Stamp Tax on Building Land: CAAD Rules on Verba 28.1 TGIS Legality (Process 671/2014-T)

ARBITRAL DECISION

I. Report

1. A… (hereinafter referred to as the "Claimant"), with tax identification number …, resident at Street …, lot …, 1st Floor …-… Coimbra, filed, 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 request for the constitution of an Arbitral Tribunal in order to declare illegal the assessment of Stamp Tax ("IS"), relating to the fiscal year 2013, in the amount of € 15,523.07, with respect to an urban property, legally classified as land for construction, registered under article …, in the urban property register of the parish of …, of the municipality of Lisbon, with the Tax and Customs Authority ("Respondent" or "ATA") being the defendant.

A) Constitution of the Arbitral Tribunal

1. Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, the Ethics Council of the Centre for Administrative Arbitration ("CAAD") appointed the undersigned as arbitrator of the single tribunal, who communicated acceptance of the assignment within the applicable period, and notified the parties of this appointment on 28 October 2014.

2. Thus, in accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, and through communication by the Chairman of the Ethics Council of the CAAD, the Single Arbitral Tribunal was constituted on 12 November 2014.

B) Procedural History

1. In the request for arbitral pronouncement, the Claimant petitioned for a declaration of illegality of the IS assessment mentioned above, by reference to an urban property, located in Lisbon, in the parish of … and registered in the urban property register of that parish under article ….

2. After the initial request was submitted, as referred to above, the Claimant was notified by the ATA regarding the possibility of enforcement of liens on its assets, as a result of the Claimant having failed to pay the assessment note no. 2014 …, relating to the first instalment of the assessment previously mentioned.

3. In this context, the Claimant proceeded to pay the aforementioned assessment note, on 16 October, in the amount of € 5,174.37 plus default interest (in the total amount of € 5,332.68).

4. The ATA filed a response, petitioning for dismissal of the request for arbitral pronouncement, on the grounds that there was no violation of law, requesting that the tax act under review, as it did not violate any legal or constitutional provision, be maintained in the legal order.

5. By order of 25 March 2015, the Single Arbitral Tribunal, under the provision of subparagraph c) of Article 16 of the RJAT, and following the request of the ATA, decided, without opposition from the parties, that it was not necessary to hold the meeting referred to in Article 18 of the RJAT, due to the simplicity of the issues at hand as well as considering that it had all the necessary elements to reach a clear and impartial decision.

6. It likewise decided, in accordance with paragraph 2 of Article 18 of the RJAT, that oral arguments were not necessary, as the positions of the parties were fully defined in their respective pleadings, and set 22 April 2015 as the deadline for the arbitral decision.

7. The Tribunal was regularly constituted and is competent to consider the issues indicated (Article 2, paragraph 1, subparagraph 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 Order no. 112-A/2011, of 22 March). No nullities exist and no exceptions were raised, so nothing prevents judgment on the merits.

8. Thus, the present proceedings are in a position for a final decision to be rendered.

II. Issue to be Decided

1. The fundamental issue to be considered and decided regarding the merits of the case, as appears from the procedural documents of the parties, is whether urban properties legally qualified as land for construction should be encompassed by the concept of properties with residential use, pursuant to Item no. 28 of the General Table of Stamp Tax ("TGIS").

2. That is, this tribunal seeks to determine whether, as the Claimant alleges, land for construction is not classified as properties with residential use, thus falling outside the scope of the aforementioned item, or, conversely, as the Respondent contends, is considered properties with residential use and, in that context, subject to IS, pursuant to Item no. 28 of the TGIS.

III. Decision on the Facts and Its Justification

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

I. The Claimant is the owner of an urban property, legally classified as land for construction, registered under article 848, in the urban property register of the parish of …, of the municipality of Lisbon, with a Tax Patrimonial Value ("VPT") of € 931,190.00, assessed on 29 July 2014.

II. Nevertheless, the VPT of the urban property in question, at the date of the relevant facts (2013), was € 1,552,306.98.

III. The Claimant, with respect to the fiscal year 2013 and as a result of Item no. 28 of the TGIS, received the assessment notes from the ATA, relating to the first (no. 2014 …) and second (no. 2014 …) instalments, in the amount of € 5,174.37 and € 5,174.35, respectively, of a total amount of € 15,523.07 (of the IS assessment for that fiscal year).

IV. On 16 October 2014, and after having been duly notified by the ATA of the possibility of enforcement of liens on its assets, as a result of the Claimant's failure to pay the first instalment of the aforementioned IS assessment up to that date, it proceeded to pay it, plus default interest, in the total amount of € 5,332.68.

1. The conviction of this tribunal regarding the proven facts resulted from the documents attached to the case file and contained in the pleadings of the parties, not challenged, as specified in the points of fact stated above.

2. There is no relevant factuality for the decision of the case found to be unproven.

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 important, first, to set out the norms that comprise the relevant legal framework, as of the date of the occurrence of the facts.

2. The subjection to IS of properties with residential use resulted from the addition of Item no. 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 superficies of urban properties whose patrimonial value recorded in the register, in accordance with the Municipal Tax on Real Estate Code (CIMI), is equal to or greater than € 1,000,000.00 – on the patrimonial value used for IMI purposes:

28.1 – For property with residential use – 1%

28.2 – For property, when the taxpayers that are not natural persons are resident in a country, territory or region subject to a clearly more favourable tax regime, listed in a list approved by order of the Minister of Finance – 7.5%".

1. The aforementioned law likewise added, in the Stamp Tax Code, paragraph 7 of Article 23, relating to the assessment of IS: "in the case of tax due under 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 the 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 applies subsidiarily".

2. In this context, and having considered the above indication, let us now turn our attention to the Municipal Tax on Real Estate Code ("IMI").

3. In the IMI Code, the species of properties are enumerated (in Articles 2 to 6), as follows:

"Article 2 – Concept of Property

1 – For the purposes of this Code, property is any portion of territory, including waters, plantations, buildings and constructions of any nature incorporated or situated therein, with a character of permanence, provided that 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 circumstances above, endowed with economic autonomy in relation to the land on which they are located, although situated in a portion of territory that constitutes an integral part of a different patrimony or does not have patrimonial nature.

2 – Buildings or constructions, although movable by nature, are deemed to have a character of permanence when devoted 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 the purposes of this tax, each autonomous fraction under the condominium property regime is deemed to constitute a property.

Article 3 – Rural Properties

1 – Rural properties are lands situated outside an urban agglomeration that are not to be classified as land for construction, in accordance with paragraph 3 of Article 6, provided that:

a) They are devoted or, in the absence of concrete use, have as their normal destination a use generating agricultural income, as considered for income tax purposes for natural persons (IRS);

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

2 – Rural properties are also lands situated within an urban agglomeration, provided that, by virtue of a legally approved provision, they cannot have any use generating income or can only have use generating agricultural income and are in fact having this use.

3 – The following are also rural properties:

a) Buildings and constructions directly devoted to the generation of agricultural income, when situated in 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 dwellings served by public streets, their perimeter being delimited by points distant 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 provision 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 of the parts can be classified as principal, the property is deemed to be mixed.

Article 6 – Species 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 purpose or, in the absence of a license, that have as their normal destination 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, prior notification admitted or favorable prior information issued for a subdivision or construction operation, and also those that have been so declared in the acquisition title, except for lands on which the competent authorities prohibit any of these operations, namely those located in green areas, protected areas or which, in accordance with municipal land use planning plans, are devoted to public spaces, infrastructure or equipment.

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

1. In parallel, and since it is one of the issues raised by the Respondent, it is necessary to highlight what is provided in Article 45 of the IMI Code.

"Article 45 – Tax Patrimonial Value of Land for Construction

1 - The tax patrimonial value of land for construction is the sum of the value of the building implantation area to be constructed, which is that situated within the perimeter of the building's fixation to the ground, measured by the exterior part, added to the value of the land adjacent to the implantation.

2 - The value of the implantation area varies between 15% and 45% of the value of authorized or planned buildings.

3 - In fixing the percentage of the value of the implantation land, the characteristics referred to in paragraph 3 of Article 42 are taken into consideration.

4 - The value of the area adjacent to the construction is calculated in accordance with paragraph 4 of Article 40.

5 - When the document proving constructive viability referred to in Article 37 only makes reference to the Municipal Master Plan indices, the appraiser experts must, on a reasoned basis, estimate the respective construction area, taking into consideration, in particular, the average construction areas of the surrounding area".

1. Finally, attention should be paid to the norms on the interpretation of laws, fundamental for understanding the scope of the concept of property with residential use.

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

"Article 11 – Interpretation

1. 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 are observed.

2. Whenever tax norms use terms specific to other branches of law, they must be interpreted in the same sense as they have there, unless otherwise directly provided in the law.

3. Should doubt persist regarding the meaning of the tax provisions applicable, account must be taken of the economic substance of the tax facts.

4. Gaps resulting from tax norms covered by the legislative reserve of the Assembly of the Republic are not susceptible to analogical integration".

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

"Article 9 – Interpretation of Law

1. Interpretation should not be confined to the letter of the law, but should reconstruct legislative intent from the texts, taking especially into account the unity of the legal system, the circumstances in which the law was enacted and the specific conditions of the time in 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 fixing the meaning and scope of the law, the interpreter will presume that the legislator adopted the most appropriate solutions and knew how to express its intent in adequate terms".

4. Thus, it is within this legal framework that it is important to decide whether urban properties classified as land for construction are, or are not, included in the concept of property with residential use, pursuant to Item no. 28 of the TGIS.

B) Arguments of the Parties

1. In this regard, the Claimant, after initiating its request with a detailed description of the relevant legal-tax framework for this issue, alleged, in summary, the following:

2. In the Claimant's perspective, "the criterion of residential use applies only to built properties since it depends on the type of their use in accordance with Article 41 of the CIMI".

3. Moreover, for it, and by virtue of Article 6 of the IMI Code, land for construction "is a legally distinct property from residential properties".

4. In this sense, the Claimant considers that, "in accordance with the principles of legality and typicality, the Tax Authority should only proceed to the assessment that is relevant in case of verification of all and each of the typical elements provided for in law as generating the State's right to the tax".

5. Now, in the opinion of the Claimant, with respect to the present assessment, and since "the verification of the presuppositions on which the enforceability of the tax in question depends was not proven, it is manifest that no tax fact was constituted, and therefore the payment demanded from the present Defendant is illegal and unenforceable".

6. Moreover, if the contrary understanding were adopted, "one would have to conclude that the Tax Authority could demand payment of the sums in question regardless of the demonstration and verification of the legally established presuppositions, as occurs in the present case, freely creating taxes, which is inadmissible".

7. The Claimant thus understands that "the act of assessment of stamp tax therefore suffers from a manifest lack of factual and legal justification, or, at least, this is insufficient, unclear and incongruous".

8. Finally, and in order to reinforce its argumentative line, the Claimant also makes reference to the CAAD Decision no. 49/2013-T, of 18 September, and likewise to the judgment of the Supreme Administrative Court, of 9 July 2014, where it was established that "having the legislator not defined the concept of properties (urban) with residential use, and resulting from Article 6 of the IMI Code (subsidiarily applicable to Stamp Tax provided for in the new item no. 28 of the General Table) a clear distinction between residential urban properties and land for construction, they cannot be considered, for the purposes of application of Stamp Tax (Item 28.1 of the TGIS, as amended by Law no. 55-A/2012, of 29 October), as urban properties with residential use".

9. The Claimant concluded its submission by requesting that the present request for arbitral pronouncement be judged well-founded and, consequently, the assessment in question be annulled, or declared null (with the legal consequences).

10. The Claimant likewise listed for the proceedings two witnesses, namely B…, with business address at Avenue … no. …, ….º …., …-…, Lisbon, and C…, with business address at Avenue …, no. …, ….º …., …-…, Lisbon.

11. For its part, the Respondent, having been duly notified, filed its response in which, in summary, it alleged the following:

12. "In the absence of any definition of the concepts of urban property, land for construction and residential use, in the context of IS, one must resort to the CIMI in search of a definition that permits determining the possible subjection to IS, in accordance with Article 67, paragraph 2 of the Code of IS as amended by Law no. 55-A/2012, of 29/10".

13. Establishing that, pursuant to the aforementioned legal norm, to matters not provided for in the Stamp Tax Code, and relating to Item no. 28 of the TGIS, the provision of the IMI Code must be applied subsidiarily.

14. Subsequently, the Respondent develops an extensive rationale that, in its opinion, permits framing land for construction in the concept of property with residential use, supporting itself, namely in Article 45 of the IMI Code.

15. "As results from the expression «… value of authorized buildings», contained in Article 45, paragraph 2 of the CIMI, the legislator chose to determine the application of the evaluation methodology of properties in general to the evaluation of land for construction, being thus applicable to them the affectation coefficient provided in Article 41 of the CIMI".

16. The Respondent therefore understands that, if for purposes of determining the VPT of land for construction there is an application of the affectation coefficient (in the evaluation of the land), then that coefficient should equally be considered for purposes of applying Item no. 28 of the TGIS.

17. Additionally, in the opinion of the Respondent, "the mere constitution of a right of potential construction immediately increases the value of the property in question, hence the rule contained in Article 45 of the CIMI that requires separation of the two parts of the land. On one side, the part of the land where the building to be constructed will be located is considered, and on the other the free land area (…)."

18. Therefore, for the Respondent, "well before the actual building of the property, it is possible to ascertain and determine the use of the land for construction".

19. The Respondent concludes that, based on what is set out above, "the assessment in question constitutes a correct interpretation and application of law to the facts, suffering from no defect of violation of law (…) and therefore the claim raised should be judged unfounded and the Respondent Entity should be absolved of the request".

20. With respect to the request for witness testimony, requested by the Claimant, for the Respondent there is no need for production of additional evidence (i.e., beyond the documents already attached to the case file).

21. Considering thus that "there is no perceived necessity for the hearing of witnesses taking into account that the tribunal can and should ex officio know of all questions of law raised, without first needing to hear the witnesses listed".

C) Tribunal's Assessment

1. In the understanding of this tribunal, and having considered the legal framework previously presented, the essential normative proposition to be taken into consideration for the decision of the case is that which results from Item no. 28 of the TGIS.

2. It should likewise be noted that, in the eyes of the Arbitral Tribunal, the issue to be decided concerns exclusively a matter of law, namely understanding, for purposes of applying the aforementioned item, whether the concept of property with residential use includes, or does not include, land for construction.

3. To this end, this tribunal will closely follow the Arbitral Decision concerning case no. 42/2013-T, of 18 October (a decision which, from now on, it applauds), for its relevance, detail and proximity to the present discussion.

4. By way of introduction, it should be noted that the IMI Code does not resort, in the classification of urban properties, to the concept of property with residential use (in fact, this concept is not found in any other statute either).

5. Thus it is necessary to carry out, on the basis of the legal framework set out above, an interpretation of the concept of property with residential use.

6. In this regard, and in order to support the present decision, we transcribe below part of the Arbitral Decision no. 42/2013-T, of 18 October, where the following was decided:

"From a literal interpretation of the tax provision provision in question, it results that the legislator wished to include within the scope of application of the norm urban properties that have a 'residential use'.

The expression 'residential use' does not appear to be able to have any meaning other than that of residential use, that is, urban properties that have an actual use for residential purposes, whether because they are licensed for such purpose, or because they have that normal destination.

And we cannot confuse a 'residential use' that implies an actual devotion of an urban property to that purpose, with the expectation, or potentiality, of an urban property potentially having a 'residential use'.

Land for construction, not being built, does not satisfy, by itself, any condition to be considered as properties with residential use, since, on the one hand, they do not have a license for use for habitation, and, on the other hand, they are not habitable (because they are simply not built).

Wherefore it does not appear to us to be sufficient for framing in the objective tax provision in question that there exists the expectation of an urban property potentially having a residential use, or of having the potentiality of potentially having a residential use" (emphasis ours).

1. Now, in the case of land for construction, in fact, there is nothing more than the mere expectation (or, possibly, potentiality) thereof, and only after the building construction, of potentially having a residential use.

2. However, only when said use is concretized can we consider that the urban property falls within the scope of Item no. 28 of the TGIS.

3. In fact, the concept of residential use must undoubtedly be reduced to something that is capable of being inhabited, even though, as set out above, it is not legally recognized as such.

4. As such, notwithstanding a land for construction resulting in the future, very probably, in a property with residential use, as long as it remains as such (that is, legally classified as land for construction), it cannot, at the date of the facts, in the understanding of this tribunal, be included in the field of application of Item no. 28 of the TGIS.

5. In parallel, the ATA demonstrated, as described above, that, in its opinion, it is by virtue of Article 45 of the IMI Code that land for construction is framed as properties with residential use.

6. In this context, and for its relevance to the present decision, let us turn again to the Arbitral Decision no. 42/2013, of 18 October.

7. As set out in the arbitral decision previously mentioned, "Article 45 of the CIMI is intended for the evaluation of land for construction, considering as one of its elements the authorized or possible destination, depending on urban planning conditionalities.

Once again we are only in the field of potentialities, of expectations, and that is not sufficient to change the nature of the property, which continues to be considered as land for construction, nor to sustain that the property in question comes to have a 'residential use' for purposes of the objective application of item 28.1 of the TGIS".

1. Thus, it is the opinion of this tribunal that, at the date of the facts, the concept of property with residential use, referred to in Item no. 28 of the TGIS, is reduced exclusively to the concept of residential urban property, pursuant to Article 6, paragraph 1, subparagraph a) of the IMI Code.

2. In other words, in the understanding of this tribunal, in consonance with the opinion expressed by the Claimant and in Decision no. 42/2013-T, of 18 October, the ATA cannot resort to Article 45 of the IMI Code to establish a relationship between land for construction and property with residential use.

3. In that sense, this tribunal concludes that, being the urban property in question land for construction, it cannot be included within the scope of Item no. 28 of the TGIS.

4. Finally, and notwithstanding the framing carried out up to now being, from the point of view of this tribunal, sufficient to recognize the illegality of the assessment act practiced by the ATA, it is important to note that, if there were doubts, the recent amendment to the text of Item no. 28 of the TGIS would surely dissipate them.

5. In fact, Law no. 83-C/2013, of 31 December, which entered into force on 1 January 2014, amended the text of item no. 28 of the TGIS to "residential property or land for construction whose building, authorized or planned, is for habitation, in accordance with the provision of the IMI Code (…)" (emphasis ours).

6. Now, in the understanding of this tribunal, such amendment occurred, naturally, because the legislator will have perceived that there was a need, verified only from 2014, to extend the aforementioned item to land for construction, in the terms referred to above.

7. In these terms, it is clear that until that date (2014), the text of the item previously mentioned left outside its scope of application properties legally classified as land for construction (otherwise, there would have been no need to amend the text of the aforementioned item).

8. Thus, and on the basis of the reasons set out above, this tribunal understands that land for construction cannot, at the date of the facts, be encompassed by the concept of property with residential use, as referred to in the text of Item no. 28 of the TGIS, whereby it is concluded that the legal presupposition of application is not met.

9. In parallel, and with respect to the production of additional evidence, as requested by the Claimant, namely the listing of witnesses, this tribunal understands that this is not necessary, especially because, as referred to by the ATA, we are dealing with a strictly legal question.

V. Decision

1. In these terms, this Arbitral Tribunal decides:

A) To judge the request for arbitral pronouncement well-founded and, consequently, to declare illegal and to annul the IS assessment mentioned above, referring to 2013, which resulted in tax payable in the amount of € 15,523.07, relating to the taxation of urban properties with residential use, pursuant to the provision of Item no. 28 of the TGIS;

B) To condemn the Respondent to reimburse the Claimant for the amount paid by it during the course of the proceedings, as set out above, in the amount of € 5,332.68, plus default interest;

C) To condemn the Respondent to pay the costs of the proceedings.

VI. Value of the Proceedings

1. The value of the proceedings is set at € 15,523.07, in accordance with Article 97-A, paragraph 1, subparagraph a), of the Code of Administrative Court Procedure, applicable by virtue of subparagraphs a) and b) of paragraph 1 of Article 29 of the RJAT and of paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings ("RCPAT").

VII. Costs

1. In accordance with the provision of Article 22, paragraph 4, of the RJAT, the amount of the arbitration fee is set at € 918, in accordance with Table I of the aforementioned Regulation, to be borne by the Respondent, given the complete success of the request.

Let it be notified.

Lisbon, CAAD, 17 April 2015

The Arbitrator

(Sérgio Santos Pereira)