Stamp Duty on Building Land (Verba 28.1 TGIS) – CAAD Ruling 717/2014-T

ARBITRAL DECISION

I – REPORT

1. Application

A… – CLOSED REAL ESTATE INVESTMENT FUND, Tax ID: …, managed and legally represented by the management company B…, S.A., with registered office at Av. …., no. …, in Lisbon, registered in the Commercial Registry Office of Lisbon under registration number and collective person number …, submitted, on 15.10.2014, pursuant to the provisions of Article 2, paragraph 1 of Decree-Law no. 10/2011, of 20 January, which established the Tax Arbitration Regime (RJAT) and Order no. 112-A/2011, of 22 March, an application for arbitral decision, aimed at the annulment of the acts of assessment of Stamp Tax no. 2014 … and no. 2014 …, as well as the decisions dismissing the administrative complaints submitted by the Applicant concerning those tax acts.

1. The application for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD and notification was given to the Tax and Customs Authority.

Pursuant to the provisions of Article 6, paragraph 1 of RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the applicable legal deadlines, the undersigned were appointed as arbitrators, and they communicated to the Deontological Council and to the Administrative Arbitration Centre their acceptance of the appointment within the applicable regular deadline.

The Arbitral Tribunal was constituted on 23.12.2014.

1. By arbitral order of 4.02.2015, the meeting provided for in Article 18 of RJAT was dispensed with, as well as the holding of hearings.

2. The Applicant alleges, in substance, the following:

• The Applicant is the owner and legitimate possessor of the urban property, composed of a plot of land for construction, located on Rua de … no. …, formerly designated as Plot no. 5, described in the Land Registry Office of Porto under no. …, parish of …. and registered in the urban property matrix under article ….º. From the subdivision permit for the property it follows that it is intended, in the future, for the construction of a building for housing and parking. However, currently, the property is a plot of land for construction, having no constructed building (nor under construction);

• Notified of the assessment of Stamp Tax (IS), under item 28.1 of the General Table of Stamp Tax (TGIS), concerning the aforementioned property and relating to the year 2013, the Applicant disagrees with such assessment on the grounds that, on 31 December 2013, land for construction was not subject to taxation under item 28.1 of Stamp Tax;

• On 31 December 2013, only urban properties "with housing designation" were subject to taxation under item 28.1 of TGIS, which was not the case with the Applicant's property, since there was no building therein capable of being designated for housing; the land for construction, in itself, is not intended for housing, because, naturally, it does not meet conditions to be habitable;

• For tax purposes and under the provisions of the Municipal Property Tax Code (CIMI), land for construction constitutes a distinct species of property completely different from properties classified as "Residential";

• It is clear that the legislator's intention, with respect to item 28.1 of the Table attached to the Stamp Tax Code, introduced by Law 55-A/2012 of 29 October, was to subject to taxation under that tax the ownership, usufruct or right of superficies over properties intended for housing / effectively residential;

• And therefore, the Applicant's property is not covered by the aforementioned rule of tax incidence.

1. In its response to the application for arbitral decision, the Respondent AT - Tax and Customs Authority pleads for dismissal of the application, alleging, in summary, the following:

• The Stamp Tax Code (CIS) not defining what should be understood by urban property, land for construction or housing designation, one must resort for this purpose to the Municipal Property Tax Code CIMI, where the notion of designation of urban property finds its basis in the section relating to the valuation of properties;

• The notation of designation of urban property finds its basis in the section relating to the valuation of properties, which is well understood since the designation of the property (purpose) incorporates value to the property, constituting a determinant factor of distinction (coefficient) for purposes of valuation;

• As results from the expression "…value of authorized buildings", contained in Article 45, paragraph 2 of CIMI the legislator chose to determine the application of the methodology for valuation of properties in general, to the valuation of land for construction, being therefore applicable to them the designation coefficient provided for in Article 41 of CIMI. Thus, the designation of the property (aptitude or purpose) is a coefficient that contributes to the valuation of the property, in the determination of the tax property value, applicable to land for construction;

• Contrary to what is advocated by the Applicant, the Respondent understands that the concept of "properties with housing designation", for purposes of the provision in item 28.1 of TGIS, comprises both constructed properties and land for construction, starting with consideration of the literal element of the rule;

• Item 28 of TGIS itself does not use the expression "properties intended for housing", which is found in CIMI, but rather the expression "properties with housing designation", an expression broader than the first, so that its meaning must be found in the need to integrate other realities beyond those identified in Article 6, paragraph 1 subparagraph a) of CIMI;

• The constitution of a right of construction increases the tax property value of land for construction, a factor which is at the origin of the valuation formula for construction land, in which account is taken of licensing for construction and the type of building to be constructed;

II – ISSUES TO BE DECIDED

1. The only issue to be decided by the Tribunal is that of the applicability of item 28.1 of TGIS, as worded on 31 December 2013, to properties qualified as "land for construction".

III – JURISDICTION AND CONSTITUTION

1. The tribunal is materially competent and is regularly constituted in accordance with RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented.

The proceedings do not suffer from defects that would invalidate it.

IV – GROUNDS FOR DECISION

1. PROVEN FACTS CONSIDERED RELEVANT

The following are the proven facts considered relevant to the decision:

a. On 31 December 2013, the Applicant was the owner of the urban property, composed of a plot of land for construction, located on Rua de … no. …, formerly designated as Plot no. 5, described in the Land Registry Office of Porto under no. …, parish of … and registered in the urban property matrix under article ….º;

b. From the subdivision permit for the property it follows that it is intended, in the future, for the construction of a building for housing and parking;

c. Notified of the assessment of Stamp Tax (IS), under item 28.1 of the General Table of Stamp Tax (TGIS), concerning the aforementioned property and relating to the year 2013, the Applicant filed two administrative complaints contesting the legality thereof;

d. The aforementioned administrative complaints were dismissed by the Respondent, of which the Applicant was notified on 17 July 2014 and 6 October 2014;

There are no proven facts considered not proven relevant to the decision.

GROUNDS FOR DECISION ON MATTERS OF FACT

1. The decision on matters of fact is based on the documents submitted by the Applicant with the application for arbitral decision, as well as those in the administrative file submitted by the Respondent, which were not subject to any challenge, all being consistent with each other. In the present proceedings, there was, moreover, no disagreement between the parties regarding matters of fact, the divergence being limited to matters of law.

V – APPLICABLE LAW

1. Item 28 of the General Table of Stamp Tax, as worded at the date of the facts, established that stamp tax applied to the ownership of properties with housing designation with TPV equal to or greater than 1,000,000 euros, in the following terms:

"28 – Ownership, usufruct or right of superficies of urban properties whose tax property value contained in the matrix, in accordance with the Municipal Property Tax Code (CIMI), is equal to or greater than 1,000,000 euros – on the tax property value used for the purpose of IMI:[1]

28.1 – For property with housing designation – 1%;

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

1. It has been abundantly emphasized in several arbitral decisions, namely in cases 42/2013-T, 48/2013-T, 49/2013-T, 51/2013-T, 53/2013-T, 144/2013-T and 202/2014-T[2] that the concept of "property with housing designation" (which is not the subject of any specific definition in the Stamp Tax Code) is not used by CIMI[3], nor in any other legislative instrument.

All these arbitral decisions, whose doctrine is followed, go, in essence, in the direction that such concept requires for its fulfillment, at least, the real possibility of the existing property being used for housing and, in all of them, it was understood that land, even if intended for the construction of residential buildings, do not fall within the concept of "property with housing designation", as results from the following passages:

Case 42/2013-T:

"The expression 'housing designation' does not seem to be able to have any other meaning than that of 'utilization' for housing purposes, that is, urban properties that have an actual use for housing purposes, either because they are licensed for such, or because they have that normal destination.

And we cannot confuse a 'housing designation' which implies an actual designation of an urban property for that purpose, with the expectancy, or potentiality, of an urban property being able to have a 'housing designation'.

Case 49/2013-T:

"The expression 'with housing designation' inculcates, in a simple reading, an idea of real and present functionality. From the rule in question it is not possible to extract, by interpretation, that, as stated in the respondent's reply, the legislator's choice of that expression was intended to integrate 'other realities beyond those identified in Article 6, paragraph 1, subparagraph a), of CIMI.' Such interpretation has no legal support, in light of the principles contained in Articles 9 of the Civil Code and 11 of the General Tax Law.

In fact, if the legislator intended to encompass within the scope of incidence of the tax other realities than those resulting from the classification governed by Article 6 of CIMI, it would have said so expressly. But it does not, instead referring, in full, to the concepts and procedures provided for in that Code".

Case 51/2013-T:

"The point that is important to decide is this: is there a difference between the expression that CIMI uses of 'residential urban property' and the expression used by Article 4 of Law no. 55-A/2012, when referring to 'property with housing designation'?

We believe not, since the same fundamental sense of taxing the ownership of properties with the same purpose prevails, the effectiveness or the possibility of use for purposes of human housing, with all the consequences that legislation in general and CIMI in particular give to it."

Case 53/2013-T:

"(…) it must be presumed that the use of a different expression is intended to have a distinct reality, so that, in good hermeneutics, 'property with housing designation', cannot be a property merely licensed for housing or intended for that purpose (that is, it will not be sufficient that it be a 'residential property'), having to be a property that already has effective designation for that purpose."

Case 144/2013-T:

"(…) we believe it is necessary, in the interpretation of the provision in item 28.1 of TGIS, the understanding that the housing designation of an urban property suggests that it be given that effective purpose, or that it can directly be given that purpose."

Case 202/2014-T:

"The expression 'with housing designation' inculcates, in a simple reading, an idea of real and present functionality. From the rule in question it is not possible to extract, by interpretation, that, as stated in the Respondent's reply, the legislator's choice of that expression was intended to integrate 'other realities beyond those identified in Article 6, paragraph 1, subparagraph a), of CIMI.' Such interpretation has no legal support, in light of the principles contained in Articles 9 of the Civil Code and 11 of the General Tax Law."

1. Also in the judgment of the STA, of 09-04-2014, case no. 048/14 it was considered that:

"The concept of 'property (urban) with housing designation' was not defined by the legislator. Neither in Law no. 55-A/2012, which introduced it, nor in the IMI Code, to which paragraph 2 of Article 67 of the Stamp Tax Code (also introduced by that Law), refers on a subsidiary basis. And it is a concept that, probably due to its imprecision – a fact all the more serious given that it is on the basis of it that the scope of objective incidence of the new taxation is determined -, had a short life, since it was abandoned upon the entry into force of the State Budget Law for 2014 (Law no. 83-C/2013, of 31 December), which gave new wording to that item no. 28 of the General Table, and which now determines its scope of objective incidence through the use of concepts that are legally defined in Article 6 of the IMI Code.

This amendment - to which the legislator did not assign an interpretative character, nor do we believe it did – merely makes clear for the future that land for construction whose authorized or planned building is for housing is covered by the scope of item 28.1 of the General Table of Stamp Tax (provided that its tax property value is equal to or greater than 1 million euros), but clarifies nothing, however, regarding prior situations (assessments for 2012 and 2013), such as that which is at issue in the present proceedings.

Now, with regard to these, it does not seem possible to adopt the interpretation of the appellant, since, contrary to what is alleged, it does not result unequivocally either from the letter or from the spirit of the law that its intention was, ab initio, to encompass within its objective scope of incidence land for construction for which the construction of residential buildings was authorized or planned, as now results unequivocally from item 28.1 of the General Table of Stamp Tax."
(…)

"It is thus concluded, with the respondent and in accordance with the decision in the judgment under review that, resulting from Article 6 of the IMI Code a clear distinction between urban properties 'residential' and 'land for construction', these cannot be considered, (…) as 'properties with housing designation' for purposes of the provision in item no. 28.1 of the General Table of Stamp Tax, in its original wording, as conferred on it by Law no. 55-A/2012, of 29 October."

1. This understanding continued to be adopted by the Supreme Administrative Court, uniformly, in the other cases in which it was called upon to pronounce itself. As can be read in the judgment delivered in case 0707/14, of 10.09.2014:

"The question was already decided by this Section of Tax Proceedings of the Supreme Administrative Court on 9 April 2014, in cases no. 1870/13 (Not yet published in the official journal, available at http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/f6fd29ac6d6ebaf380257cc30030891a?OpenDocument.) and 48/14 (Not yet published in the official journal, available at http://www.dgsi.pt/jsta.nsf/35fbbbf22e1bb1e680256f8e003ea931/0e28073928824e5080257cc3003a0cbd?OpenDocument.), and, since then, reiterated and uniformly in numerous judgments, and may be considered as established case law in the sense that land for construction cannot be considered for purposes of the incidence of Stamp Tax provided for in Item 28.1 (as worded by Law no. 55-A/2012, of 29 October) as urban properties with housing designation.

This is case law which is also accepted here, as we fully agree with it and in light of the provision in paragraph 3 of Article 8 of the Civil Code (CC)(…)

1. Thus, a point unequivocally common to all these decisions is the understanding that land for construction, even if intended for residential construction, are not properties with housing designation. In line with this case law, it is understood that the application of item no. 28.1 of the General Table of Stamp Tax, as worded by Law no. 55-A/2012, requires, at least, the actuality of the designation of the property for housing, the mere potentiality of building for housing purposes not being sufficient.

In fact, regardless of the reasons that may have led Law no. 55-A/2012 to use the expression "property with housing designation", instead of "residential property" contained in Article 6, paragraph 1, subparagraph a) of CIMI, for the subsumption to item 28.1 of CIS there cannot fail to be required, at least, the real and actual potentiality (relative to the tax event) of the property in question being used for housing.

A plot of land for construction cannot, in our understanding, be considered a property with "housing designation", since it consists of a reality not apt for human habitation. To achieve that aptitude it is necessary for there to occur a reality that is external to it - the construction of a building apt for habitation - and, with such event, a plot of land for construction ceases to exist and a new reality comes into being: the building. And it is this that can have housing designation.

Thus, land for construction does not fall within the concept of "property with housing designation", and item 28.1 of the General Table of Stamp Tax is not applicable to it.

1. Having regard to the foregoing, as item 28.1 of the Stamp Tax Code is inapplicable to the Applicant's property, the Applicant's claim for annulment cannot fail to succeed, since the tax acts are tainted by the defect of violation of law due to error in the legal assumptions.

VI – DECISION

Thus, the Tribunal decides, ruling entirely in favor of the present application for arbitral decision:

a) To declare the non-application of item 28 of the General Table of Stamp Tax to the property in question.

b) To declare the illegality and consequent annulment of all the tax acts sub judice.

Value of the claim: 63,414.00 € (sixty-three thousand four hundred and fourteen euros), in accordance with the provisions of Article 306, paragraph 2, of the Code of Civil Procedure and Article 97-A, paragraph 1, subparagraph a), of the Tax Arbitration Procedural Code and Article 3, paragraph 2, of the Costs Regulation in Arbitration Proceedings.

Costs charged to the Respondent, in the amount of 2,448.00 € (two thousand four hundred and forty-eight euros) in accordance with paragraph 4 of Article 22 of RJAT.

Lisbon, CAAD, 26 March 2015.

The Arbitral Tribunal,

José Poças Falcão

(presiding arbitrator)

Nina Aguiar

(member arbitrator)

Marcolino Pisão Pedreiro

(member arbitrator)

[1] The rule was amended upon the entry into force of the State Budget Law for 2014 - Law no. 83-C/2013, of 31 December, broadening expressly the tax base, now including land for construction.

[2] Which can be consulted on the website "https://caad.org.pt/tributario/decisoes/"

[3] Article 67, paragraph 2, of CIS provides that "To matters not regulated in this Code concerning item no. 28 of the General Table, the provisions of CIMI apply, subsidiarily." In turn, CIMI uses the concept of residential urban property, being considered as such the buildings constructions licensed for such purpose or those which have as their normal purpose each of these purposes, in accordance with Article 6, paragraph 1, subparagraph a) and paragraph 2. This same article clearly distinguishes the concept of land for construction, in its paragraph 1, subparagraph c) and in paragraph 3.