, in this Item 28 of the TGIS, a merely static dimension, aiming to tax existing wealth, assets (…) it is not therefore affirmed that the Legislator intended to discriminate against the real estate sector.

However, the result of the application of such a rule implies the penalization of this sector and, in the case sub judice, the penalization of the Claimant, without having revealed any increased economic capacity.

In the absence of this "rational foundation" (…), it becomes clear that this discrimination violates the constitutional principle of equality, embodied by the principle of contributory capacity".

1. In this respect, the Claimant invokes various arbitral and judicial decisions which, in its understanding, allow support for its arguments.

2. For the Claimant, "contributory capacity is only exhibited (possibly), in cases where there is an approved or planned project, which is manifestly not the case of the plot of land for construction sub judice. When this rule is applied to taxpayers, regardless of their contributory capacity, as in the present case, to the Claimant, this rule is simply discriminatory and violates the Principle of Equality (…)".

3. The Claimant concludes that "it being abundantly demonstrated that the Claimant has no approved project, nor is the construction of buildings assigned to housing of value exceeding €1,000,000 foreseen (…) it becomes evident that the Claimant and the plot of land for construction were negatively discriminated (…)".

4. Requesting, for this purpose, that the assessment in question be annulled as it suffers from a breach of law.

5. For its part, the Respondent, after being duly notified for this purpose, presented its response in which, in summary, alleged the following:

6. "…With regard to the property registered in the urban register under… of the parish of…, municipality of Maia, the Claimant alleges that it has no authorized or planned building, there is only the subdivision permit which provides for the construction of collective housing and commerce.

Without disregarding the facts alleged above by the Claimant, we nevertheless cannot agree that for that land there is no foreseen construction of housing.

(…)

According to information provided by the SF of… to instruct this arbitral proceeding, information dated 24.01.2017, and in accordance with points 6, 7 and 8, in view of the new wording of the item, the IS assessments are correct, because the plot of land for construction in question was assigned, in evaluation, the residential use.

(…)

Given the well-established facts, the registered property (…) has the characteristics contained in the definition of a plot of land for construction for the purposes of item 28.1 of the TGIS, in the wording given by Law 83-C/2013, that is, a plot of land for construction with residential use in accordance with the provisions of the Property Tax Code, without, for the purposes of IS assessment, the non-housing area having been excluded from the value, because it does not appear in the assessment and this was not contested, and for that very reason it also does not appear in the register that serves as the basis for the IS assessment".

1. For the Respondent, the legal type provided for in item 28.1 of the TGIS is thus fulfilled, since "with the amendment made by Law No. 83-C/2013, of 31 December, lands "…for construction whose building, authorized or planned, is intended for housing, in accordance with the provisions of the Property Tax Code" are now expressly covered by its provision".

2. As for the violation of the principles of equality and contributory capacity invoked by the Claimant, the Respondent understood that "the fact that the legislator establishes a value (€1,000,000) as a delimiting criterion for the incidence of tax, below which the provision of the tax rule is not met, constitutes a legitimate choice of the legislator regarding the establishment of the material scope of "luxury residential properties" that it intends to tax more heavily, especially since any other value of analogous magnitude would likewise assume an artificial character that is inherent to any quantitative fixing of a level or limit".

3. In this respect, it should be noted that the Respondent made a long exposition on the matter of unconstitutionality raised, bringing to bear relevant jurisprudence and doctrine on the subject.

4. The Respondent concluded by considering that the assessments in question constitute a correct interpretation and application of law to the facts, not suffering from a breach of law, whether of the Constitution or of the IS Code.

5. It thus requested that the Claimant's petition be declared without merit, absolved of the petition, with all legal consequences.

C) TRIBUNAL'S APPRAISAL

1. By way of preliminary remark, it should be noted that, in the eyes of this Arbitral Tribunal, the issue to be decided concerns the definition, based on the facts found as proven, of whether the property in question is or is not subject to IS, pursuant to Item 28.1 of the TGIS.

2. Thus, this tribunal will seek to ascertain whether the plot of land for construction in question meets the legally necessary requirements to fall within the scope of Item 28.1 of the TGIS, namely whether its authorized or planned building is for housing.

3. Now, in the present case, we are faced with a plot of land for construction which, at the time of the last update of its subdivision permit, in 2008, was intended solely for the construction of a building for collective housing and respective parking with basement.

4. As emerges from the aforementioned permit, whereas the remaining 5 plots have mixed use – collective housing and commerce – this specific plot of land for construction has an authorized allocation limited exclusively to collective housing.

5. A difficulty that often arises is the question of whether Item 28.1 of the TGIS concerns plots of land for construction completely allocated to residential building or, instead, whether such allocation can only be partial.

6. For in the second situation, doubt remains as to how to allocate the respective VPT to the various purposes of the property and, with no understanding in the law that allows doing so, it has been decided, and rightly so, that in those specific cases there should be no incidence of IS, pursuant to Item 28 of the TGIS.

7. However, in this case the subdivision permit only provides that on the land in question a building for collective housing be implemented (which includes parking).

8. So the doubt that could subsist was knowing to what extent the concept of collective housing differs from the concept of housing, for the purpose of the aforementioned item.

9. And, in that respect, despite arguing that they are different concepts, the Claimant also failed to prove how housing and collective housing could possibly be distinguished.

10. The CIMI, legislation to be applied subsidiarily when the IS Code does not provide an answer to these matters, also does not provide any distinction between housing or collective housing.

11. In the eyes of this tribunal, these shall be materially identical situations, for the purposes of the application of Item 28 of the TGIS, as both presuppose the residential purpose.

12. Indeed, it is understood that collective housing shall concern situations in which a given property has several residential units, as opposed to individual housing, which shall encompass, in principle, only a single unit.

13. In light of the foregoing, it is necessary to establish the following.

14. It is clear that, since 2014, pursuant to Item 28.1 of the TGIS, subject to tax, in addition to residential properties, are plots of land for construction, provided that building intended exclusively for housing has been authorized or is planned. In fact, "residential property or (…) plot of land for construction whose building, authorized or planned, is intended for housing, in accordance with the provisions of the Property Tax Code".

15. Now, in the present case, the Claimant failed to demonstrate with facts that the plot of land for construction in question had, at the date of the relevant facts, an allocation, even if partial, to a reality other than residential (services, for example).

16. And in the same way, the Claimant was also unable to prove that the concept of collective housing could, in any way, depart from the concept of housing, for the purpose of the aforementioned item.

17. For, when confronted with the evidence joined to the case, this tribunal does not envision any other scenario than that of the total allocation of the land in question to residential construction, namely by means of what is provided for in the subdivision permit.

18. Having regard to what was previously stated, it was the Claimant that had, pursuant to Article 74 of the LGT, the obligation to prove that the property in question, a plot of land for construction, did not have building, expressly or planned, solely for housing.

19. In the alternative, the Claimant could also have demonstrated that collective housing is a legal concept that, for the purpose of the application of the aforementioned item, departs from the concept of housing.

20. Obligations that it was unable to fulfill.

21. It is true that the Claimant invoked various arbitral decisions that ruled out the incidence of IS on plots of land for construction.

22. However, all of them concern tax facts prior to the amendment of Item 28 of the TGIS, which occurred in 2014, and began to provide that it applied to "residential property or (…) plot of land for construction whose building, authorized or planned, is intended for housing, in accordance with the provisions of the Property Tax Code", and, as such, are completely irrelevant to the case sub judice.

23. Indeed, in the opinion of this tribunal, plots of land for construction with a VPT equal to or greater than €1,000,000 and which have only authorized or planned building for housing, not being broken down, for example, into various realities (for example, services or commerce), should be subject to IS, pursuant to Item 28 of the TGIS.

24. As for the question of the constitutionality of the rule raised by the Claimant, it should be noted that it is only for this tribunal to examine the possible illegality of the assessment issued by the AT, not pronouncing itself on the competence of the legislator.

25. Thus, this tribunal refrains from analyzing this question, as it falls outside the scope of its competencies.

26. Thus, and based on the reasons enumerated above, this tribunal understands that the property in question should, at the date of the facts, have been subject to IS, pursuant to Item 28.1 of the TGIS, whereby it is concluded that the legal assumption of incidence is met.

V. DECISION

1. Whereupon this Arbitral Tribunal decides:

A) To declare the petition for arbitral pronouncement without merit; and

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

VI. VALUE OF THE CASE

1. The value of the case is fixed at €10,538.90, pursuant to Article 97-A, paragraph 1, paragraph (a), of the Code of Administrative Court Procedure ("CPPT"), applicable by force of paragraphs (a) and (b) of Article 29, paragraph 1, of the RJAT and paragraph 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, paragraph 4, of the RJAT, the value of the arbitration fee is fixed at €918, pursuant to Table I of the aforementioned Regulation, to be borne by the Claimant, given the complete lack of merit of the petition.

Let it be notified.

Lisbon, CAAD, 10 April 2017

The Arbitrator

(Sérgio Santos Pereira)