Stamp Tax on High-Value Property: Independent Units Under Verba 28.1 TGIS (CAAD 718/2015-T)

ARBITRAL DECISION

Carla Castelo Trindade, Arbitrator appointed by the Deontological Council of the Administrative Arbitration Centre to form this arbitral tribunal, renders the following decision:

I – REPORT

On 30 November 2015, A…, widow, resident at Rua …, no. …, … Dt.°, …-… Lisbon, holder of tax identification number …, in her capacity as head of the undivided estate, with the tax identification number …, opened by the death of her father B… (hereinafter "the Claimant"), filed a petition for the constitution of the arbitral tribunal, in accordance with the terms and for the purposes provided in Articles 2 and 10 of the Legal Framework for Arbitration in Tax Matters, approved by Decree-Law 10/2011, of 20 January (RJAT).

By means of the petition for constitution of the arbitral tribunal and for arbitral pronouncement, the Claimant seeks the annulment of the acts of assessment of Stamp Duty, carried out under item 28.1 of the General Table of Stamp Duty (TGIS), relating to the year 2014, having assigned to the petition for constitution of the arbitral tribunal the value corresponding to the three instalments, i.e., the amount of € 13,623.20 (thirteen thousand six hundred and twenty-three euros and twenty cents).

In fact, not accepting the Stamp Duty assessment above identified, the Claimant requested the constitution of this arbitral tribunal, formulating, as it is understood, the following claims:

a) Declaration of illegality of the acts of assessment of Stamp Duty, as it is understood, on the grounds of:

i. Defect of violation of law due to error as to the legal prerequisites upon which the application of Item 28.1 of TGIS depends;

ii. Unconstitutionality of the provision in item no. 28 of TGIS, by violation of the principle of equality, enshrined in Article 13 of the Constitution of the Portuguese Republic (CRP).

b) Condemnation of the Tax Authority to pay indemnity interest, in accordance with Article 43, no. 1, of the General Tax Law (LGT).

With the petition, seven documents were attached.

As the Claimant opted for not appointing an arbitrator, in accordance with the terms provided in subparagraph a) of no. 2 of Article 6 and subparagraph b) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed Dr. Carla Castelo Trindade as arbitrator of the sole arbitral tribunal, who communicated her acceptance of the appointment within the applicable timeframe.

The parties were notified of this appointment, and no request for recusal of the appointment as arbitrator was presented by Dr. Carla Castelo Trindade.

Thus, in accordance with the provision of subparagraph c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the sole arbitral tribunal was constituted on 10 February 2016.

On 23 February 2016, the Tax and Customs Authority (hereinafter "the Respondent") presented its answer in which it alleged the total inadmissibility of the petition for arbitral pronouncement, arguing for the maintenance of the Stamp Duty assessment, on the basis that it represents the correct interpretation of Item 28 of the General Table as amended by Law no. 55-A/2012, of 29 December.

Given that, in this case, none of the purposes legally entrusted to the meeting referred to in Article 18 of the RJAT were present and, taking into account the position taken by the parties in their pleadings, pursuant to Articles 16(c) and 19 of the RJAT, as well as the principles of procedural economy and prohibition of futile acts, the holding of this meeting was dispensed with, and the parties were notified to present their arguments.

On 18 March 2016, the Claimant requested the attachment to the case of 12 (twelve) documents relating to the collection notes and proof of payment of the third instalment of Stamp Duty in question.

Both the Claimant and the Respondent presented arguments.

The Claimant concluded her arguments by stating that "the error of the Tax Authority (…) lies in applying the concept of real property under civil law to a situation in which only the corresponding tax-legal concept is relevant" and that from the application of the provisions of the Property Transfer Tax Code, required both by Article 67, no. 2 of the Stamp Duty Code, and by Item 28 of TGIS itself, it follows that the tax concept of real property for purposes of Property Transfer Tax and Stamp Duty "is based on the principle of autonomization of parts susceptible to independent use, which therefore have their own tax value". She further argued that "the Tax Authority thus made abusive use of a criterion of convenience that has no legal support and does not correspond to the legislator's intent when mandating the application to matters not regulated in the Stamp Duty Code, subsidiarily, the provisions of the Property Transfer Tax Code".

The Claimant concluded her arguments by reinforcing the view that the practice followed by the Tax Authority's services in the assessment acts of Stamp Duty relating to Item 28.1 constitutes a flagrant violation of the principle of equality, as enshrined in Article 13 of the Constitution.

The Respondent counter-argued, reiterating the total inadmissibility of the petition for arbitral pronouncement, because "(…) the legality of the act in question in the present proceedings [is] unquestionable" not recognizing any error in the factual or legal prerequisites in which the tax assessment acts of the Stamp Duty in question may have incurred and, consequently, not recognizing the right of the taxpayer to payment of indemnity interest.

II. DISMISSAL OF TECHNICAL OBJECTIONS

The arbitral tribunal was properly constituted and is materially competent.

The proceedings do not suffer from defects and no issues have been raised that may prevent the tribunal from ruling on the merits of the case.

The parties possess legal personality and capacity and are entitled to be parties.

Having considered all the above, the tribunal proceeds to decide.

III. ON THE FACTS

III.1. PROVEN FACTS

With respect to the factual matter, it is important to note at the outset that the tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish proven from unproven matters. This is in accordance with Article 123, no. 2, of the Tax Procedure and Process Code and Article 607, nos. 2, 3 and 4 of the Civil Procedure Code, applicable pursuant to Article 29, no. 1, subparagraphs a) and e), of the RJAT. Thus, the facts relevant to the adjudication of the case are selected and delimited according to their legal relevance, which is established in light of the various plausible solutions to the legal issue(s) (see Article 596 of the Civil Procedure Code applicable pursuant to Article 29, no. 1, subparagraph e), of the RJAT).

Now, in light of the positions taken by the parties, the documentary evidence and the Administrative Record attached to the proceedings, the following facts with relevance to the decision are considered proven:

• The Claimant is the head of the undivided estate with the tax identification number …, opened by the death of B….

• The estate includes the real property located at Rua … nos. … to …, registered in the urban real estate register of the parish of …, municipality of Lisbon, under article … (hereinafter "the property").

• The Claimant and the other heirs are owners of the property above described in hereditary co-ownership.

• The property consists of six storeys, with two units per floor, for a total of twelve divisions susceptible to independent use (cf. Doc. 1 of the petition for constitution of the arbitral tribunal).

• The property is in vertical ownership with storeys or divisions susceptible to independent use (cf. Doc. 1 of the petition for constitution of the arbitral tribunal).

• It has a tax patrimonial value of € 1,362,320.00 (one million, three hundred and sixty-two thousand and three hundred and twenty euros) (cf. Doc. 1 of the petition for constitution of the arbitral tribunal).

• All divisions susceptible to independent use, with residential use, were the subject of individual valuation in 2014, and their tax patrimonial value was determined separately, in accordance with the terms and for the purposes set out in Article 7, no. 2, subparagraph b) of the Property Transfer Tax Code.

• According to the valuation carried out, each of the divisions susceptible to independent use with residential purpose was assigned the following tax patrimonial value (cf. Doc. 1 of the Petition for Constitution of Arbitral Tribunal):

• On 20 March 2015, the Respondent assessed the Stamp Duty provided for in Item 28.1 of TGIS, at the rate of 1%, on the tax patrimonial value of each division of the property, susceptible to independent use, and intended for residential purposes, in the total amount of € 13,623.20 (thirteen thousand six hundred and twenty-three euros and twenty cents) (cf. Doc. 2 of the petition for constitution of the arbitral tribunal).

• The Claimant was notified to proceed with the payment of the first instalments of the acts of assessment of Stamp Duty, relating to the year 2014, carried out under item no. 28.1 of the General Table of Stamp Duty, corresponding to the following amounts and collection notes:

(as per Doc. 2 of the Petition for Constitution of Arbitral Tribunal)

• The Claimant was notified to proceed with the payment of the second instalments of the acts of assessment of Stamp Duty, relating to the year 2014, carried out under item no. 28.1 of the General Table of Stamp Duty, corresponding to the following amounts and collection notes:

(as per Docs. 3 of the Petition for Constitution of Arbitral Tribunal)

• The Claimant was further notified to proceed with the payment of the third instalments of the acts of assessment of Stamp Duty, relating to the year 2014, carried out under item no. 28.1 of the General Table of Stamp Duty, corresponding to the following amounts and collection notes:

• On 23 April 2015, the Claimant proceeded to pay the first instalments of the acts of assessment of Stamp Duty relating to the year 2014 contested here, relating to the property above identified, in the total amount of € 4,541.08 (four thousand, five hundred and forty-one euros and eight cents); (cf. Doc. 4 attached with the Claimant's petition for constitution of arbitral tribunal).

• On 27 July 2015, the Claimant proceeded to pay the second instalments of the acts of assessment of Stamp Duty relating to the year 2014 contested here, relating to the property above identified, in the total amount of € 4,541.06 (four thousand, five hundred and forty-one euros and six cents); (cf. Doc. 4 attached with the Claimant's petition for constitution of arbitral tribunal).

• As mentioned in the Request filed on 18 March 2016, the Claimant proceeded to pay the third instalments of the acts of assessment of Stamp Duty relating to the year 2014 contested here, relating to the property above identified, in the total amount of € 4,541.06 (four thousand, five hundred and forty-one euros and six cents).

III.2. UNPROVEN FACTS

As stated, with respect to the factual matter established as certain, the tribunal is not required to rule on everything alleged by the parties; rather, it has the duty to select the facts that are relevant to the decision and to distinguish proven from unproven matters, as provided in Article 123, no. 2, of the Tax Procedure and Process Code, applicable pursuant to Article 29, no. 1, subparagraphs a) and e), of the RJAT. Thus, the facts relevant to the adjudication of the case were, as stated above, selected and delimited according to their legal relevance, and there is no other factual matter alleged that is relevant to the proper resolution of the procedural dispute.

IV. ON THE LEGAL MATTERS

In light of the positions of the parties as expressed in their pleadings, the central question to be resolved by this arbitral tribunal consists of assessing the legality of the act of assessment of Stamp Duty.

As the Claimant has imputed various defects to the contested tax act, it is necessary to determine the order of examination of these defects, which must be in accordance with the order provided in Article 124 of the Tax Procedure and Process Code, applicable pursuant to Article 29, no. 1, subparagraph a) of the Legal Framework for Tax Arbitration[1].

The substantiation of any of the defects invoked by the Claimant will result in the annulment of the tax act. The defect of violation of law will be analyzed first, to the extent that it will result in the "more stable or effective protection of injured interests" insofar as its possible substantiation will prevent the renewal of the act, which is not the case with annulment resulting from other defects.

In accordance with this, this tribunal will assess first the defect of violation of law.

Defect of Violation of Law

The question to be decided consists in determining whether the tax assessment acts of Stamp Duty that fell upon the storeys/divisions susceptible to independent use of the property described above are or are not illegal, due to a defect of violation of law, on account of the erroneous interpretation and application of Item 28.1 of TGIS.

Thus, it must first be stated that it was Law no. 55-A, of 29 October that amended Article 1 of the Stamp Duty Code, adding Item 28 to TGIS, which provides that:

"28 – Ownership, usufruct or right of superficies of urban real property whose tax patrimonial value recorded in the register, in accordance with the Property Transfer Tax Code (CIMI), is equal to or greater than € 1,000,000 – on the tax patrimonial value used for purposes of Property Transfer Tax:

28-1 – For real property with residential use – 1%;

28-2 – For real 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 the list approved by order of the Minister of Finance – 7.5%."

Thus, with the entry into force of Item 28.1, real properties with residential use with a tax patrimonial value equal to or greater than € 1,000,000.00 became subject to Stamp Duty, at the rate of 1%.

It is therefore to be stated that there are three prerequisites for the occurrence of Item 28.1 of TGIS, namely: (1) that the property be real property; (2) that such real property have residential use; and (3) that the taxable patrimonial value (TPV) recorded in the register and used for purposes of Property Transfer Tax assessment be equal to or greater than € 1,000,000.00.

To give effect to the first two prerequisites, it is important to pay attention to the concept of real property with residential use.

Now, the Stamp Duty Code does not define the concept of "real property," nor does it define "real property with residential use." Indeed, it is Article 1, no. 6, of the Stamp Duty Code itself that determines that "For the purposes of this Code, the concept of real property is that defined in the Property Transfer Tax Code (IMI)".

In accordance with Article 2, no. 1 of the Property Transfer Tax Code, real property is:

"any portion of territory, including waters, plantations, buildings and constructions of any nature incorporated in or situated on it, 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 above mentioned, endowed with economic autonomy in relation to the land on which they are situated, even if situated on a portion of territory that constitutes an integral part of other assets or does not have an asset nature."

In turn, urban properties with residential use are those properties "(…) that have as their normal purpose each of these uses," in accordance with the terms set out in Articles 4 and 6, no. 2, of the Property Transfer Tax Code.

In the present case, we are dealing with an urban property, in full ownership, or in a vertical ownership regime. Taking into account the concept of real property established by the legislator – the above cited concept – there is no doubt that the property now under analysis, owned by the Claimant, is literally covered by item 28.1 of TGIS.

Nevertheless, it is a property composed of storeys or divisions susceptible to independent use, also with residential use, as appears from the Urban Real Estate Register Certificate, attached as Doc. 1 with the Petition for Constitution of Arbitral Tribunal.

It should be noted, however, that the law does not distinguish, at any moment, between property in vertical ownership and property in horizontal ownership. In fact, Article 2, no. 4, of the Property Transfer Tax Code merely determines that "for purposes of this tax, each autonomous fraction, under the horizontal ownership regime, is considered as constituting a property". What the provision determines is that autonomous fractions are considered as properties. This does not imply, however, that only autonomous fractions are considered as residential properties whose tax patrimonial value, for purposes of the provision of Item 28.1, is equal to or greater than € 1,000,000.00.

It remains, therefore, to determine whether the TPV relevant in this case, for purposes of the occurrence of Item 28.1 of TGIS, will be the "total" TPV of the property, or the TPV of each of the storeys or divisions susceptible to independent use, individually considered.

Now, as results from Item 28.1 of TGIS itself and, likewise, from no. 1 of Article 6 of Law no. 55-A/2012, of 29 October, Stamp Duty shall apply to the TPV used for purposes of Property Transfer Tax.

Articles 38 and following of the Property Transfer Tax Code define the manner of determination of TPV for purposes of that tax, in accordance with the terms set out in no. 1 of Article 7 of that same Code.

Furthermore, no. 3 of Article 12 of the Property Transfer Tax Code provides that:

"Each storey or part of property susceptible to independent use shall be separately considered in the registration entry, which shall also specify the respective tax patrimonial value."

In this way, for purposes of Property Transfer Tax assessment, each part of the property susceptible to independent use is assigned an individual TPV, being specified in the real estate register of the property in full or vertical ownership. It is thus on that TPV separately considered that Property Transfer Tax will be determined and assessed, that is, in relation to each storey, part or division of the property with independent use.

In this regard, attention should be drawn to what was decided in the context of arbitral proceedings no. 194/2014-T, where it was stated that:

"the Property Transfer Tax Code enshrines, both as to the registration entry and the specification of the respective tax patrimonial value, and as to the assessment of the tax, the autonomization of parts of urban property susceptible to independent use and the segregation/individualization of the TPV relating to each storey or part of property susceptible to independent use.

Thus, to each property, in terms conceptually defined by Article 2 of the Property Transfer Tax Code, corresponds a single entry in the register (…) but, according to no. 3 of Article 12 of the same Code, relating to the concept of real estate register (…) 'each storey or part of property susceptible to independent use shall be separately considered in the registration entry, which shall also specify the respective tax patrimonial value' (…).

That is, the rule is autonomization, the characterization as "property" of each part of a building, provided it is functionally and economically independent, susceptible to independent use, in accordance with the concept of property defined in no. 1 of Article 2 of the Property Transfer Tax Code (…)".

In summary, for purposes of Property Transfer Tax, the TPV to be considered shall be the TPV of each of the storeys, parts or divisions of the property susceptible to independent use.

And in this way, if Item 28 of TGIS itself refers to the terms of the Property Transfer Tax Code, the same rules and principles must necessarily be applicable in the context of Stamp Duty. The same conclusion would be reached by virtue of the provision of no. 2 of Article 67 of the Stamp Duty Code, according to which "To matters not regulated in this Code relating to item no. 28 of the General Table shall be applied, subsidiarily, the provision of the Property Transfer Tax Code."

Thus, if in accordance with Article 11 of the General Tax Law the interpretation of tax laws must be carried out with attention to the general principles of interpretation; and if one must proceed from the assumption that the legislator "enshrined the most correct solutions and knew how to express his thought in appropriate terms" (cf. Article 9 of the Civil Code), only those storeys or divisions susceptible to independent use, with residential use, whose TPV is less than € 1,000,000.00 are covered by the rule of occurrence of Item 28.1 of TGIS.

The material truth is, therefore, the determining criterion of taxable capacity, the mere legal-formal reality of the property being irrelevant. Indeed, and as stated above, the legislator did not distinguish between properties in horizontal ownership and properties in vertical ownership. Consequently, the Respondent cannot make a distinction where the legislator itself chose not to, on pain of violating the principle of fiscal legality, provided for in Article 103 of the CRP, and also the principles of fiscal justice, equality and proportionality.

Recalling what was stated by the arbitral tribunal constituted in the context of proceedings no. 50/2013-T:

"(…) considering that the registration in the property register of properties in vertical ownership, constituted by different parts, storeys or divisions with independent use, in accordance with the Property Transfer Tax Code, is subject to the same registration rules as properties constituted in horizontal ownership, with their respective Property Transfer Tax, as well as the new Stamp Duty, assessed individually in relation to each of the parts, it offers no doubt that the legal criterion for defining the occurrence of the new tax must be the same. (…)

Therefore, if the legal criterion requires the issuance of individualized assessments for the autonomous parts of properties in vertical ownership, in the same manner as it establishes for properties in horizontal ownership, it has clearly established the criterion, which must be unique and unequivocal, for the definition of the rule of occurrence of the new tax.

Thus, the new stamp duty would only occur if any of the parts, storeys or divisions with independent use had a TPV greater than € 1,000,000.00.

The criterion sought by the Tax Authority, of considering the value of the sum of the TPVs attributed to the parts, storeys or divisions with independent use, on the argument that the property is not constituted under a horizontal ownership regime, finds no legal support and is contrary to the criterion applicable under the Property Transfer Tax Code and, by reference, under Stamp Duty.

(…)

Thus, the adoption of the criterion defended by the Tax Authority violates the principles of fiscal legality and equality, as well as the prevalence of material truth over legal-formal reality.

The tax legislator (…) makes no distinction as to the regime of properties that are in horizontal or vertical ownership, if the property were in a horizontal ownership regime, none of its residential fractions would be subject to the occurrence of the new tax, which is why the Tax Authority cannot treat equal situations differently."

Notwithstanding this practically unanimous understanding, the Respondent argues, in its answer that:

"To dispel any doubts, a Binding Opinion was issued on this matter in Proceedings: 2013… - BOP no. … with the endorsing order of the Deputy Legal Officer of the Director-General of the Tax and Customs Authority of 11.02.2013, the contents of which are only partially transcribed: '3. For purposes of taxation under Stamp Duty, pursuant to item 28 of the respective General Table, the distinction between properties constituted in full ownership and properties constituted under horizontal ownership is determinative. In the case of property constituted in horizontal ownership, as provided in Articles 1417 et seq. of the Civil Code, each autonomous fraction thus constituted is considered as constituting a property, as results from the provision of Article 2, no. 4 of the Property Transfer Tax Code, applicable by virtue of the provision of Article 1, no. 1 and no. 6 of the Stamp Duty Code, as amended by Law no. 55-A/2012 of 29 October and Item 28 of the General Table of Stamp Duty, in its present wording.

1. For the proper and legal purposes, in particular for purposes of taxation under Stamp Duty, item 28 of TGIS, properties constituted in full ownership are considered in their entirety as a single property. (…)

2. For purposes of Property Transfer Tax and consequently for purposes of subjection to Stamp Duty, item 28 of the General Table, as set out in that Code, by reference from that Code, the property in full ownership with parts or divisions susceptible to independent use (so-called full ownership) and the property under a horizontal ownership regime are, with respect to the concept of "fiscal property" distinct, since in the latter case the autonomous fraction, for purposes of Property Transfer Tax, is part of the concept of property. This is an exception to the general rule, given that each autonomous fraction of a building subject to the horizontal ownership regime belongs to an independent owner, who is the owner of his autonomous fraction and co-owner of the common parts of the property.

3. As for the first case (full ownership), even though the property has parts or divisions susceptible to independent use, the fiscal legal concept is that this property constitutes a single unit, since its ownership, without prejudice to co-ownership, belongs only to a single owner'."

The Respondent thus comes to support its understanding, seeking to "dispel any doubts" on the basis of a Binding Opinion provided in 2013, to another taxpayer, in the presence of a factual basis which, though substantially analogous, is not concretely identical.

Now, as is known, requests for Binding Opinions arise, broadly speaking, when a particular taxpayer, taxpayer, tax obligor or other person who demonstrates interest directs to the Tax Authority a request for clarification regarding the fiscal legal framework of a particular well-identified factual situation. The Tax Authority's response regarding that framework will then be binding for it.

Nevertheless, Binding Opinions bind only the Tax Authority, not obligating the taxpayers or other interested parties who requested them. Nor can they bind other taxpayers, tax obligors or taxpayers who did not request them. Taxpayers (whether or not they requested the Binding Opinion, whether or not they are subject in the fiscal legal situation whose framework was requested) are not therefore obligated to follow the sense of the Binding Opinion provided by the Tax Authority, and may act in accordance with the interpretation they understand to be most correct. For this very reason, the Claimant presented the present petition for constitution of arbitral tribunal, which is now decided, disagreeing entirely with the position that has been sustained by the Tax Authority.

Furthermore, as has been understood, courts – whether judicial or arbitral – as organs of independent sovereignty, are not subordinated to the decisions taken by the Tax Authority in tax matters, and may interpret and apply tax law "without any dependence on the criteria adopted by the Tax Authority". In this way, not only are the courts, judicial or arbitral, not bound to interpret tax law in the sense that the Tax Authority interpreted it in the Binding Opinion, but the latter must respect the judicial or arbitral decisions that contradict it, executing them (See in this regard, Jesuíno Alcântara Martins and Costa Alves (2015) Tax Procedure and Process, p. 52).

Reasons for which the argument of the Respondent cannot proceed.

The interpretation here being defended – that the TPV relevant for purposes of Item 28.1 of TGIS is that which is imputed to each of the storeys or divisions susceptible to independent use and not the sum of all these values – is the interpretation that results, in fact, from the ratio of Item 28.1 and, consequently, from the reasons that determined the taxation, by way of Stamp Duty, of urban residential properties with a value equal to or greater than € 1,000,000.00.

Indeed, in the explanatory memorandum of bill no. 96/XII (2nd) which gave rise to Law no. 55-A/2012, of 29/10 which, in turn, introduced item 28 to TGIS, it is stated that:

"these measures are fundamental to reinforce the principle of social equity in austerity, ensuring an effective sharing of the sacrifices necessary to comply with the adjustment programme. The Government is strongly committed to ensuring that the sharing of these sacrifices will be made by all and not just by those who live from the income of their work. In accordance with that objective, this decree expands the taxation of capital and property, equitably covering a broad set of sectors of Portuguese society".

In turn, in the presentation and discussion of the said bill in the Assembly of the Republic, in his intervention, the State Secretary for Tax Affairs stated the following:

"The Government has chosen as the priority principle of its tax policy social equity. This is even more important in times of austerity as a way to ensure the fair sharing of the tax burden.

In the demanding period that the country is going through, during which it is obliged to comply with the programme of economic and financial assistance, it becomes even more urgent to affirm the principle of equity. The same cannot always be – employees and pensioners – bearing the tax burden.

For the tax system to be more just, it is decisive to promote the expansion of the taxable base requiring an increased effort from taxpayers with higher incomes and thus protecting Portuguese families with lower incomes.

In order for the tax system to promote greater equality, it is fundamental that the effort of budgetary consolidation be shared by all types of income, covering with special emphasis capital income and high-value properties. This matter, it may be recalled, was extensively addressed in the Constitutional Court judgment.

Finally, for the tax system to be more equitable, it is crucial that all be called to contribute according to their taxable capacity, giving the tax administration enhanced powers to control and monitor situations of tax fraud and evasion.

In this sense, the Government today presents a set of measures that effectively reinforce a fair and equitable distribution of the adjustment effort across a broad and comprehensive set of sectors of Portuguese society.

This proposal has three essential pillars: the creation of special taxation on urban properties worth more than 1 million euros; the increase in taxation on capital income and on securities gains and the strengthening of rules to combat tax fraud and evasion.

First, the Government proposes the creation of a special rate on the highest-value urban residential properties. This is the first time in Portugal that special taxation on high-value properties intended for residential purposes has been created. This rate will be 0.5% to 0.8% in 2012, and 1% in 2013, and shall apply to properties worth € 1 million or more. With the creation of this additional tax rate, the tax burden required of these owners will be significantly increased in 2012 and 2013".

In their interventions, in the discussion of this bill, deputies Pedro Filipe Soares, of the Left Bloc, and Paulo Sá, of the Communist Party, speak of the taxation of luxury real estate, with allusions even being made to previous bills on the same subject that were not approved." (emphasis ours)

The ratio legis was therefore to create a tax that would apply to, in the words of the State Secretary, "properties worth € 1 million or more".

In this way, insofar as none of the storeys, parts or divisions of the property, with independent use, have a tax patrimonial value equal to or greater than € 1,000,000.00 (as results from the documents attached to the proceedings), it is concluded that the legal prerequisite for the occurrence of Stamp Duty provided for in Item 28 of TGIS is not met. There is, therefore, a defect of violation of law, whereby the taxation in question is undue, the illegality of the act of assessment of Stamp Duty in question being verified.

In summary, it is therefore concluded that the assessment of Stamp Duty as carried out is illegal due to a defect of violation of law, due to error as to the legal prerequisites, which justifies its annulment in accordance with Article 135 of the Administrative Procedure Code, applicable in accordance with Article 29, no. 1, subparagraph d), of the Legal Framework for Tax Arbitration and subparagraph c) of Article 2 of the General Tax Law.

The petition for arbitral pronouncement thus succeeds in full.

Unconstitutionality of the Provision in Item No. 28 of TGIS

As previously decided in arbitral proceedings in the context of Proceedings no. 91/2012-T: "The complete substantiation of the defects of violation of law prejudices the examination of the defects of form and procedural issues, as results from the order of examination of defects provided in no. 2 of Article 124 of the Tax Procedure and Process Code, subsidiarily applicable by virtue of the provision in subparagraph a) of no. 1 of Article 29 of the Legal Framework for Tax Arbitration".

In fact, the establishment of an order of examination of defects is only justified by the possible substantiation of the defects with priority examination making the examination of the remaining defects unnecessary, for if it were always necessary to examine all defects, the order of their examination would be irrelevant.

By the above, the defects of violation of law proceeding, the examination of the defect of unconstitutionality is thus precluded.

Indemnity Interest

The Claimant further requests that the payment of indemnity interest be determined, in accordance with Article 43, no. 1, of the General Tax Law, relating to the amounts of € 13,623.20 referring to the instalments already paid.

In accordance with the provision of subparagraph b) of Article 24 of the Legal Framework for Tax Arbitration, the arbitral decision on the merits of the claim to which no appeal or challenge is available binds the Tax Authority from the end of the deadline provided for appeal or challenge, and the latter must, in the exact terms of the substantiation of the arbitral decision in favour of the taxpayer and until the end of the deadline provided for the spontaneous execution of the sentences of the tax judicial courts, "restore the situation that would have existed if the tax act subject to the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose," which is in line with the provision of Article 100 of the General Tax Law, applicable by virtue of the provision in subparagraph a) of no. 1 of Article 29 of the Legal Framework for Tax Arbitration[2].

Now, in accordance with no. 5 of Article 24 of the Legal Framework for Tax Arbitration, in stating that "the payment of interest, regardless of its nature, is due, in accordance with the terms provided in the General Tax Law and in the Tax Procedure and Process Code," it is merely the recognition of the right to indemnity interest in arbitral proceedings.

Doctrine has also held that it falls within the scope of the powers of arbitral tribunals to fix the effects of their decisions, in the same terms provided for judicial challenge, in particular, as to condemnation for indemnity interest or condemnation for wrongful guarantee (See Carla Castelo Trindade (2016), "Legal Framework for Tax Arbitration Annotated," 121 and Jorge Lopes de Sousa (2013), "Commentary to the Legal Framework for Tax Arbitration," 116).

This was also the understanding of the arbitral tribunal constituted in the context of proceedings no. 66/2013-T, where claims for reimbursement and condemnation to payment of indemnity interest were also in question. That tribunal concluded that:

"Thus, similar to what occurs in tax courts in judicial challenge proceedings, this Tribunal is competent to assess the claims for reimbursement of the amount paid and payment of indemnity interest.

In the case at hand, it is clear that these claims must succeed, since the assessments are annulled and the error from which they suffer is imputable to the Tax Authority, whereby the right to indemnity interest is recognized by Article 43, no. 1 of the General Tax Law."

The petition for pronouncement regarding the right to indemnity interest thus concerns the first and second instalments of the acts of assessment of Stamp Duty paid at the date of submission of the petition in the CAAD electronic system, but also the third instalments whose payment was made in the interim.

Indeed, this is the case insofar as the illegality of the assessment acts implies the illegality of all collection notes relating to all instalments of Stamp Duty.

In conclusion, in the case at hand, it is manifest that, following the declaration of illegality of the acts of assessment of Stamp Duty, there is occasion for payment of indemnity interest, since the illegality of those acts is imputable to the Tax Authority, which, on its own initiative, carried them out without legal support.

Doctrine and case law have questioned whether the legislator, in using the term error and not defect in no. 1 of Article 43 of the General Tax Law where it recognizes the right to indemnity interest, intended to restrict this right to the defects of the annulled act regarding which that designation is appropriate, that is, error as to factual prerequisites and error as to legal prerequisites, excluding defects of form such as incompetence or violation of procedural rights.

The Supreme Administrative Court has understood it this way, stating in particular in its judgment of 3 February 2010, issued in appeal no. 01091/09, that when "the defect that leads to the annulment of the act relates to a norm that regulates the activity of the Tax Authority, the latter reveals nothing about the fiscal legal relationship and about the character of the performance as undue in light of the substantive tax norms. In such cases, the annulment of the act does not imply that there was a lesion of the substantive legal situation and, consequently, from the annulment it cannot be concluded that there was damage that merits reparation."

In the same sense, this higher court understood in its judgment of 22 May 2013, issued in the context of proceedings no. 0245/13, that "the annulment of an act of assessment based on the violation of the principle of participation, because the Tax Authority failed to take into account the new elements provided by the taxpayer in the exercise of the right to be heard, does not imply the existence of any error as to the factual or legal prerequisites of the act of assessment, whereby there is no right to indemnity interest in favour of the taxpayer, provided for in that no. 1 of Article 43 of the General Tax Law".

The case law of the Supreme Administrative Court has thus understood that the right to indemnity interest does not arise when the act invalid due to a defect of form can still be replaced by a valid act that complies with all legal formalities, that is, when the tax paid can still be legally demanded, requiring that an error as to factual or legal prerequisites be present.

In our case, we are faced with a violation of substantive law, embodied in error as to the legal prerequisites, imputable to the Tax Authority.

Consequently, there is no doubt that the Claimant is entitled to indemnity interest, in accordance with Article 43, no. 1, of the General Tax Law and Article 61 of the Tax Procedure and Process Code, calculated on the amount that she paid unduly at the rate of legal interest provided for in Article 559 of the Civil Code and, presently, in Order no. 291/2003, of 8 April (Articles 43, no. 4, and 35, no. 10, of the General Tax Law).

V. DECISION

For these reasons, this arbitral tribunal decides as follows:

a) To find the petition for arbitral pronouncement well-founded;

b) To declare the illegality of the acts of assessment of Stamp Duty relating to the year 2014;

c) To annul the Stamp Duty assessment above referred to;

d) To condemn the Tax and Customs Authority to pay the Claimant indemnity interest, in accordance with Article 43, no. 1, of the General Tax Law and Article 61 of the Tax Procedure and Process Code, calculated on the amount that she paid unduly until the date of filing of the petition for constitution of the arbitral tribunal.

VI. COSTS

The arbitration fee is fixed in the amount of € 918.00 in accordance with Table I of the Regulations on Costs of Tax Arbitration Proceedings, to be paid by the Respondent, since the petition was entirely well-founded, in accordance with Articles 12, no. 2, and 22, no. 4, both of the Legal Framework for Tax Arbitration, and Article 4, no. 4, of the cited Regulations.

Let notification be made.

Lisbon

24 June 2016

The Arbitrator

(Carla Castelo Trindade)

Text prepared by computer, in accordance with Article 138, no. 5 of the Civil Procedure Code (CPC), applicable by reference from Article 29, no. 1, subparagraph e) of the Tax Arbitration Framework.

The drafting of this decision is governed by the old spelling.

[1] Jorge Lopes de Sousa, Commentary to the Legal Framework for Tax Arbitration, in Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, 2013, Almedina, p. 202.

[2] Which establishes that "the Tax Authority is obliged, in case of total or partial substantiation of complaint, judicial challenge or appeal in favour of the taxpayer, to the immediate and full restoration of the legality of the act or situation subject to the dispute, including payment of indemnity interest, if applicable, from the end of the deadline for execution of the decision".