VAT on Subsidies and Right to Assess Tax Expiry: CAAD Case 111/2014-T

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 111/2014 – T

Subject: VAT – Expiration of the right to assess; VAT liability; subsidies.

The arbitrators Dr. Alexandra Coelho Martins (arbitrator-president), Prof. Dr. Clotilde Celorico Palma and Dr. Emanuel Augusto Vidal Lima, appointed by the Deontological Council of the Administrative Arbitration Centre ("CAAD"), to constitute the Collective Arbitral Tribunal, constituted on 14 April 2014, agree as follows:

I. REPORT

"A" – TOURISM PROMOTION AND DEVELOPMENT, LTD., with the unique registration number and collective legal entity number … and headquartered at Rua …, No. …, …-…, Vila Nova da …, within the territorial scope of the Tax Authority Service of Vila Nova da …, hereinafter "Claimant", requested the constitution of an Arbitral Tribunal, under the provisions of articles 2, No. 1, paragraph a), 10 and following of the Legal Framework for Tax Arbitration ("LFTA"), approved by Decree-Law No. 10/2011, of 20 January.

The request for arbitral pronouncement was submitted following the dismissal order of the Administrative Review filed against the additional VAT assessments and corresponding compensatory interest, in the total amount determined by the Claimant of € 84,955.37, and has as its object the illegality and consequent annulment of these tax acts in the aforementioned amount and the dismissal of the aforementioned Review.

As grounds for its claim, the Claimant alleges, in summary, the following:

(a) That the right of the Tax and Customs Authority to assess the tax for the year 2008 has expired, both because the corresponding assessment act was not validly notified to the Claimant within the 4-year period enshrined in article 45, Nos. 1 and 4 of the General Tax Law ("GTL"), and because the provision in No. 3 of this article is inapplicable, and further because the suspension of the expiration period provided for in article 46, No. 1 of the same statute did not occur;

(b) That the subsidies were granted to it in the context of the Execution of the PARK Promotion Plan … 2007/2008, with the purpose of promoting and enhancing the region and ensuring the promotion of events held there. Such subsidies are not directly related to the price of operations, but rather constitute a subsidy to operations, to functioning;

(c) The fact that the subsidized amount has as reference a projected cost does not mean that it should be classified as a subsidy directly linked to price, especially since no condition was established that the beneficiary provide goods or services, but only to promote its own activity;

(d) That compensatory interest is not due, even on the assumption that the subsidy in question is taxable, since we are dealing with a complex matter whose legal-fiscal qualification is controversial, and it is reasonable that the taxpayer has a (plausible) interpretation different from that advocated by the Tax and Customs Authority. Thus, even if the act of assessment of VAT is not to be annulled, the assessment of compensatory interest is illegal as the fault of the Claimant required by article 35 GTL has not been demonstrated.

It concludes by requesting the declaration of illegality of the VAT assessments and compensatory interest, as well as condemning the Tax and Customs Authority to reimburse the wrongfully paid amounts, plus indemnity interest.

With the petition, it attached 20 documents and called 4 witnesses.

The Tax and Customs Authority submitted a response arguing that:

(i) The expiration of the right to assess the VAT did not occur, as an external inspection procedure was initiated on 25 October 2012, whose service order was signed on that date by the representative of the majority shareholder of the Claimant ("B" – Business Association of the Region of …), which suspended the counting of the expiration period until notification of the final inspection report, which occurred on 13 March 2013, within the maximum period of six months provided for in article 46, No. 1 of the GTL. Thus, discounting the one hundred and forty days during which the suspension occurred, notification of the assessment on 27 March 2013 was effected within the expiration period;

(ii) Furthermore, the alleged expiration also did not occur, since, in the case of exercise of the VAT deduction right implemented through credit carryover and subsequent VAT refund request, the case law of the Supreme Administrative Court ("SAC") must be invoked, in case No. 303/07, whose Judgment dates to 12 July 2007, according to which in order to assess whether the conditions for the right to refund are met, the Tax and Customs Authority is not limited by the expiration period of the right to assess, and may make corrections to the declarations of taxpayers relating to the period for which the refund is requested, even if prior to that expiration period;

(iii) In this regard, it should be added that the expiration period must be counted in accordance with article 45, No. 3 of the GTL, which tells us that "in case any deduction or credit of tax has been made, the expiration period is that of the exercise of that right", and therefore for this reason as well, the assessments were made during that (expiration) period;

(iv) The grants provided by the Regional Operational Program for Lisbon and Tagus Valley amounted to 75% of the "cost price of the shows" with the remaining value (plus structural costs) charged to the three municipalities of "E", "C" and "D", as services rendered by the Claimant;

(v) Thus, the participation received from the European Union constitutes a subsidy to the cost of the operations in question and therefore forms part of the taxable value of the operations and is subject to VAT taxation, as it is linked to the price of the operations to be practiced, under article 16, Nos. 1 and 5 paragraph c) of the VAT Code and article 73 of Directive 2006/112/EC, of 28 November 2006, OJ L 347, of 11 December 2006 ("VAT Directive").

The Defendant concludes that the action should be judged unfounded as groundless.

It attached the administrative file to these proceedings, of which the Claimant was informed.

On 1 October 2014, an order determined the extension, for an additional period of two months, of the deadline for the arbitral decision, under the provisions of article 21, No. 2 of the LFTA, by virtue of the vicissitudes of procedural processing and the intervention of judicial holidays.

On 20 October 2014, there took place, at the headquarters of the CAAD, the meeting of the Collective Arbitral Tribunal, in accordance with the terms and for the purposes of article 18 of the LFTA. No dilatory exceptions were raised, and the Tribunal concluded that there was no need to examine the witnesses called by the Claimant.

On 14 December, the extension was renewed, for an additional period of two months, on the grounds of article 21, No. 2 of the LFTA.

Claimant and Defendant submitted their allegations in writing, maintaining, in substance, the arguments set out in the initial pleadings.

II. PROCEDURAL MATTERS

The Tribunal was properly constituted and is competent ratione materiae, in accordance with article 2 of the LFTA.

The parties have legal personality and capacity, show themselves to be legitimate and are properly represented (cf. articles 4 and 10, No. 2 of the LFTA and article 1 of Ordinance No. 112-A/2011, of 22 March).

The accumulation of claims is admissible as we are dealing with the same factual circumstances and the interpretation and application of the same principles or rules of law (cf. article 3, No. 1 of the LFTA).

III. QUESTIONS TO BE DECIDED

There are three questions submitted for the appreciation of this Arbitral Tribunal.

The first concerns the appreciation of the expiration of the right to assess for the year 2008, in which it is important to reach conclusions regarding the applicability to the concrete case:

(i) The suspension of the expiration period enshrined in article 46, No. 1 of the GTL;

(ii) The provision in article 45, No. 3 of the GTL; and

(iii) The reasoning of the SAC Judgment, Case No. 0303/07, of 12 July 2007, according to which in order to assess whether the conditions for the right to refund are met, the Tax and Customs Authority is not limited by the expiration period of the right to assess.

The second question, in the event the expiration of the right to assess the VAT does not occur, concerns the legal-tax qualification, for purposes of this tax, of the subsidy granted to the Claimant under the ERDF - Operational Program of the Region of Lisbon and Tagus Valley. Specifically, the question is whether it is subject to VAT, which will be the case if it is concluded that it is directly linked to the price of the (active) operations of the Claimant, integrating the respective taxable value.

Finally, it is necessary to reach a conclusion regarding the independent invalidity of the assessment of compensatory interest, based on the invocation of absence of fault on the part of the Claimant.

IV. REASONING

1. OF THE FACTS

a) Established facts

For the purposes of the decision, the following facts are important:

A. "A" – TOURISM PROMOTION AND DEVELOPMENT, LTD., here Claimant, is a limited liability company incorporated on 7 November 2000, whose share capital is held by the municipalities of "C" (16%), "D" (16%), "E" (16%) and by "B" – Business Association of the Region of … (52%) – cf. Copy of Permanent Certificate attached to the arbitral request as Document 14 and Tax Inspection Report ("TIR"), contained in the administrative file ("AF"), file AF2.

B. The Claimant is a VAT taxpayer classified under the normal regime, with quarterly periodicity, and has as its corporate purpose "Activities of Amusement and Thematic Parks" which it develops in the municipalities of "C", "D" and "E", to which corresponds the CAE … – cf. ("TIR"), file AF2.

C. The principal activity of the Claimant has centered on promoting, advancing and enhancing the tourism, economic and social development of the riverside area known as PARK …, located in the aforementioned municipalities of "C", "D" and "E", including the construction of support infrastructure for water sports activities, active tourism, recreation and leisure, the acquisition of equipment, its management and operation, directly or through third parties, the management of concessions and the holding of tourist, cultural and social events – as per Bylaws attached to the arbitral request as Document 15.

D. Within the scope of its statutory attributions and after, in a first phase, having proceeded to create support infrastructure for the development of PARK … (such as the water sports centers of "C" and "E" and support bars in riverside areas, particularly the Bar/Reception Post for Visitors at Castle …), from 2008 onwards, the Claimant sought to promote the PARK Project …, through promotional events – cf. Reports and Accounts for 2007, 2008 and 2009, contained in AF2 and TIR.

E. For this purpose, the Claimant proceeded to establish the following calls for proposals:

(a) International Public Call for Proposals "Conception and Organization of Animation and Promotion Events of the River and Margins of the Tagus integrated in the Promotional Plan of Park … 2007/2008", which included the holding of the following events:

• POEM Village – multidisciplinary event (held on 12 and 13 July 2008);

• … NonStop - multidisciplinary event (held on 14 and 15 June 2008);

• Dances of the World – dance and music events (held on 2, 15 and 23 August 2008);

• Horse Weapons Tournament and Falconry – period event (held on 5 July 2008);

• Castle Assault – period event (held on 26 July 2008);

• Temple … – multidisciplinary event (held on 6 September 2008);

(b) Direct procurement for the "Conception and organization of two events on the Tagus River integrated in the Promotional Plan of Park …", which includes the holding of the following events:

• River Show – multidisciplinary event (held on 24 May and 15 June 2008);

• Seafarers – comprised of various shows and entertainment (held on 3, 9, 10, 24 and 31 August 2008);

(c) Limited call for the acquisition of Media Relations services for the promotion of Park … 2007/2008

– as per Reports and Accounts for 2007, 2008 and 2009, contained in AF2 and TIR.

F. To finance the events described above, the Claimant submitted, on 30 July 2007, an application to the Coordination and Regional Development Commission for Lisbon and Tagus Valley ("CCDLTV"), under the Operational Program for the Region of Lisbon and Tagus Valley ("OPLTV") – Priority Axis 2 – Integrated Area-Based Actions – Measure 2.3 – VALTEJO – Enhancement of the Tagus – in accordance with the Application Form attached to the arbitral request as Document 19 and contained in file AF3.

G. The Project had as its purpose the promotion of the infrastructure previously created in the riverside area of PARK … and also the tourism, economic and social development of the region – cf. annex to the Application Form contained in file AF3.

H. The application was approved on 5 December 2007, with an ERDF co-financing rate of 75% of the eligible amount, corresponding to € 454,500.00, against the total estimated value for the holding of the promotional events and shows identified above (point E, above) and for the acquisition of "Media Relations" services intended for their promotion and dissemination, which amounted to € 606,000.00 (values without VAT) – cf. notification of approval of the application attached to the arbitral request as Document 20 and TIR.

I. The remaining non-co-financed costs of the aforementioned events and Media Relations services, corresponding to 25% of the respective base value, plus the Claimant's structural costs, were imputed and invoiced to the municipalities where such events were held – cf. TIR.

J. Considering that the Claimant incurred VAT in the acquisition of goods and services necessary for the holding of the aforementioned events and for their promotion and dissemination, a tax regarding which it exercised the right to full deduction (100%), and that it only invoiced with VAT to the municipalities where the events were held, as services rendered, for the portion of the value of these costs that was not co-financed (approximately 25% of the respective base value, plus some structural costs), the Claimant determined a tax credit in its favor, as the VAT deducted substantially exceeded the VAT assessed to the municipalities – cf. TIR.

K. In order to recover the aforementioned tax credit (resulting from the fact of assessing VAT on a billing value substantially lower than the costs incurred and of deducting the VAT relating to these costs in full), the Claimant submitted a VAT refund request with reference to the period of … (i.e., the second quarter of 2009) – cf. TIR.

L. By letter dated 11 January 2011, with No. …, the Finance Department of Santarém sent the Claimant a "Request for information within the scope of collaboration with the Tax Administration (Art. 59 and 63 of the General Tax Law and 29 of the Supplementary Regime of Tax Inspection Procedure). This request sought the sending of the following items: Bylaws of the Claimant; Protocols entered into between the Claimant and Municipal Councils, for the holding of events in the fiscal years 2007 to 2010; Description of the activity developed by the Claimant in those fiscal years – cf. Document 10 attached with the arbitral request and AF2.

M. To which the Claimant responded by letter dated 28 January 2011 with the sending of the Bylaws and the Reports and Accounts for the years 2007, 2008 and 2009 – cf. Document 15 attached with the arbitral request.

N. The Finance Department of Santarém made a request for information to the VAT Directorate of Services – Design Division, regarding the classification of the operations described above for VAT purposes – cf. TIR.

O. In response to this request, the VAT Directorate of Services provided Information No. 2736, of 9 November 2011, from which the following excerpt contained in the TIR is extracted:

"II - VAT CLASSIFICATION

1. Upon consultation of the computer system, it is verified that the taxpayer is registered for tax purposes with the activity of "Activities of Amusement and Thematic Parks" (…).

2. Regarding a possible exclusion of tax incidence, through the rule established in art. 2, No. 2 of the VAT Code, it is important to point out that this provision applies when, cumulatively, the following conditions are met: i) the performance of operations by the State and other public legal entities ii) in the exercise of activities in the capacity of public authority iii) provided that the non-subjection does not give rise to competition distortions.

3. Now, the referred conditions are not met, wherefore it is concluded that the company in question is a taxpayer as referred to in art. 2, No. 1, paragraph a) of the VAT Code, which is bound to comply with the main obligation of assessing tax regarding the activity which it exercises, and the other declaratory and ancillary obligations imposed by the VAT Code.

4. Regarding the operations practiced by the taxpayer, as referred by the Tax Inspection Division of the Finance Department of Santarém, the activity of this taxpayer in the fiscal years of 2007 and 2008, is mainly summarized in the contracting of the conception and production of shows subsidized as a grant (75%) by the Regional Operational Program of Lisbon and Tagus Valley, being the remaining non-co-financed costs (25%) invoiced to the other municipalities.

5. The application submitted incorporated the following planned interventions for the Park Project …:

a) Organization of two events on the Tagus River integrated in the promotional plan of Park …;

b) Conception and organization of animation and promotion events of the River and Margins of the Tagus integrated in the promotional plan of Park … for 2007/2008;

c) Acquisition of "Media Relations" services for the promotion of Park …;

1. The financing by the European Union was granted taking into account the total eligible cost of the project.

2. Non-compliance with the approved physical and financial programming and/or structural alteration of the approved execution project implies the reformulation of the approved application or the annulment of the financial commitment agreed for the project, involving in that case the refund of financial amounts already received (cfr. term of acceptance of the decision to approve the ERDF application).

3. With regard to the application of VAT to community aid, the Commission has already pronounced itself in the following sense: "However, it should be noted that point A), No. 1, paragraph a) of the article of the Sixth Directive (as amended) establishes that, within the country, the taxable amount is constituted, in the case of supplies of goods and services, by everything that constitutes the consideration that the supplier or service provider has received or must receive in relation to those operations, from the buyer, the recipient or a third party, including subsidies directly related to the price of such operations. Consequently, the taxation of aid (namely community aid) is not excluded a priori but may be excluded, especially if the subsidies do not constitute consideration for the supply of goods or the provision of services, if, for example, there is no consumption." [Note – Answer given by Commissioner Bolkenstein on behalf of the Commission (30 April 2004) to written question P-1 199/04.]

4. In accordance with article 73 of the VAT Directive (Directive 2006/112/EC, of the Council, of 28 November which republished the Sixth Directive), article 16, Nos. 1 and No. 5 paragraph c) of the VAT Code establishes that the taxable value of supplies of goods and services subject to tax is the value of the consideration obtained or to be obtained from the buyer, the recipient or a third party, including subsidies directly linked to the price of each operation, considering as such those that are established based on the number of units supplied or the volume of services rendered and are fixed prior to the performance of the operations.

5. On this matter, Clotilde Celorico Palma notes that subsidies are "directly linked to the price of operations, those subsidies whose amount is determined in relation to the sale price of goods and services supplied, based on quantities sold, or the cost of goods and services, the greatest doubts remain regarding other types of subsidies, such as so-called equilibrium subsidies or operating subsidies, which aim to restore the economic situation of a company and are granted without express reference to a price."

6. And further the same author, citing the Advocate General F.G. Jacobs, in his conclusions presented in the case Landboden-Agrardienste, Proc. C-384/95, "the Sixth Directive provides for the taxation of subsidies only in limited terms. According to the rules of the Directive, the subsidy will be included in the taxable base if its payment is subject to the condition that the beneficiary supply goods or services. Thus, for example, a measure of aid through which a farmer receives a certain amount for each product sold forms part of the consideration for the supply. By contrast, subsidies less related to the concrete supplies and more directed towards improving the economic situation of companies do not form part of the taxable base. Examples of such subsidies are those intended for the acquisition of goods, the coverage of losses and the restructuring of a company."

7. Still according to José Guilherme Xavier de Basto, "The solution of the directive is, on the other hand, far from being easy to apply by Member States, it implies the distinction between subsidies "directly linked to the price" of operations, to be included in the taxable base, and others of different natures, which do not count towards the determination of that base. Taking into account the diversity of situations that can occur, it is not always easy to make the distinction. When the amount of subsidies is determined either by reference to selling prices or quantities sold "compensatory indemnities", it is clear that these are subsidies directly linked to prices. Also, the non-inclusion of capital subsidies will not raise doubts. However, it may prove difficult to decide the question regarding other types of operating subsidies, which are not calculated with reference to prices or quantities sold. Such would be the case for example of so-called "equilibrium subsidies" calculated, after the fact, to cover operating deficits, and "operating subsidies" which are supplements to revenue determined beforehand regardless of the results of operations."

8. Finally, it is worth citing the case law of the Court of Justice on this matter, which in the judgment of 22 November 2001 [Note: Case C-184/00 (Office of Walloon Products ASBL against the State of Belgium)] stated the following: "Indeed, article 11, A, No. 1, paragraph a) of the Sixth Directive is aimed at situations in which three parties are involved, namely, the authority granting the subsidy, the body that benefits from it and the buyer of the good or the recipient of the service respectively supplied or rendered by the subsidized operator. Thus, the operations provided for in article 11-A, of the Sixth Directive are not those carried out for the benefit of the authority granting the subsidy."

In light of the foregoing, the following is concluded:

1. "A" is a taxpayer as referred to in art. 20, No. 1, paragraph a) of the VAT Code, wherefore the consideration received within the scope of its activity constitutes the consideration that the supplier of goods or the service provider has received or must receive in relation to taxable operations, from the buyer, the recipient or a third party, and are subject to VAT under the general terms of the Code.

2. The financial participation granted to "A", Ltd., by the European Union and by the municipalities, constitutes the consideration of the conception and organization of the events and shows. These events are invoiced to the Municipalities, entities that demonstrated interest in their acquisition, for 25% of their total cost. In consistency with this classification, the taxpayer assessed VAT in the amount divided, imputed and invoiced to the three municipalities where the events were held. It was possible to invoice only 25% of the total cost to the Municipalities given the circumstance that "A", Ltd. received the remaining 75% from the European Union.

3. The financing by the European Union was granted, not only with a view to the implementation of a specific project, but also its total eligible cost. To that extent, it is financing that does not constitute a subsidy to operations (equilibrium or financing) that aims to restore the company's economic situation, granted without express reference to a price.

4. Accordingly, the remaining 75% financed by the European Union constitutes, in accordance with paragraph c) of No. 5 of article 16 of the VAT Code, a subsidy to the price of operations carried out, included in the taxable value, regarding which tax must be calculated and assessed.

5. Thus, the taxpayer did not proceed correctly, and therefore must, to the extent that the amount received is divided into financing and corresponding VAT assessment, proceed with its remittance, withdrawing it from the financing received.

6. Acting in accordance with the procedure referred to above, in accordance with the rules of the right to deduction and the principle of tax neutrality, Park …, may deduct the VAT incurred with the acquisition of goods and services that contributed to the development of its activity. (…)

Not having thus proceeded with the remittance to the State treasury of the VAT due in accordance with No. 1 of article 27 of the VAT Code. The value of the respective VAT not remitted amounts to € 72,652.74 and € 3,787.60 in 2009.

This value divided by each of the quarters is as follows:

P. Following the analysis of the legitimacy of the VAT credit that gave rise to the VAT refund request submitted by the Claimant, an inspection procedure was initiated originating from External Service Orders OI… and OI…, of partial scope, relating to VAT, covering the years 2008 and 2009, respectively – cf. TIR.

Q. The commencement of external inspection action for the years 2008 and 2009 was preceded by a notice letter sent to the Claimant, dated 28 September 2012, for each of the years in question, and was initiated on 25 October 2012 with the signing of the respective Service Orders by …, representative of "B" – Business Association of the Region of …, majority shareholder of the Claimant (at 52%), inserted in field 7 (THE TAXPAYER(S)) – cf. AF4.

R. The inspection acts were concluded on 24 January 2013, with the signing of the respective diligence notes by a representative of the Municipality of "E", shareholder of the Claimant, in field 7 (THE TAXPAYER(S)), followed by notification of the respective Draft Report which became final, the right to be heard not having been exercised – cf. AF4.

S. The (final) Tax Inspection Report was notified to the Claimant on 13 March 2013, concluding that there was a lack of VAT assessment in the amounts of € 72,652.74 (2008) and € 3,787.50 (2009), relating to the subsidies received, given the provision in article 16, No. 5, paragraph c) of the VAT Code, adhering to the grounds of Information No. 2736, of the VAT Directorate of Services, of 9 November 2011 (see point O above), which it reproduces – cf. TIR and AF2.

T. The Claimant was notified, on 27 March 2013, of the additional VAT assessments and compensatory interest itemized in the following table:

– cf. Documents 1 to 8 attached with the arbitral request and AF1.

U. The Claimant filed an Administrative Review as it did not accept the tax acts mentioned in the previous point, which was dismissed by letter dated 2 January 2014, notified the following day (03.01.2014) – cf. copy of the dismissal decision attached to the arbitral request as Document 9, AF1 and AF5.

V. The decision to dismiss the Administrative Review is anchored in the grounds of the Tax Inspection Report, introducing, regarding the allegation of expiration of the right to assess invoked by the Claimant, the argument that the applicable rule is No. 3 of article 45 of the GTL and not No. 1 of this provision, and corrections can be made to the declarations of taxpayers "relating to the periods for which the refund is requested, even if prior to that expiration period" – cf. copy of the dismissal decision attached to the arbitral request as Document 9, AF1 and AF5.

W. The Claimant proceeded to pay the amounts of tax and compensatory interest contained in the additional assessments in question, within the respective period for voluntary payment – cf. Documents 1 to 8 attached with the arbitral request and AF1.

X. On 11 February 2014, the Claimant filed a request for the constitution of a Collective Arbitral Tribunal with the CAAD – cf. electronic request in the CAAD system.

b) Facts not proved

No other facts with relevance for the decision of the case were proved.

c) Reasons for the factual decision

The decision on the matter of fact was made on the basis of the examination and critical analysis of the documents and information attached to the proceeding described above regarding each one of the items of evidence, and the established facts were not challenged, nor their authenticity and veracity questioned by the parties.

1. ON THE MERITS

2.1 Regarding the Expiration of the Right to Assess for the year 2008

A. The alleged non-existence of suspensory effect, due to the inapplicability of article 46, No. 1 of the GTL

According to the Claimant, the counting of the expiration period of the right to assess VAT for 2008 began on 1 January 2009, that is, at the beginning of the calendar year following the taxation period in question, and therefore notification of the assessments should have occurred by 1 January 2013 (cf. article 45, No. 1 of the GTL). Since these assessments were notified on 26 March 2013, the expiration period was exceeded and the same suffer from illegality.

In this context, the Claimant considers that the inspection procedure to which it was subject, which it calls the "alleged external inspection," did not have an external character and, consequently, rejects the suspensory effect of the expiration period provided for in article 46, No. 1 of the GTL.

First of all, for the Claimant, the inspection action was initiated, at least in 2011, as an internal inspection, in light of the request for information regarding the Bylaws and Protocols entered into contained in letter No. 383, dated 11 January 2011, from the Finance Department of Santarém, under the principle of "collaboration with the Tax Administration" (point L of the factual matter).

For the change of the inspection procedure from internal to external to be valid, it would have had to occur by reasoned order of the Tax and Customs Authority to be notified to the Claimant, which did not occur. Not having been validly notified of any change to the type of inspection, the external inspection suffers from manifest nullity, and only internal inspection should be considered, without suspensory effect on the expiration period (cf. article 15 of the Supplementary Regime of Tax Inspection Procedure – "SRCIP").

Additionally, the Claimant argues that it was not validly notified, i.e., "in accordance with legal terms," of the service order at the beginning of the external inspection action, as it was not signed by (and delivered to) a legal representative, or by the tax accountant or, further, by any employee or collaborator of theirs, as required by article 51 of the SRCIP. It states moreover that "at no time did it receive / sign any notification relating to the external inspection."

Again, and basing itself on the fact that notification was not made "in accordance with legal terms," the Claimant refuses the application of article 46, No. 1 of the GTL and the effect of suspension of the expiration period.

It is further argued that, even if it were perhaps considered that the alleged defects did not occur, the assessment would suffer from "unconstitutionality due to manifest violation of the principle of legal certainty," as it would be a matter of accepting the "manipulation" of the period by the Tax and Customs Authority for a period of 6 months, without the requirement of any grounds and potentially leading to discriminatory treatments and inequality of taxpayers whose inspection is internal, especially if the external inspection was initiated solely for the purpose of extending the expiration period, without any real grounds for its conduct.

In assessing the defects alleged by the Claimant regarding expiration, it is clear that the counting of the period began on 1 January 2009. The question that arises, then, is whether said counting was suspended by meeting the legal hypothesis of article 46, No. 1 of the GTL.

It results from the analysis of the established facts that, following the assessment of the VAT refund request submitted by the Claimant, an inspection procedure was initiated originating from External Service Orders OI… and OI…, of partial scope, relating to VAT, covering (respectively) the years 2008 and 2009, and the Claimant was notified by notice letters, dated 28 September 2012, of the conduct of these two inspection actions. And, on 25 October 2012, the inspection procedure in question was initiated, with the signing of the two Service Orders by a representative of the majority shareholder of the Claimant (the "B" – Business Association of the Region of …).

It is thus established that the Claimant was indeed subject to an external inspection procedure initiated at the end of October 2012.

Regarding the precedence of an internal inspection action reported to the beginning of 2011, alleged by the Claimant and characterized by article 13, paragraph a) of the SRCIP as that in which inspection acts are carried out exclusively in the services of the tax administration through formal and consistency analysis of documents, the same, if it has occurred, is not preventive of the subsequent conduct of an external action, which differs from that in that inspection acts are carried out, in whole or in part, in installations or dependencies of the taxpayers.

The distinguishing criterion of the two types of procedure is, thus, the place of its conduct, entailing important differences in regime, which essentially relate to the potentially invasive character of external procedures that does not exist in internal ones, which do not entail disturbance and interference in the sphere of taxpayers. For this reason, the principle of non-repetition of inspections applies only to external procedures (cf. article 63, No. 4 of the GTL).

The succession of an (inspection) action internal to an external action does not constitute an alteration of the same inspection procedure, as the Claimant seems to intend, but two distinct procedures, with differentiated requirements and regimes. In this sense, the Judgment of the Central Administrative Court South "CACS," case No. 05303/12, of 10 July 2012, is invoked, according to which external inspections "do not constitute the continuation of the internal procedure previously initiated, even though it may have been immediately motivated by the failure to achieve the objectives that it sought to obtain (…) and it is certain that the law only prohibits the existence of more than one external inspection procedure (…) but not that, following an internal inspection action another of an external nature may be initiated (…)."

Thus, the scope of application of article 15 of the SRCIP, which imposes notification of the reasoned order of alteration, does not encompass the referred succession of procedures, but modifications during external procedures.

Article 15 of the SRCIP, under the heading "Alteration of purposes, scope and extent of procedure," provides in its No. 1 that "[T]he purposes, scope and extent of the inspection procedure may be altered during its execution by reasoned order of the entity that ordered it, and must be notified to the inspected entity."

It follows from the grammatical interpretive element that the type of procedure, internal or external, is not covered by the field of application of this rule, as neither the purposes, nor the scope, nor the extent of the procedure are related to its internal or external nature. As for the purposes, article 12 of the SRCIP clarifies the respective classification criterion, dividing it into verification and information procedure. Regarding scope, the procedure may be general or partial, in accordance with article 14, No. 1 of the SRCIP. And, regarding extent, No. 2 of this article 14 regulates its temporal amplitude, the procedure being able to encompass one or more taxation periods. It is concluded that the type of procedure is not aimed at by the regime conforming article 15 of the SRCIP.

It should be further noted that the restriction of the scope of article 15, No. 1 of the SRCIP to externally initiated procedures is the only one consistent with the fact that only these should be subject to notification to taxpayers, and not internal ones. Indeed, beyond the fact that the Claimant's position has no support in the legislative text, as the type of procedure is not contained in its legal hypothesis (of the cited article 15 of the SRCIP), the notification of alterations to internal procedures would have no place, as these internal procedures, their inception and vicissitudes, are not subject to notification to taxpayers.

In summary, there was no alteration of the internal inspection procedure (in continuity) to external, with an external procedure instead being initiated for 2008 based on the corresponding Service Order. Now, the provision in article 15, No. 1 of the SRCIP does not apply to the inception of an external inspection action, and therefore the defect of failure to notify the reasoned order to the Claimant to justify an alteration of the type of inspection, from internal to external, does not occur.

Obiter dictum, it will always be said that it is consolidated case law of the SAC that procedural defects do not necessarily generate the invalidity of the tax assessment act, so that even if the position of the Claimant were to be sustained (which it is not), the alleged defect could not produce the invalidating effect of the tax assessment act (cf. among others, the following Judgments of the SAC: case No. 0955/07, of 27 February 2008; case No. 080/08, of 10 December 2008; case No. 0102/08, of 10 December 2008; and case No. 103/08, of 4 June 2008).

Secondly, the Claimant raises the defect of invalid notification of the external inspection action for "at no time" having received or signed "any notification relating to the external inspection," contrary to the requirement of article 51 of the SRCIP. This defect would affect the suspensory effect of the notification of the inception of the external inspection action, provided for in article 46, No. 1 of the GTL, given that such notification would have to be made "in accordance with legal terms."

Let us look, for this purpose, at the provision in the cited articles:

"Article 46 of the GTL - Suspension and interruption of the expiration period

1. The expiration period is suspended by notification to the taxpayer, in accordance with legal terms, of the service order or order at the inception of external inspection action, ceasing, however, this effect, counting from the beginning of such period, should the duration of the external inspection have exceeded the period of six months following notification." (emphasis in original)

2. (…)

3. (…)"

"Article 51 SRCIP – Date of inception of the inspection procedure

1. A copy of the service order or order which determined the inspection procedure shall, at the inception thereof, be delivered to the taxpayer or tax obligor, except in the situations provided for in No. 6 of article 46.

2. The taxpayer or tax obligor or its representative must sign the service order indicating the date of notification, which, for all purposes, determines the inception of the external inspection procedure.

3. The service order must be signed by the tax accountant or any employee or collaborator present should the taxpayer or tax obligor or its representative not be present at the location.

4. The refusal to sign the service order does not prevent the inception of the inspection procedure.

5. (…)

6. (…)"

With respect to this, we cannot fail to note that both the Service Order, on the basis of which the inspection was initiated, and the diligence note for the closure of the inspection procedure were signed by properly identified persons, at the premises of the Claimant, persons who acted in the capacity of representatives of the taxpayer, signing in field 7 of the respective form, under the name "THE TAXPAYER(S)."

These are not persons foreign to the Claimant, but a representative of the Business Association of Santarém, an entity that holds a majority interest (of 52%) in the Claimant, and a representative of the Municipality of "E," an entity that also has the status of shareholder of the Claimant.

The Claimant itself states that article 51 of the SRCIP is intended to ensure that, in the case of legal entities, notification is effectively delivered to its legal representatives, directly (manager / administrator) or indirectly but with effective connection to the legal entity (through the tax accountant or employee – all of these with duties towards the legal entity), preventing notification from being made to a third party with no connection or obligation towards the party subject to inspection, giving as an example the doorman.

Indeed, given the potential for harm of the external inspection procedure, the purpose that article 51 of the RCSIP is intended to protect is that effective notice be given to those persons who have a relevant connection to the taxpayer legal entity.

However, contrary to what the Claimant alleges, this scope was properly safeguarded in the concrete case, as, at the premises of the Claimant itself, those persons – properly identified representatives of its shareholders (note that the Claimant is a limited liability company and not a corporation) – declared taking notice of the Service Order and the diligence note relating to the conclusion of the inspection and acted in representation of it (cf. Judgment of the CACS, case No. 05792/12, of 23 October 2012).

And one cannot deny that the said persons/entities hold a relationship relevant to the Claimant, as relevant as that established with the tax accountant or employees, as they are holders of interests and substantive positions in the Claimant. For this reason, the Claimant's assertion that it did not receive "any notification relating to the external inspection" is not to be accepted, which, in the circumstances described, represents a venire contra factum proprium, nor the allegation that the suspensory effect provided for in article 46, No. 1 of the GTL did not occur. The Claimant was validly notified.

It should further be noted that even in cases of refusal to sign the Service Order, such does not prevent the inception of the inspection procedure and the production of its effects, particularly the suspensory effect on the expiration period, and therefore the argument of illegality in notification of the external inspection alleged by the Claimant does not hold.

The Claimant invokes, ad cautelem, the defect of "unconstitutionality due to manifest violation of the principle of legal certainty." It argues that this is a matter of "manipulation" of the 6-month period by the Tax and Customs Authority which, without any real grounds for its conduct, initiated external inspection solely for the purpose of extending the expiration period, thereby discriminating against taxpayers who are only subject to internal inspections.

Such an argument is not only unsubstantiated in the constitutional norm(s) that accommodate such principle and allegedly violated, but does not materialize the allegations on which it is based to conclude for deviation(s) from the constitutional parameter. Specifically, the Claimant does not demonstrate the premise that the external inspection action had no real grounds for its conduct and that it solely aimed arbitrarily to extend the expiration period. The invoked defect of unconstitutionality is thus groundless.

B. The inapplicability of article 45, No. 3 of the GTL and the Judgment 0303/07, of 12.07.07

The Claimant opposes that the expiration period applicable be counted in accordance with article 45, No. 3 of the GTL and not No. 1 thereof, the classification recommended by the Tax and Customs Authority in the dismissal of the Administrative Review. Let us see the respective wording:

"Article 45 of the GTL - Expiration of the right to assess

1. The right to assess taxes expires if the assessment is not validly notified to the taxpayer within four years, when the law does not set another.

2. (…)

3. In case loss carryforwards have been made, as well as any other deduction or credit of tax, the expiration period is that of the exercise of that right.

4. (…)"

It is important to recall that in the case at hand, the inspection procedure preparatory to the additional assessments in question was based on the VAT refund request initiated by the Claimant. However, that procedure did not conclude that the exercise of the right to VAT deduction was improper, which, by contrast, was confirmed.

Thus, the grounds for the VAT assessments in question do not relate to improper exercise of the right to deduct the tax (through the corresponding mechanism of tax credit), but to the identification of the lack of VAT assessment in active operations, as the amounts received by way of subsidies were not taxed.

Since there is no underlying situation of improper VAT deduction in the disputed assessments, the matter sub iudice does not appear to fall within the scope of the mentioned No. 3 of article 45 of the GTL, which expressly applies to cases of deduction or credit of tax and not to those of lack of tax assessment in active operations. Equally, the provisions contained in articles 19 to 22 of the VAT Code, referred to by the Defendant, relating to the exercise of the right to deduction, are totally devoid of application in this case.

There appears to be no reason to justify changing this conclusion merely because the inspection procedure was motivated by a VAT refund request.

Indeed, this distinction between VAT deducted (through the mechanism of tax credit) in passive operations or inputs and VAT assessed in active operations or outputs is also relevant to understanding the meaning and extent of the reasoning of the Judgment of the SAC, in case No. 0303/07, of 12 July 2007, on which the Tax and Customs Authority relies for the application of article 45, No. 3 of the GTL to the situation at hand.

The question subject of that legal proceeding consisted of knowing whether, for purposes of VAT refund, credits of the Tax and Customs Authority could be considered, derived from prior improper deductions made by the same taxpayer, relating to the period of time to which the refund request refers, which were not subject to assessment within the respective legal expiration period. The question to which an affirmative answer was given, that is, regardless of the expiration of the period.

The judgment concludes that acts of denial of credit carryforwards, like those of refusal of refund, as negative acts that they are, do not produce or declare any obligation for the taxpayer, and therefore it does not consider the analogous application of article 45 of the GTL justified. That is, the Judgment 0303/07 invoked by the Tax and Customs Authority itself rejects the (analogous) application of article 45, whether No. 1 or No. 3.

On the other hand, it is important not to forget that the subject matter of the proceeding is delimited to a situation of improper VAT deduction, a deduction that forms the grounds for the VAT refund request.

The pronouncement of the SAC in Judgment 0303/07 concerns, thus, a situation of improperly deducted VAT, considering that refunds should not be made without verification, at the time of refund, of the verification of its conditions (of the right to deduction). In other words, since the reason for the refund is the exercise of the right to VAT deduction incurred in acquisitions of goods and services made, if it is verified that this deduction has no legal basis, the refund should not be granted, as the restitution of such sums is improper (cf. article 22, Nos. 1 and 8 of the VAT Code).

A different question, which does not form the subject matter of the legal proceeding at the origin of that Judgment, is whether, being identified a lack of VAT assessment by the taxpayer (and not improper deduction of tax), identical reasoning applies, leaving open the possibility of "compensation" of this lack of VAT assessment with the amounts of deducted VAT, for which refund was requested, or, in other words, its setoff against the refund amount.

In that case, we are inclined to consider that yes, since, similar to the case of improperly deducted VAT, what is at stake in the assessment of the refund request is, as the cited judgment states, the "entirety of tax relations relating to a certain period," and its final content is necessarily to be defined, "so it cannot be justified, for reasons of legal certainty underlying the regime of expiration of the right to assess, that there be restrictions on the ascertainment and relevance of the facts that matter to define them."

However, this flexibility of the expiration regime does not have the scope to permit the issuance ex novo of additional assessments, not subject to an expiration period or to its valid notification after the expiration of the period (whether it be that of No. 1 or No. 3 of article 45 of the GTL). The issue is the assessment of VAT refund requests and their dismissal, in whole or in part (i.e., until the value of refund requested is exhausted), and not the issuance of tax assessment acts that follow the expiration regime applicable to them (cf. articles 45 and 46 of the GTL).

Thus, the Claimant is correct on this point.

Notwithstanding the foregoing, the simultaneous application to the case of the regime of suspension of period provided for in article 46, No. 1 of the GTL leads to a conclusion contrary to that of the Claimant, and therefore the expiration period is not exhausted, and the notification of the additional VAT assessments and interest for the years 2008 and 2009 was timely.

Indeed, with the beginning of the counting of the expiration period on 1 January 2009, the same was suspended on 25 October 2012, with the notification of the Service Order and the inception of the external inspection procedure.

The inspection action was concluded on 24 January 2013, with the signing of the corresponding diligence note. The inspection not having exceeded six months, the suspensory effect was maintained until notification to the taxpayer of the Final Report, which occurred on 13 March 2013, at which time the counting of the expiration period was resumed (cf. Judgment of the SAC, case No. 0594/12, of 21 November 2012, and Full Bench Judgment, case No. 0103/12, of 22 January 2014).

Notification of the assessments on 27 March 2013 was thus within the expiration period, discounting the mentioned suspensory effect. It should be noted that this conclusion is maintained regardless of whether such suspension is counted in accordance with the orientation of the majority case law of the SAC, as noted above, or with the position advocated in the dissenting opinion of Counselor Fernanda Maçãs, in case No. 0594/12, understanding here that the suspensory effect ceases with notification of the diligence note relating to the conclusion of the procedure.

In light of the foregoing, the defect of expiration alleged with reference to the VAT assessments and compensatory interest for the year 2008 is groundless.

2.2 The Erroneous Qualification of the Nature of the Subsidy

A. Preliminary Note

The Tax and Customs Authority considered the subsidy granted to the Claimant under the ERDF - Operational Program of the Region of Lisbon and Tagus Valley to be a subsidy "connected to price," classifiable under the provision in article 16, No. 5, paragraph c) of the VAT Code, and therefore taxed in VAT.

The essential disagreement of the Claimant is one of qualification, advocating that such subsidy is not linked to the price of supplies of goods and services, but rather constitutes a subsidy to operations or functioning, which generates no obligation to assess tax, and therefore the tax acts are materially illegal.

In this regard, it should be noted that the concept of subsidy and the various classifications into which it is broken down are not defined, either in the VAT Code or in the Community Directive source, Directive 2006/112/EC, of the Council, of 28 November 2006, published in OJ L 347, of 11 December 2006 ("VAT Directive").

Doctrine is unanimous in pointing to the difficulties in defining subsidy or establishing its classification criteria, a circumstance aggravated by the differentiated regime applicable to subsidies depending on their nature (they may be considered, or not, inserted in the taxable value and form, or not, an integral part of the apportionment of the pro rata deduction or of a real allocation methodology).

This unanimity extends to the viewpoint that the notion of subsidy, for purposes of VAT, constitutes an autonomous notion of Community law, configuring a matter directly related to the determination of the taxable value of operations subject to VAT, whose harmonization, or even in some points uniformity, constitutes a purpose of the VAT Directive. In this sense, RUI LAIRES, "The Treatment of Subsidies in VAT in Community Legislation and Case Law," in Science and Technical Taxation, No. 419, 2007, pp. 7-88 (26-27) and ISABEL VEGA MOCOROA, "VAT and subsidies in the European Union: problems and challenges," in Review of European Union Law, No. 3-2005, pp. 447-481.

This autonomous notion of Community law has been developed by the Court of Justice of the European Union ("CJEU"), referring to the specific concept of subsidies directly related to the price of operations, as will be analyzed further.

B. The Regime of Subsidies in the VAT Code and the VAT Directive and Summary of Evolution

This matter is regulated by the VAT Code, as follows:

"Article 16 - Taxable value in domestic operations

1 - Without prejudice to the provision in No. 2, the taxable value of supplies of goods and services subject to tax is the value of the consideration obtained or to be obtained from the buyer, the recipient or a third party.

5 - The taxable value of supplies of goods and services

subject to tax includes:

a) (…)

b) (…)

c) Subsidies directly connected to the price of each operation, considering as such those that are established based on the number of units supplied or the volume of services rendered and are fixed prior to the performance of the operations.

(…)" (emphasis in original)

For its part, the VAT Directive, in its article 73, inserted in Title VII, under the heading "Taxable Value," Chapter 2 (supplies of goods and services) determines that:

"In supplies of goods and to services other than those referred to in articles 74 to 77, the taxable value comprises everything that constitutes the consideration that the supplier or service provider has received or must receive in relation to those operations, from the buyer, the recipient or a third party, including subsidies directly related to the price of such operations." (emphasis in original)

Thus, both in the VAT Code and in the Community directive, the taxable value will only include subsidies that are connected to the price of operations (read: price of active operations) of the taxpayer beneficiary of the subsidy, which the VAT Code clarifies by introducing two conditions: that subsidies be established based on the number of units supplied or the volume of services rendered; that they be fixed at a moment prior to the performance of the operations.

There is clearly underlying this regime the principle of neutrality, which emerges from Recital 7 and article 1 of the VAT Directive, in the sense of ensuring equivalent tax treatment of identical economic operations, one subsidized and the other not, and of achieving the objective of influencing the decisions of economic agents as little as possible, as emphasized by ISABEL VEGA MOCOROA (cited work, pp. 453 to 455).

It is recalled that "the principle of equality of treatment is part of the fundamental principles of Community law. This principle requires that comparable situations not be treated differently, unless a differentiation is objectively justified" – cf. Judgment Ideal Tourisme, of 13 July 2000, case C-36/99.

The European Commission, in its first report on the functioning of the common VAT system (contained in document COM (83) 426 final, of 14 September 1983), understands that there are certain types of subsidies regarding which it is easy to decide on their inclusion in the taxable value, enumerating cases in which subsidy amounts (i) are determined with reference to the selling prices of goods or services supplied; (ii) or based on the quantities supplied; (iii) or are intended to cover the costs of goods or services that are provided free to the public.

However, regarding several other types of subsidies – namely those intended to cover deficits and operating subsidies – the Commission considers it extremely difficult to lean towards their inclusion (or not) in the taxable value of operations covered by VAT (as highlighted by RUI LAIRES and ISABEL VEGA MOCOROA cited above).

These latter are normally granted to strengthen the economic situation of the subsidized entities, and not specifically reported to the prices practiced, although, adds the Commission, no substantial difference is found between these two types of subsidies. This finding, combined with the circumstance that one can with relative ease convert a subsidy directly reported to prices into another type of subsidy illustrates, according to the Commission, the fragility of a distinction based on a formal criterion and the inadequacy of the Directive's rules (then Sixth Directive, 77/388/CEE.

In the Commission's second report on the functioning of the common VAT system (contained in document COM (88) 799 final, of 20 December 1988), a strict and literal interpretation is advocated, according to which the inclusion of the subsidy in the taxable value depends on the concurrence of three cumulative conditions: (i) the subsidy constituting the consideration or part of the consideration; (ii) the subsidy being paid to the supplier of goods or provider of services; and, finally, (iii) the subsidy being paid by a third entity.

For XAVIER DE BASTO "The logic of including these subsidies in the VAT taxable value may be questioned. Including or not including subsidies linked to operations is a matter of two ways of conceiving or rationalizing the value-added tax – the two faces of the tax: as a transaction tax (tax on businesses) or as a general consumption tax. (…) In truth, the inclusion of subsidies in the taxable value only makes sense when VAT is viewed as a tax on businesses, "a business tax – ultimately designed to tax its added value. If subsidies are not included, the tax would not reach the added value, the value of production at factor cost – the subsidized company would be favored relative to the unsubsidized company. However, that is not how the problem should be approached when one is dealing with a consumption-type VAT" (…) In this logic, what should matter is the effective price, the consumer's expenditure" – cf. "The Taxation of Consumption and Its International Coordination," in Notebooks of Science and Technical Taxation (164), 1991, p. 210.

Still according to this distinguished Professor, the Directive's solution is far from being easy to apply. "It implies the distinction between subsidies 'directly linked to the price' of operations, to be included in the taxable base, and others of different natures, which do not count towards the determination of that base. Taking into account the diversity of situations that can occur, it is not always easy to make the distinction. When the amount of subsidies is determined either by reference to selling prices or quantities sold ('compensatory indemnities'), it is clear that these are subsidies directly linked to prices. Also, the non-inclusion of capital subsidies will not raise doubts. However, it may prove difficult to decide the question regarding other types of operating subsidies, which are paid to improve the economic position of companies, but are not calculated with reference to prices or quantities sold. This would be the case for example of so-called 'equilibrium subsidies,' calculated after the fact, to cover operating deficits, and 'operating subsidies' which are supplements to revenue determined beforehand, regardless of the results of operations." – cf. cited work, p. 212.

CLOTILDE CELORICO PALMA notes that subsidies constitute "one of the gray areas of this tax" and that Community legislation does not contain a definition of subsidy, "limiting itself to providing the rule on its inclusion in the taxable value of operations and the possibility of its inclusion in the apportionment calculation." It adds that "the treatment of subsidies in VAT is not a matter fully harmonized at the level of various Member States, calling into question a uniform application of the common system and respect for the neutrality of the tax" – in Public Entities and Value-Added Tax – A Rupture in the Principle of Neutrality, Almedina, 2011, pp. 561 and 565.

In this framework of some indeterminacy, it is the judicial construction of the CJEU that provides us with the (valid) interpretation of the VAT Directive and the decision criteria for the taxation of subsidies.

C. CJEU Case Law

The case law on subsidies, while not particularly abundant, provides important clues.

In the Judgments Jurgen Mohr (C-215/94, of 29 February 1996) and Landboden-Agrardienste (C-384/95, of 18 December 1997), the Court considered that the commitment of farmers to abandon dairy production or reduce potato production could not be treated as a provision of services to the Community or to national authorities, or that these could be considered as "consumers of a service" since the Community does not acquire goods or services for its own use, but acts in the common interest (to promote the proper functioning of the Community market).

The agricultural producer does not supply services to an identifiable consumer nor an advantage susceptible of being considered as an element constitutive of the cost of the activity of another person in the commercial chain – cf. points 21 and 22 of the Judgment Jurgen Mohr and point 23 of the Judgment Landboden-Agrardienste. Such subsidy is not, consequently, subject to VAT.

RUI LAIRES highlights the conclusions of Advocate General JACOBS in case C-384/95, Landboden-Agrardienste (points 12 to 16). In his perspective, there must be a direct relationship between the good or service made available and the consideration obtained, together with the possible circumstance that subsidies granted regarding specific goods or services may have a direct impact on competition. He clearly considers outside the scope of taxation "subsidies less related to concrete supplies and more directed towards improving the economic situation of companies […]. Examples of such subsidies are those intended for the acquisition of goods, coverage of losses and restructuring of a company."

The Advocate General GEELHOED, in case C-184/00, Office of Walloon Products ("OWP"), of 22 November 2001, followed this line of argument and states that "the taxation of subsidies, taking into account in particular the legislative history, is an exception" which "is only justified if non-taxation produces an unsatisfactory result. Such unsatisfactory result may consist in the fact that an untaxed subsidy that directly and fully reflects itself in the lower price of operations causes a decrease in tax revenue" – cf. points 45 and 48 of the conclusions.

The OWP judgment constitutes a fundamental landmark in delimiting the necessary conditions for the consideration of a subsidy in the taxable value for purposes of VAT.

It was a case in which the Walloon regional administration granted an annual amount to a private non-profit association, intended to promote agricultural, horticultural and agri-food products of that region.

The issue was to determine whether operating subsidies covering a diverse part of operating expenses, namely the remuneration of personnel, the cost of facilities, the cost of acquiring equipment and supplies necessary and all other direct and indirect expenses related to the activity, should be included in the VAT taxable base.

In this context, the Court understands that the taxation of the subsidy implies meeting certain conditions. Let us see.

First condition – that it be a subsidy granted by an authority in the context of a triangular relationship, i.e., involving three parties (point 10 of the OWP Judgment):

(a) The authority granting the subsidy;

(b) The body/taxpayer benefiting from it; and

(c) The buyer of the good or the recipient of the service respectively supplied or rendered by the subsidized operator, clarifying that the operations in question are not those carried out for the benefit of the authority granting the subsidy.

Second condition – that the subsidy be directly related to the price of operations to be carried out by the subsidized operator (point 12 of the OWP Judgment). For this, it is necessary that such subsidy be specifically paid to the operator for it to supply a good or render a determined service.

Third condition – the price of the good or service must be determined, as a matter of principle, at the latest at the moment the taxable event occurs (point 13 of the OWP Judgment).

Fourth condition – the undertaking to pay the subsidy assumed by the one granting it has as a corollary the right to receive it recognized to the beneficiary when the taxable operation has been carried out by it (point 13 of the OWP Judgment).

It is important to emphasize that the Court expressly returns to the national court the burden of proving the existence of a direct nexus between the subsidy and the good or service in question (point 14 of the OWP Judgment).

This relationship between the subsidy and the price must result in an unequivocal manner and following a case-by-case analysis of the circumstances underlying the payment of the consideration and requires that it be verified, in a first instance, that the buyers of the good or the recipients of the service benefit from the subsidy granted to the beneficiary thereof. Indeed, it is necessary that the price to be paid by the buyer or recipient (in this case the three municipalities) be fixed in such a way that it decreases in proportion to the subsidy granted to the seller of the good or provider of the service. Otherwise, it is not necessary that the price of the good or service – or a part of the price – be determined. It is sufficient that it be determinable.

It is for the national court to assess whether, objectively, the fact that a subsidy is paid to the provider allows the latter to provide a service at a price lower than it would require in the absence of such subsidy. It is not necessary that the amount of the subsidy correspond exactly to the decrease in the price of the good delivered, it being sufficient that the relationship between this and the said subsidy, which may be fixed, be significant. However, it should be emphasized that the mere fact that a subsidy may have influence on the prices of goods delivered or services rendered by the subsidized body is not sufficient to make it taxable (points 12, 14 and 17 of the OWP Judgment).

The conditions just outlined correspond, moreover, to those which the Tax and Customs Authority enumerates generically in Information No. 1758, of 28 January 1992 - see EMANUEL VIDAL LIMA, in Value-Added Tax, Commented and Annotated, 9th Edition, Porto Publisher, p. 325-326.

D. Application to the Concrete Case

Claimant and Defendant are in agreement in qualifying the patrimonial attribution obtained by the former as a subsidy in the sense of VAT, so it suffices to note that it is a patrimonial attribution (pecuniary), received by a VAT taxpayer (the Claimant) using funds of public origin, from the European Regional Development Fund - "ERDF".

The disagreement concerns the characterization of the subsidy as directly connected to the price of the operations, which is independent of the nomen iuris attributed to such subsidy. The linkage to price is determinative, as emphasized by MARIA ODETE OLIVEIRA AND SEVERINO HENRIQUES DUARTE. It is required that the subsidy be shown to be due and firmly fixed before the operation – "The Treatment of Subsidies in VAT, Reflections Before and After the 2005 Judgments," in Studies in Memory of Teresa Lemos, Notebooks of Science and Technical Taxation 202, 2007, pp. 222-241, in particular p. 226.

The situation under analysis concerns the performance by the Claimant of a set of events/shows and animation projects specified with the purpose of promotion of the riverside area PARK … which crosses three distinct municipalities, whose municipalities are shareholders of the Claimant.

These concrete and individualized events and the media relations services for their better dissemination were the subject of an application by the Claimant for community funds (ERDF – Community Support Framework – "CSF" – III), framed in the enhancement of the Tagus River and in the creation of conditions for sustainability and affirmation of the Territory of the Vale do Tejo as a space for leisure and tourism, of economic dynamics and social welfare, with the direct recipients being the municipalities of "E", "C" and "D".

In this application, the Claimant indicated the three components to be financed (two of events and one of media relations), their execution regime (direct procurement or call for proposals) and the cost of each one, that is, the costs of holding each one of the promotional events and shows (and their dissemination) identified in point E of the factual matter. The application was approved at the end of 2007, with an ERDF co-financing rate of 75% of the eligible amount.

The events and shows were publicized and held and the respective non-co-financed specific costs were invoiced with VAT assessment to the municipalities where the events took place, plus the Claimant's structural costs, which, in turn, exercised the right to full deduction of all VAT incurred in the acquisitions of goods and services intended for its activity.

It is necessary, given the factual framework described, to overcome the distinction between subsidies connected and not connected to price, resorting to the judicial development of the Court and to the concrete analysis of the respective conditions and conditions.

In the situation of the Claimant, the subsidy is granted by an authority in the context of a triangular relationship: (a) we have on one hand, the authority granting the subsidy (CCDLTV); on the other hand, the beneficiary taxpayer (the Claimant); and, finally, a third party, the recipient(s) of the services to be rendered by the Claimant (the three municipalities that purchased the services of promotion and dissemination of their region, for the benefit of the respective populations). The negative requirement is additionally verified that the operations, events and shows are not performed for the benefit of the authority granting the subsidy.

In this way, the first condition set out in point 10 of the OWP Judgment is considered met.

The subsidy requested refers to a set of services to be rendered (to the municipalities) – events, shows and dissemination – and to the projected cost for their performance.

The approval of the subsidy is specifically intended for the coverage, at 75%, of the estimated cost of the said services to be acquired (from the contracted suppliers) and, subsequently, to be rendered (to the municipalities). Thus, if the Claimant does not perform the said events, shows and dissemination actions, it will not be entitled to receive the granted amounts, as these were granted on the assumption of the performance of such activities.

On this point, MARIA ODETE OLIVEIRA AND SEVERINO HENRIQUES DUARTE teach that "the subsidy is always linked to the purpose that is intended to be achieved with it (…) in such a way that whoever receives it is obliged to use its value for the purpose for which it was granted" – cited work p. 225.

The second condition is thus verified, as the ERDF participation is specifically paid to the Claimant for it to render determined services within the scope of its activity – point 12 of the OWP Judgment.

The price of the services in question is determined ab initio, contained in the application form (point 13 of the OWP Judgment), so the third condition is also considered met.

The subsidy enables the Claimant to practice prices with the municipalities, immediate recipients of the services, substantially lower than those that would be practiced if it did not exist. Indeed, the amount invoiced to the municipalities is that which results from the costs incurred minus the ERDF participation. That is, the price is reduced proportionally to the subsidy received, with the relationship between that decrease and the value of the subsidy received being manifest and expressive.

The proof of the existence of a direct nexus between the subsidy and the services in question results in an unequivocal manner: from the tripartite relationship established (CCDLTV, Claimant and Municipalities); from the circumstances underlying the subsidy – it was specifically intended to finance certain services characterized and delimited (as to their nature, time frame and respective value); from the fact that the municipalities benefited from the subsidy granted to the Claimant, as they only supported 25% of the cost of the services they purchased from it (plus structural costs); the price was determinable from the outset, constituting a requirement of the application the estimate of the value of the services to be subsidized.

Thus, it is clear that not only did the ERDF subsidy enable the Claimant to supply a service at a significantly lower price than it would require in its absence, but it was a condition of that subsidy that the services (events, shows and dissemination) that it aimed to finance be performed.

The determining conditions of the taxation provided for in article 16, No. 5, paragraph c) of the VAT Code are thus met, given the circumstance that the subsidy in question was established based on the services to be rendered and was fixed prior to the performance of the operations.

Finally, it should be noted that this solution is that which best accords with the principle of neutrality, permitting the equal treatment of identical situations and the assessment of tax on the effective value of the cost of factors of production (relating to the services rendered) and the value of the consumption of the services, knowing that these would ultimately be made available free of charge by the municipalities to the populations and visitors. Otherwise, the result achieved would be unsatisfactory.

What is set forth above is not prejudiced by the fact that the services of events and dissemination to be rendered by the Claimant are inserted in its statutory purposes and in the

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