By André Ferronato Girelli and Thaís Dechandt
Property owners in Chapecó have been directly affected by a recent decision of the Brazilian Federal Supreme Court (STF), which declared unconstitutional the imposition of IPTU (Urban Property Tax) rates based on the built-up area of properties. The ruling puts an end to a controversy involving Municipal Supplementary Law No. 639/2018 and establishes a precedent with potential implications for taxpayers who have been subject to the taxation system adopted by the municipality over the past several years.
The municipal legislation sets a 1% tax rate for residential properties with a built-up area equal to or greater than 400 m², while other residential properties remain subject to the 0.5% rate provided for under the Municipal Tax Code. This differential treatment had already been deemed unconstitutional by the Santa Catarina State Judiciary, an understanding that was upheld by the STF in its judgment of Theme No. 1,455 under the general repercussion system.
In ruling on this binding precedent, the STF addressed the controversy as to whether the municipal legislation, by establishing different tax rates based on the size of a property, constituted a form of selectivity or progressivity of the tax. The taxpayer argued that increasing the IPTU rate progressively based on the size of a property is not supported by Article 156, paragraph 1, item I, of the Federal Constitution, whereas the Municipality argued that the municipal legislation was implementing the criterion of selectivity.
In seeking to overturn the decision issued by the First Appellate Panel of the Santa Catarina State Court of Justice (TJSC), the Municipality of Chapecó argued that larger properties represent a more intensive use of urban land and require greater public infrastructure, thereby justifying a higher tax rate. The Supreme Court, however, rejected this argument and concluded that the Federal Constitution does not authorize the use of a property’s area as a criterion for increasing the IPTU tax burden.
Justice Dias Toffoli’s opinion emphasized that the Constitution permits progressive IPTU rates based on the value of the property and allows different rates depending on the property’s location or use. The size of the property, however, does not fall within any of these categories. According to the Court, using the built-up area as a factor to increase the tax rate constitutes a form of progressivity that is not provided for under the Constitution.
The Supreme Court’s conclusion revisited a long line of case law concerning the constitutional limits on progressive IPTU taxation. As noted by the reporting Justice, even before Constitutional Amendment No. 29/2000, the Court had already established that the area of a property could not serve as the basis for progressive tax rates. In several precedents, the STF rejected attempts to increase the tax based on property size, allowing only those circumstances expressly authorized by the Constitution.
The decision devoted particular attention to the distinction between progressivity and selectivity. According to the Supreme Court, progressivity refers to an increase in the tax burden based on specific constitutionally established parameters, whereas selectivity allows for different tax treatment according to specific characteristics of the property. The built-up area has consistently been associated by the Court’s case law with the concept of progressivity rather than selectivity. This finding was decisive in rejecting the position advanced by the Municipality of Chapecó.
The STF noted that Constitutional Amendment No. 29/2000 expanded the possibilities for differentiating IPTU rates but established objective limits on such expansion. Following the amendment to Article 156 of the Federal Constitution, municipalities were authorized to establish progressive rates based on the value of the property and different rates according to its location or use. Built-up area, however, was not included among the criteria authorized by the Constitution.
One particularly noteworthy aspect of the judgment was the analysis of the legislative debates that culminated in the enactment of Constitutional Amendment No. 29/2000. In examining the legislative history of the proposed constitutional amendments addressing the matter, the reporting Justice emphasized that the intention of the amending constitutional legislature was specifically to allow progressivity based on property value and differentiation based on location and use. At no point was property size contemplated as a basis for increasing IPTU rates.
The Court also rejected the attempt to include property size within the constitutional concept of “use of the property.” According to the prevailing opinion, use relates to the property’s purpose, encompassing categories such as residential, commercial, industrial properties or properties used for the provision of services. Built-up area is merely a physical characteristic of the property and cannot be equated with its economic or social purpose. It therefore cannot be used to justify different tax rates under Article 156, paragraph 1, item II, of the Federal Constitution.
Another relevant aspect was the recognition that allowing property size to serve as a criterion for increasing the tax would, in practice, authorize a form of progressivity not provided for under the Constitution. Although it could be argued that larger properties indicate greater economic capacity on the part of their owners, the STF held that the Constitution expressly establishes the parameters that municipal lawmakers may use, and municipalities may not create new criteria for progressive taxation.
The Supreme Court thus defined the scope of municipal lawmakers’ regulatory authority, reaffirming the strict constitutional criteria governing the IPTU. Although the Municipality of Chapecó argued that a different rate for properties with a larger built-up area was justified by the more intensive use of urban land and because, in its view, this criterion could indicate greater ability to pay and promote equality through selectivity, the STF reaffirmed that the criterion is associated with progressivity. Accordingly, the municipal law exceeded the constitutional framework governing the IPTU.
By establishing the general repercussion thesis that “a municipal law enacted after Constitutional Amendment No. 29/2000 that sets an IPTU rate based on the area of the property is unconstitutional,” the Supreme Court established an interpretation that must be followed by other courts in similar cases. Once the decision becomes final and no longer subject to appeal, the precedent will also be binding on the Tax Administration.
The decision goes beyond the specific circumstances of Chapecó and has nationwide implications, potentially affecting municipal legislation that adopts similar taxation systems.
For taxpayers in Chapecó, the ruling confirms the invalidity of the criterion adopted under the municipal legislation. Furthermore, the precedent may serve as grounds for reviewing situations involving taxes assessed under the rule now deemed incompatible with the Federal Constitution. In the specific case that gave rise to the judgment, the Court ordered the tax to be recalculated using the lower rate and the refund of amounts overpaid within the period not barred by the statute of limitations.
It should be noted that Tax Administrations do not always implement changes to municipal legislation and the operational adjustments required to align tax assessments — represented by the annual IPTU tax bill — with newly established judicial precedents as quickly as taxpayers might expect. This will be particularly relevant to the tax to be assessed in 2027. With respect to prior years, considering such delays — which are also inherent in the judicial proceedings involving STF Theme No. 1,455 and the time required for the decision to become final — as well as the five-year statute of limitations, taxpayers should consider whether to seek judicial relief for the recovery of amounts unduly paid.
The judgment of Theme No. 1,455 reaffirms an important principle of Brazilian constitutional case law: although municipalities have autonomy to regulate real estate taxation, such authority must be exercised within the limits expressly established by the Federal Constitution. By rejecting the use of built-up area as a criterion for increasing IPTU rates, the STF has provided greater legal certainty to taxpayers and municipal administrations, consolidating an interpretation that is likely to guide future disputes on the matter.
In light of this scenario, taxpayers in Chapecó and in other municipalities that adopt similar practices should review the taxation applicable to their properties and assess whether there is an interest and basis for challenging taxes assessed by the respective municipality.
