VAT Deduction Rights for SGPS Holding Companies: CAAD Arbitration Case 112/2017-T

ARBITRAL AWARD

The arbitrators José Baeta de Queiroz (president-arbitrator), Magda Feliciano and Leonor Fernandes Ferreira, appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 19 April 2017, agree as follows:

I. REPORT

A…, SGPS, S.A., legal entity no. …, with registered office at Rua …, no. …, …-… Lisbon, notified on 14 November 2016 of the decision to refuse the application issued by the Head of the Division of Tax Management and Assistance of the Large Taxpayers Unit within the scope of the Gracious Appeal no. …2016…, hereby requests the annulment of:

(i) the acts of additional VAT (Value Added Tax) assessment no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015… and no. 2015…, relating to the year 2013;

(ii) the corresponding acts of assessment of compensatory interest no. 2015… to no. 2015…; and

(iii) the corresponding statements of account adjustments no. 2015… to no. 2015….

The Claimant thereby intends that the illegality of the said VAT assessment acts and corresponding compensatory interest be declared.

The Claimant further requests compensation for damages resulting from the provision of undue guarantee to obtain the suspension of the tax enforcement process no. …2016… and related matters.

On 22 May 2017, the Tax and Customs Authority, hereinafter AT, responded defending the dismissal of the request for arbitral award, for lack of proof.

On 13 July 2017, the meeting provided for in article 18 of the Legal Framework for Tax Arbitration (RJAT) was held, with witness testimony being produced and agreement being reached that the process would proceed to written submissions.

The Arbitral Tribunal was duly constituted and is competent.

The parties have legal personality and capacity, are legitimate (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011 of 22 March) and are duly represented.

The process is not affected by nullities.

II. STATEMENT OF FACTS

1. Proven Facts

The following facts are considered proven:

a) The Claimant is a management company for shareholdings (SGPS), with registered office in national territory, which carries out the activity of management of shareholdings and provides technical services of administration and management to the companies in which it holds stakes;

b) The Claimant is subject to the legal framework for SGPS, established by Decree-Law no. 495/88 of 30 December;

c) For VAT purposes, the Claimant is classified under the normal regime with monthly periodicity, in accordance with item a) of no. 1 of article 41 of the VAT Code (CIVA);

d) Following Service Order no. OI2015… of 5 May 2015, a general scope external tax inspection procedure was carried out on the Claimant, with reference to the year 2013;

e) From this procedure resulted the Tax Inspection Report that was notified to the Claimant in November 2015, in which a VAT correction was proposed, in the amount of € 516,006.22 corresponding to VAT indirectly deducted, this amount being itemized as follows:

• Acquisition of services related to non-economic activity (management of shareholdings) in the amount of € 9,913;

• Acquisition of services related to the evaluation of assets of related entities in the amount of € 144,275.35;

• Proportional part of general expenses not related to economic activity subject and not exempt (provision of services) in the amount of € 268,853.29;

• Investment expenses of the Claimant, in the value of € 92,964.60;

f) The Claimant (i) manages shareholdings (activity excluded from VAT); (ii) makes remunerated loans to its investees (activity subject, but exempt from VAT); (iii) and provides to the latter technical services of administration and management (activity subject and not exempt from VAT);

g) The Claimant provided itself with an organizational structure adequate for the pursuit of all its activities, having opted not to autonomize organically or accountably each of the three activities;

h) The activity of provision of services to its investees is the one that consumes the majority of the Claimant's resources (both working hours and goods and services acquired from third parties);

i) When the Claimant carries out operations for management of shareholdings, the main expenses it bears are (i) the costs of acquisition of shares and (ii) the interest associated with financing these operations;

j) The Claimant does not bear VAT on (i) the costs of acquisition of shares; (ii) the interest associated with financing these operations; and (iii) the working hours spent by its employees in managing shareholdings;

k) The number of working hours spent by the Claimant's employees with the activity of management of shareholdings is very low compared to that dedicated to other activities;

l) During the year 2013, the Claimant did not carry out any significant financing operation, merely continuing to provide treasury support to its investees (cf. doc. 53);

m) The Claimant continuously has complete and updated information on the situation of its investees, not needing to resort to services of third parties to evaluate the financing conditions to be applied in operations in which it grants them credit (testimony of Witness B…);

n) When the Claimant carries out financing operations to the investees, the main expenses it bears are the interest on its own financing (testimony of Witness B…);

o) The amount of income earned by the Claimant within the scope of activities subject to VAT amounted, in 2013, to €11,616,848.20 (eleven million, six hundred and sixteen thousand, eight hundred and forty-eight euros and twenty cents), corresponding to the sum of the amount recorded in account 72 (administration services to investees) with the amount recorded in sub-account 781 (supplementary income), net of the amount not subject to VAT (cf. doc. 54);

p) If the Claimant ceased to manage shareholdings and finance its investees, its structure would not have to undergo changes, as these activities consume insignificant resources (testimony of witness B…);

q) In addition to certain operating expenses – those that are directly allocable to a certain activity – the Claimant regularly bears general expenses (also called mixed-use expenses or period expenses), whose use cannot be directly attributed to a particular operation or a certain type of operations, but rather to the whole of the company's activity (testimony of witness B…);

r) The general expenses borne by the Claimant are included in the constituent elements of the prices charged within the scope of all its operations, including the provision of services to investees (testimony of witness B…);

s) The Respondent used the cost allocation key used by the Claimant for corporate income tax purposes to correct part of the deductions made by the Claimant for VAT purposes, in the total amount of € 268,853.29;

t) The Claimant was notified of the acts of additional VAT assessment and compensatory interest: no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015… and no. 2015…, relating to the twelve tax periods of 2013; no. 2015… to no. 2015…; and no. 2015… to no. 2015…;

u) The total value of the acts of additional VAT assessment is € 516,006.24, with € 44,844.26 being the value of compensatory interest;

v) A bank guarantee was provided to obtain the suspension of the tax enforcement processes for the collection of the additional VAT assessment acts identified;

w) The additional assessment acts above identified are consequential to the corrections made by the Respondent to the Claimant's VAT returns for the year 2013.

2. Justification for the Determination of Facts

The facts were determined to be proven based on the documents submitted with the request for arbitral award and with the administrative process and supported by the testimony of the witness examined, who demonstrated knowledge of the activity carried out by the Claimant and appeared to testify impartially.

III. STATEMENT OF LAW

Introduction

The principal issue that arises in the present proceedings concerns whether or not the acts of additional VAT assessment, which are the subject of this petition, are valid, considering the right to VAT deduction provided for in articles 20 and following of the VAT Code.

a. Position of the Claimant

In this regard, the Claimant alleges in its request for constitution of the Arbitral Tribunal, in summary, the following:

1. The AT considered illegal the deduction of all the tax borne by the Claimant with the acquisition of services for studies on corporate matters and legal certification of accounts, in the total amount of € 9,913.00 (nine thousand nine hundred and thirteen euros);

2. On this matter, the Tax Inspection Report states, simply, that "Through the analysis carried out on the VAT deductible accounts, a series of inputs were identified based on the acquisition from third parties of specialized services, relating to operations not arising from the exercise of an economic activity, that is, by their nature and purpose the identified charges relate solely and exclusively to acts of management in the interest of A…, that is, it is possible to establish a correlation with the activity of management of the company. It is considered that the charges for studies on corporate matters and legal audit of accounts are incurred in the interest of the company and necessary for its proper and correct operation, being supported exclusively in its interest, presenting no relationship or direct benefit, nor even reflected, with any of its investees" (cf. page 19 of the cited doc. 50);

3. However, the VAT regime also ensures to taxable persons the right to deduction of the tax borne within the scope of the realization of general expenses, related to the whole of its activity and not to one or another type of active operations in particular;

4. Indeed, as the CJEU repeatedly affirms, the system of the tax also ensures "the right to deduction also in favor of the taxable person, even in the absence of a direct and immediate relationship between a certain operation upstream and one or several operations downstream with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, indeed, a direct and immediate relationship with the whole of the economic activity of the taxable person" (cf., for example, no. 24 of the Judgment delivered in Case Investrand, no. 58 of the Judgment delivered in Case SKF and no. 37 of the Judgment delivered in Case PT SGPS);

5. Also in the Arbitral Award delivered on 27 December 2012, within the scope of Process no. 77/2012-T, it was decided that "there is legal cover for the deduction [by a SGPS] of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its investees with the right to deduction or that, not having a direct and immediate nexus with certain services, is VAT borne with costs that form part of the general expenses [of that SGPS] that have a direct and immediate nexus with the whole of its economic activity" (in the same sense, see also the Arbitral Award delivered on 8 January 2015, within the scope of Process no. 409/2014-T);

6. Now, as is manifest and the AT itself assumes in the Tax Inspection Report, the expenses on which the tax now disregarded fell (repeat: studies on corporate matters and legal certification of accounts) are general expenses, which ensure the normal operation of the company as a whole (and, therefore, of its materially more relevant activity: the provision of services to investees);

7. Furthermore, it is proven that the Claimant passes on in the prices of the services provided to its investees the general expenses inherent to the operation of the company;

8. In this context, "it must be concluded that the requirements that in the cited CJEU judgment [Judgment of 6 September 2012, delivered in Case C-496/11 (PT SGPS)] are considered necessary for the deduction of VAT are met, as it is considered there that it is viable for a holding even in the absence of a direct and immediate nexus between a certain operation upstream and one or several operations downstream with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides" (cf. Arbitral Award delivered on 5 January 2016, in Process no. 316/2015-T, relating to the VAT of 2011 of the Claimant);

9. To disregard the deduction of VAT borne by the Claimant with the acquisition of goods and services identified above, the AT was required to apply the real allocation method referred to in no. 2 of article 23 of the VAT Code, establishing objective criteria that would make it possible "to determine the degree of use of these goods and services in operations that give the right to deduction and in operations that do not give that right";

10. As it did not do so, and opted for the disregard in totum of the deductions under analysis, without taking into account the fact that the expenses were necessary for the development of the various activities of the Claimant, the AT labored under error and the correction here in question must be declared illegal, together with the assessment acts that reflect it;

11. During the inspection procedure for the exercise of 2013, the AT analyzed the tax consequences of the acquisition of a series of specialized services necessary to carry out an operation of exchange of assets directly and indirectly held by the Claimant, concluding that (i) such services benefited materially third-party taxable persons domiciled outside national territory and with special relationships with the Claimant; and that, to that extent, (ii) should have been re-billed by the Claimant to those other taxable persons related to the Claimant, having corrected the taxable matter of the Claimant's corporate income tax, imputing to it income in an amount corresponding to the price of the services that should have been re-billed and was not re-billed and disregarding all deductions of the tax borne by the Claimant with the acquisition of those services, in the amount of € 144,275.35;

12. However, and as results from the case law of the Court of Justice set out above, it is unequivocal that the expenses here in question (qualified by the Tax Authority itself as expenses related to provision of services) have a direct and immediate relationship with the Claimant's taxed activity and, to that extent, the VAT that fell on them is deductible;

13. As the CJEU states in the already cited Judgment delivered in Case Investrand "it is important to recall that the deduction scheme established by the Sixth Directive aims to free the entrepreneur entirely from the burden of VAT due or paid within the scope of all its economic activities. The common VAT system thus ensures perfect neutrality regarding the tax burden of all economic activities, whatever their purposes or results, on the condition that they are, in principle, themselves subject to VAT (see, in particular, judgments of 14 February 1985, Rompelman, 268/83, Recueil, p. 655, no. 19; of 15 January 1998, Ghent Coal Terminal, C-37/95, Collect., p. I-1, no. 15; and of 22 February 2001, Abbey National, C-408/98, Collect., p. I-1361, no. 24)";

14. In light of the above, and mindful of the assumptions delimited by the AT itself, the correction here in question must be considered illegal, together with the tax acts that reflect it.

15. Once the amounts of VAT that the AT qualified as borne exclusively in function of the Claimant's non-taxed activity were disregarded, the Inspection Services of the Tax Administration proceeded to analyze the deductibility of the tax related to the other services acquired by the company during the year 2013, in the total value of € 649,717.95;

16. In relation to these services, the AT states that the determination of the amount of deductible VAT should result from the application of the "real allocation method taking into account that the criterion for allocation of the amounts of value added tax paid upstream between economic activities and non-economic activities should objectively reflect the part of real allocation of upstream expenses to each of these two activities". With regard to the criteria or allocation keys to be used to implement the real allocation method, the Tax Inspection Report begins by citing Circular Letter no. 30103 of 23 April 2008, in the part where it determines that, in compliance with the provision of no. 2 of article 23 of the VAT Code, regarding goods of mixed use between economic activities and non-economic activities, i) The "determination of the amount of non-deductible VAT relating to these cannot be based on the pro-rata method, and the real allocation must be compulsorily used based on actual use (…) through objective criteria (…)"; that ii) "Consequently, the degree, proportion or intensity of each good or service should be determined in operations arising from [an] economic activity subject to VAT and of operations not arising [from that activity] through objective criteria, which may be referred to, merely by way of example, as follows: a) the occupied area; b) the number of personnel elements assigned; c) the payroll; d) machine hours; e) man-hours"; and that iii) "In any case, the determination of these objective criteria must be adapted to the concrete situation and organization of the taxable person, to the nature of its operations in the context of the overall activity carried out and to the goods or services acquired for the needs of all operations, whether or not included in the concept of relevant economic activity" (cf. pp. 21-22 of the cited doc. 50);

17. Given this, the AT considered that "having the taxable person indicated to the Tax and Customs Authority, through the Transfer Pricing File, that part of the operational costs incurred by the holding refer to costs borne in the exercise of a single activity subject to VAT and not exempt, embodied in the provision of support services to some of its investees, it was decided to consider that proportion in determining the expenses whose borne VAT could be deductible" (cf. p. 22 of the cited doc. 50);

18. However, the allocation key to which the AT refers was provided by the Claimant for purposes of verifying compliance with the corporate income tax rules on transfer pricing, and allocates a certain percentage (i) of expenses with supplies and external services and (ii) of expenses with personnel of each of the cost allocation centers to the provision of services made for the benefit of the investees;

19. The amounts added by the AT were not allocated to any of the three cost centers indicated by the Claimant in the transfer pricing key (for which three different ratios of expenses associated with the provision of services had been determined);

20. Furthermore, despite the very significant increase in the basis for calculating the ratio of deductible tax, the AT did not correct the value of the expenses "to be allocated to the provision of services", which remained at the said € 4,284,268.94 (four million, two hundred and eighty-four thousand, two hundred and sixty-eight euros and ninety-four cents);

21. Implementing the correction, the AT disregarded the difference between this value and that initially deducted by the Claimant, correcting, in accordance with the provision of item a) of no. 1 of article 23 of the VAT Code, the periodic returns relating to the twelve tax periods of 2013, in the total amount of € 268,853.23 (two hundred and sixty-eight thousand, eight hundred and fifty-three euros and twenty-three cents);

22. In the year 2013, the provision of services to investees was the most relevant activity provided by the Claimant to the investees, with the income from this activity being €5,250,000.00, while the income generated by management of shareholdings reached only €1,906,039.90;

23. Only by admitting the deduction of the entirety of the VAT borne by the Claimant is the neutrality of the tax avoided;

24. To the above is added that, even if that were not the case, and if it were accepted that the deduction made by the Claimant was susceptible to being corrected – which is not admitted – the fact remains that the criterion concretely applied by the AT in the present case is inadequate and itself results in the violation of the principle of neutrality, underlying, as has been demonstrated, the wording of no. 2 of article 23 of the VAT Code;

25. Indeed, the allocation key used by the AT is by no means adequate for the allocation of general expenses subject to VAT, since it was elaborated using the analysis of a universe of expenses much wider than that at issue in the present process and, in that universe, about two-thirds of the expenses are expenses excluded from VAT;

26. Such key was not developed taking into account only expenses with goods and services subject to VAT, but rather all expenses recorded in the "62 – Supplies and external services" account and, more importantly, expenses related to work recorded in the "63 – Personnel expenses" account – which are not, naturally, subject to VAT and represent more than 52% of the calculation basis;

27. Now, as is evident, assuming that the goods and services subject to VAT acquired by the Claimant during the year 2013 were allocated to the provision of services exactly in the same proportion as the set of expenses that served as the basis for the elaboration of the allocation key in question is abusive;

28. These are disparate universes and expenses subject to different tax regimes, which, from the outset, invalidates the adequacy of the key in question.

29. Moving away without justification from the reality underlying the execution of general expenses recorded in the "622 – Specialized Services" account, it is necessary to conclude that the method devised and applied by the AT to determine the part of the VAT that fell on the general expenses borne by the Claimant in 2013, and which is deductible in the calculation of the tax to be paid to the State, does not correspond to an objective criterion that makes it possible to determine the degree of use of these goods and services in operations that give the right to deduction and in operations that do not give that right, in accordance with the provision of no. 2 of the said article 23 of the VAT Code;

30. Even if, in the abstract, (i) the correction in question were admissible; and (ii) the criterion adopted by the AT were not illegal – which is not admitted – the fact remains that the AT also erred in the practical application of the aforementioned criterion;

31. Indeed, although it states that the correction here under analysis results from the application of the allocation key provided by the Claimant itself, the fact is that, as indicated above, the AT did not merely consider the 65% ratio resulting from that allocation key, having instead reduced that ratio to 58.2% in an absolutely discretionary manner;

32. In this sense, even if it were considered that the use of the allocation key elaborated for transfer pricing purposes as adequate to the determination of the part of deductible VAT in accordance with the provision of no. 2 of article 23 of the VAT Code, the fact is that the corrections made by the AT would eliminate that adequacy, affecting the correction now at issue.

33. The additional VAT assessments now challenged are illegal and must, therefore, be annulled, whereby, as a consequence, no damage to the Public Treasury actually occurred, and the acts of assessment of compensatory interest are, also, illegal.

34. The allowance of the present request for arbitral award will imply the recognition of an error attributable to the AT, and this, in turn, the payment of damages caused to the Claimant by the provision of the guarantee indicated above, in the value of € 590,425.48, from 7 March 2016 until the date of its effective cancellation.

b. Position of the AT

1. The now Claimant indirectly bore expenses with services whose real beneficiaries were third-party companies, having deducted the amount of € 144,275.35 relating to the VAT associated with the said expenses;

2. Indeed, according to what was demonstrated in the Tax Inspection Report (fls.14 et seq.) the legal services relating to the said amount relate to the preparation and implementation of an asset exchange of C… (Spain) with D…, an operation prior to the exchange of assets between D… and E… (Brazil);

3. As a result, the expenses borne by the now Claimant as an intermediary of the related entities translate an assumption of resources that are not related to the exercise of its activity;

4. The Claimant, not having proceeded to any re-billing of the said expenses (with the consequent invoicing/regularization of the tax in favor of the State so that in the sphere of the company the effect of VAT relating to these operations would be null) the right to deduction was also completely barred to it by the provision of item a) of no. 1 of article 20 of the VAT Code;

5. Taking into consideration the reasoning contained in the Tax Inspection Report and the submissions produced by the Claimant, it is found that the controversial question concerns the susceptibility of a Management Company for Shareholdings, like the Claimant, to deduct the VAT borne with the acquisition of goods and provision of services connected with a certain type of activities related to the management of shareholdings and the respective income, and that translate themselves into expenses proper to the operation of a holding, because, according to the AT's understanding, such activities are not considered to be covered by the concept of economic activity;

6. Indeed, in that circumstance, the exercise of such activity of management of shareholdings does not make possible the exercise of the right to deduction of the upstream tax in accordance with the provision of article 20 of the VAT Code.

7. On the other hand, by virtue of the various activities carried out by the Claimant, it is important to ascertain the possibility of full deduction of the VAT borne with the acquisition of goods and services, used in the pursuit of the various activities and the respective method of deduction and allocation key, in order to determine the deductible VAT in accordance with the provision of article 23 of the VAT Code.

8. However, having analyzed the issues underlying the present request for arbitral award, we understand that the Claimant is not correct, as was demonstrated within the scope of the Gracious Appeal decision procedure, whose grounds we fully endorse.

9. The right to deduction of VAT borne on operations related to non-economic activity was corrected in the amount of € 9,913.00, corresponding to "shareholder costs" and others that do not present a direct and immediate nexus with the downstream taxable operations (e.g. certification and legal audit of accounts, analysis of corporate matters, etc. fls. 19 of RIT);

10. Indeed, it is manifest that these are services that are related to the activity of acquisition, holding and management of shareholdings developed by the Claimant, in a business management and expansion of activity perspective, relating to A… itself, as shareholder, having been contracted by the Claimant in its exclusive interest and not for the benefit of any of its investees, and which, by definition, cannot be fully attributed to them, not being, as a consequence, permitted the full deduction of the respective VAT;

11. In the absence of any relationship between the services acquired and an economic activity for VAT purposes, the tax borne with its acquisition is not deductible in accordance with no. 1 of article 20 of the VAT Code;

12. Furthermore, as stated, for it to be possible to admit that we are dealing with general costs arising from economic activity, it is required that "(…) the taxable person demonstrate, through objective elements, that the expenses related to the acquisition of these services form part of the cost of the various constituent elements of the price of the downstream operation" - Judgment of the CJEU of 08 June 2000, Case Commissioners of Customs and Excise v. Midland Bank plc., process no. C-98/98.

13. Now, in view of the elements available, both at the stage of Tax Inspection, at the stage of Gracious Appeal, and within the scope of the present request for arbitral award, it is not seen that the Claimant has managed to carry out that demonstration.

14. Regarding the VAT borne on general expenses – € 268,853.29, in paragraph 4 of the arbitral petition and with regard to the correction relating to the VAT relating to the expenses allegedly borne for the development of the various activities, in the amount of € 268,853.23, it is not seen that the same can be the subject of full deduction by the Claimant;

15. Thus, resulting from the analysis of accounts 62 (supplies and external services and specialized services) and 63 (management with personnel), considering the proportion of these expenses that the Claimant indicated were related to the activity of provision of services, the Tax Inspection Services concluded that VAT was improperly deducted in accordance with no. 1 of article 20 of the VAT Code by application of item a) of no. 1 of article 23 of the same instrument because, in the determination of deductible VAT, the Claimant had considered as subject to VAT the entirety of its activity;

16. With regard to the so-called general expenses and the allocation key adopted, the Claimant carries out operations subject to VAT that give the right to deduction (remunerated provision of services), simultaneously, with others that, although subject to tax, are exempt therefrom in accordance with the provision of article 9 of the VAT Code (provision of credit) and, as well, with operations arising from its main activity, which is outside the scope of tax (acquisition, holding, disposition, management of shareholdings, arising from which it receives dividends, capital gains, etc.);

17. To that extent, there are no doubts that the now Claimant is configured as a mixed/partial taxable person;

18. Thus, contrary to what the Claimant intends to assert, it can never be considered a taxable person with the right to full deduction, that is, with the right to deduct 100% of the upstream VAT borne with the acquisition of goods and services, its right to deduction being necessarily limited;

19. When the said services are used by the holding company to simultaneously carry out economic operations with the right to deduction and economic operations without the right to deduction, deduction is only allowed for the part of the VAT that is proportional to the amount relating to the first operations and the national Tax Administration is authorized to provide one of the methods for determining the right to deduction, enumerated in the said article 173, no. 1 of the VAT Directive;

20. When the said goods and services are used simultaneously for economic activities and for non-economic activities, no. 1 of article 173 of Directive 2006/112/EC of 28 November is not applicable and the methods of deduction and allocation are defined by the Member States, which, in the exercise of this power, must take into account the purpose to which the inputs are intended and in accordance with the said Directive, provide a method of calculation that objectively reflects the part of real allocation of upstream expenses for each of these two activities;

21. In these circumstances, the resort to the real allocation method implies, simultaneously, the need for adoption of a criterion or allocation key that makes it possible to ascertain, measure or discriminate what is the measure of the actual use of the good or service in the part that gives the right to deduction and in the part that does not permit the exercise of that right;

22. Among the set of these available criteria the following can be highlighted: criterion of the area occupied by each type of company activity, the number of personnel elements assigned to each of them, the payroll, the number of machine hours, the number of man-hours, etc.

23. The Claimant understands that "… in the original allocation key, each of those three cost allocation centers has a different ratio of expenses associated with the provision of services to investees (65% for the board of directors, 75% for the corporate center and 55% for the external relations and communications department)." – article 215 of the Gracious Appeal,

24. Now, what is found is that the Claimant did not present an objective criterion or allocation key, so it fell to the AT to define, taking into account the purpose to which the inputs are intended and in accordance with the "VAT Directive", a method of calculation that objectively reflects the part of real allocation of upstream expenses to each of these two activities;

25. Thus, in the absence of an objective criterion made available by the Claimant, the AT resorted to the data it had, namely, those contained in the transfer pricing file;

26. With such procedures, the Tax Inspection Services defined a criterion that objectively reflects the part of real allocation of upstream expenses to each of the two activities (taxed and non-taxed), in compliance with the applicable internal and Community rules and, as well, with what is recommended in the internal guidelines published on the matter;

27. A ratio of 58.62% was thus ascertained, which it applied to the VAT deducted in the expenses considered common to all activities, which resulted in a correction of € 380,864.66, the difference of which to € 649,717.95 is € 268,853.29 here contested;

28. Whereby the alleged illegality and inadequacy of the allocation key does not stand.

29. As stated above, where it is a matter of determining the deductible VAT relating to goods and services partially assigned to the carrying out of operations not arising from an economic activity, it is mandatory to resort to the real allocation method, based on objective criteria that make it possible to determine the degree of use of these goods and services in the various activities undertaken.

30. Given this, the argumentation advanced by the Claimant cannot proceed either with regard to the determination of the method for calculating deductible tax used by the tax inspection services, or with regard to the allocation key used to allocate the amounts of upstream paid tax between economic and non-economic activities.

31. The responsibility of the Claimant in the delay in the assessment and payment to the State of the owed tax results from the non-compliance with the legal provisions in force for its concrete tax situation and from the irregularities ascertained, which constitute, as expressly stated in the RIT at fl. 62, violations provided for and punished by the General Tax Violations Regime, from which the guilt of the Claimant and the legality of the assessment of compensatory interest is demonstrated.

32. For compensation for undue guarantee to take place, it is required that, as a preceding condition, there is proven in gracious appeal or judicial challenge, the existence of "error attributable to the services", which, following all that was previously explained, does not occur in the case at issue.

1.1 Applicable Legal Framework

1.1.1 Legal Framework for SGPS

Decree-Law no. 495/88 of 30 December, which establishes the Legal Framework for Management Companies for Shareholdings (SGPS), was created "with a view to creating favorable conditions, in particular of a fiscal nature, which facilitate and encourage the creation of economic groups, as appropriate instruments to contribute to the strengthening of the Portuguese business fabric." – See Preamble of the said Decree-Law.

In accordance with article 1, no. 1 of the legal framework for SPGS, "Management companies for shareholdings, hereinafter referred to in abbreviated form as SGPS, have as their sole contractual purpose the management of shareholdings in other companies, as an indirect form of exercise of economic activities."

SGPS are permitted "the provision of technical services of administration and management of all or some of the companies in which they hold stakes provided for" (Cf. Article 4, no. 1 of the legal framework for SGPS), on an ancillary basis.

Being the contractual purpose of SGPS a legal limit to the exercise of its commercial activity in the form of SGPS, to the extent that no. 2 of article 8 of the legal framework for SGPS provides as follows:

"Companies which, having different contractual purposes, have as their sole purpose in fact the management of shareholdings in other companies and likewise SGPS which in fact carry out direct economic activity shall be dissolved by the court, in accordance with article 144 of the Commercial Companies Code, without prejudice to the application of the penalty provided for in no. 1 of article 13 of this instrument."

As taught by Mariana Gouveia de Oliveira,[1] "the concept of holding company is used internationally to designate very heterogeneous realities, and may encompass both companies that merely manage passively portfolios of securities, in a logic of risk distribution, and companies that only hold controlling stakes and that actively intervene in the management of their investees, providing or not remunerated services to them.

Among other arrangements, it is customary to distinguish between pure holding and mixed holding and between financial holding and management holding.

In the first case, the criterion used refers to the exclusive character of its corporate purpose, making it possible to distinguish between pure holding, dedicated solely to the holding of shareholdings, and mixed holding, whose corporate purpose also encompasses activities of a commercial and industrial nature.

The second of those criteria, relating to the purpose for which the management of shareholdings is intended, implies differentiation between management holding, which aims, more than mere holding of shareholdings, at the framing and direction of the companies held, thus carrying out taxable operations and operations outside the field of tax subjection, and the so-called financial holding, directed only at the profitability of the investment concentrated in shareholdings.

Now, in accordance with the provision of article 1, no. 1 of Decree-Law no. 495/88 of 30 December (and successive amendments), SGPS have as their sole contractual purpose the management of shareholdings in other companies, as an indirect form of exercise of economic activities.

Participation in the capital of other companies shall be considered as an indirect form of exercise of an economic activity, in accordance with articles 1, nos. 2 and 3 of the said instrument, once two cumulative requirements are met: on the one hand, the non-occasional character of the participation, i.e., the preservation of ownership of it for a period exceeding one year; on the other, the holding of at least 10% of the capital, to which is attached the voting right of the company participated (alone or jointly with stakes of other companies in which the SGPS is in a position of dominance).

(…)

On the other hand, the SGPS should qualify itself as a management holding, achieving, through its respective activity, more than mere holding of shareholdings.

Because it is a management holding, the SGPS may, in accordance with articles 4 and 5 of its legal framework, provide technical services of administration and management, treasury services and granting of credit to all or some of the companies in which it holds indirect stakes with the restrictions established in law.

In sum, it may be affirmed as follows: the management of shareholdings in other companies, as an indirect form of exercise of an economic activity, constitutes the sole corporate purpose that, in the eyes of the law, any SGPS may have.

For this reason, these are equated to pure holdings.

However, this qualification does not preclude the respective activity from exceeding mere acquisition, holding and disposition of shareholdings, so it is perfectly possible for an SGPS to exercise an economic activity related to the management of the shareholdings it holds in accordance with the terms permitted by law.

It should be noted, however, that the qualification as pure or mixed holding does not seem to find full correspondence with the same concepts used within the case law of the CJEU.

Indeed, concentrating our attention on the distinction between those two types of holdings, it is necessary to recognize the different purpose of the criterion used in the corporate and community context.

Indeed, in the community context, the fundamental question to analyze is whether the holding is a VAT taxable person, i.e., whether it carries out an economic activity, analyzing for this purpose whether, in addition to simple holding of shareholdings, any activity of production, commercialization or provision of services is carried out, in particular, provision of services to investees.

If its activity is merely passive, it will be a company that does not exercise an economic activity for VAT purposes, since the dividends and interest it receives constitute mere fruits resulting from ownership of an asset and not the proceeds resulting from its economic exploitation, so the company in question will not be considered a taxable person for VAT purposes.

We are talking about entities that, in economic terms, do not constitute real enterprises, but only vehicles for holding and organizing economic groups.

Differently, a holding company that actively intervenes in the management of its investees, resulting in the realization of taxable outputs, should be considered as an entity that exercises an economic activity, assuming the status of a VAT taxable person.

Although the legal framework for SGPS does not preclude the existence of merely passive holdings, it results from its legal framework and the preamble of Decree-Law no. 495/88 of 30 December, that the Portuguese legislator intended to create a legal framework for the creation of active SGPS, which would manage in a "centralized and specialized" manner its investees.

As the legislator states, the shareholdings to be held by SGPS, "do not, however, translate into a mere application of capital, instead assuming an active presence and intervention, as partners of the said company held."

Indeed, its sole corporate purpose is management – and not mere holding – of shareholdings, which is reinforced by the fact that it is the law itself that recognizes competence to provide management services to investees, resulting in the exercise of an economic activity for VAT purposes.

(…)

Thus, we must conclude that Portuguese SGPS may be qualified as passive holdings (generally referred to as pure holdings in community case law) or active holdings."

In the concrete case under analysis, it was proven that the Claimant is an active holding that provides support, monitoring and advisory services to investees, this being the activity that consumes the most resources (both working hours and goods and services acquired from third parties).

In this context, let us see what is the legal framework for holdings in VAT.

1.1.2 Scope of VAT

In accordance with article 2, no. 1 a) of the VAT Code, taxable persons of the tax are legal entities that, in an independent manner and with a character of habituality, carry out activities of production, commerce or provision of services.

From this perspective, SGPS may or may not be VAT taxable persons depending on whether or not they develop an economic activity for VAT purposes.

When holdings are passive, it has been understood that the mere taking, holding and disposition of shareholdings and other financial assets does not constitute an economic activity in the sense relevant for VAT purposes. Indeed, in these cases we are dealing with the mere enjoyment of an asset and not with its exploitation.[2]

When holdings are active, the fact that their sole corporate purpose is "the management of shareholdings of other companies, as an indirect form of exercise of economic activities" should not be relevant in any way in ascertaining the right to VAT deduction, which should be evaluated according to the general criteria.

Thus, notwithstanding the rule being established that the mere acquisition and holding of shares and stakes does not constitute an economic activity, the acquisition or holding of stakes may be carried out within the framework of a commercial activity, or constitute the direct, permanent and necessary continuation of the taxable activity.[3]

Thus, considering that SGPS may have a dual status for VAT purposes, as taxable persons and final consumers, to the extent that they may develop taxable activities, such as the provision of services to their investees and non-economic activities, such as the holding and enjoyment of shareholdings, may SGPS with these characteristics qualify themselves as partial taxable persons.

Considering that, in the case at issue, the Claimant is an active holding that develops, also, an economic activity, it is important to next verify on what terms it may exercise its right to VAT deduction, as a mixed VAT taxable person.

1.1.3 Right to VAT Deduction

As is known, VAT is a general tax on consumption that aims to tax the final use of goods and services, that is, their use by the final consumer.

Being an indirect tax of Community origin and multi-phase, VAT tends to tax the entire act of consumption, and the right to deduction is an essential element of the functioning of the tax, and must guarantee its principal characteristic – neutrality.

It is settled case law of the CJEU that, being the right to deduction a fundamental element of the VAT scheme, it is only possible to limit this right in the cases expressly provided for by the VAT Directive and, even then, with respect for the principles of proportionality and equality, and the common VAT system cannot be emptied of its content.

As emphasized in the BP Soupergaz Judgment, the so-called indirect subtraction method, of invoices, of tax credit or system of fractional payments, is the essential mechanism for the functioning of this type of tax. As stated in the conclusions of this Judgment, "In this regard, the right to deduction provided for in articles 17 et seq. of the Sixth Directive, which is an integral part of the value added tax mechanism, cannot, in principle, be limited and is exercised immediately in relation to all taxes that have been levied on operations carried out upstream, has an impact at the level of the tax burden and must be applied similarly in all Member States, so that derogations are only permitted in cases expressly provided for by the directive."[4]

It is further argued that "the provisions that provide for derogations to the principle of the right to VAT deduction, which guarantees the neutrality of this tax are of restrictive interpretation" [5].

Therefore, the principle of VAT neutrality requires that the deduction of upstream paid tax be granted if the substantive requirements have been met, even if the taxable persons have neglected certain formal requirements.[6]

In this context, according to the CJEU, as long as the Tax Administration has the necessary data to determine that the taxable person, as the recipient of the operations, is the debtor of VAT, it cannot impose, with regard to its right to deduction, additional conditions that may have the effect of making the exercise of that right completely unfeasible.[7]

In reality, the right to deduction is embodied as the essential element of the functioning of the tax, the "cornerstone of the value added tax system", based on the so-called method of deduction of tax, method of tax credit, indirect subtraction method or also method of invoices.

In accordance with this method, and in compliance with the provision of article 19 of the VAT Code, through an arithmetic operation of subtraction, from the tax determined on sales and provision of services (outputs) and identifiable in the respective invoices, the tax borne in purchases and other expenses (inputs) is deducted.

The rules for exercising the right to deduct tax contemplate objective requirements, more linked to the type of expenses, subjective, relating to the taxable person, and temporal, relating to the period in which it is possible to exercise the right to VAT deduction, which must be verified simultaneously to exercise the right to deduction.

As objective requirements for exercising the right to deduct tax we have, in particular, the fact that the borne tax must appear in an invoice issued in legal form (article 36 of the VAT Code), that it is Portuguese VAT, and that the expense, by itself, gives the right to VAT deduction (that is, it should not be an expense excluded from the right to deduction, in accordance with the provision of article 21 of the VAT Code).

As subjective requirements for exercising the right to deduct tax, it is determined, in particular, that goods and services should be directly related to the exercise of the activity in question.

Thus, taking into account Community case law and the VAT Directive, the right to deduction of SGPS is only recognized to the extent that these inputs are related to taxable outputs and, to the extent that these outputs are effectively taxed (or benefit from full exemption).

To determine the right to deduction of active holdings, it is then necessary to verify:

• Whether the VAT borne on inputs is directly related to taxable outputs;
• Whether the VAT borne on inputs is directly related to one of the economic activities pursued;
• Whether the VAT is borne on general costs of the economic activity.

In this context, it was concluded in Case BLP10[8], that the goods or services upstream must present a direct and immediate relationship with one or several taxable operations downstream, and the right to VAT deduction presupposes that the expenses in question must constitute an integral part of the constituent elements of the price of the taxed operations.

Inevitably, the analysis of the scope of that expression "(…) direct and immediate relationship (…)" should be carried out on a case-by-case basis, with it being incumbent on the national judicial bodies to apply the criterion to the facts of each case before them and to take into consideration all the circumstances in which the operations in question take place.

However, the density of that relationship may differ depending on the status of the taxable person and the nature of the operations performed and these variables may also have repercussions on the burden of proof of the existence of the relationship, which falls on the operator interested in the deduction.

Thus, in accordance with CJEU case law, whenever a taxable person carries out economic activities intended to realize exclusively taxable operations, it is not necessary, for the totality of tax to be deducted, to establish, for each upstream operation, the existence of a direct and immediate relationship with the specific taxable operation.

Indeed, it has been argued that it is sufficient that there is a relationship with the company's activity.

Thus, the costs incurred by an SGPS directly related to the provision of services to investees justify the right to VAT deduction, given that there is a direct link between the VAT borne on inputs and the taxable outputs of the SGPS.

With regard to the right to VAT deduction borne on inputs directly related to one of the economic activities pursued by an SGPS, it is understood that the right to VAT deduction only exists if it is possible to establish a direct link between the inputs and a defined set of taxable economic activities.

Indeed, the CJEU has understood that, for example, the exploitation of capital with the objective of deriving income from it, whether in the form of dividends or of interest resulting from the mere ownership of the asset does not constitute an economic activity in itself, there being no, therefore, right to VAT deduction regarding expenses incurred related to non-economic activities, that is, not subject to VAT, and the same reasoning may apply to activities exempt without the right to deduction.

With regard to the right to VAT deduction borne on general costs of economic activity, it has been understood that the cost of services acquired by an SGPS falls within the general expenses of the taxable person when those costs are constituent elements of the price of the services of a company.

In this context, the CJEU decided in the CIBO Judgment[9], that there is no direct and immediate relationship between the various services acquired by a holding within the scope of taking a stake in a subsidiary and one or several downstream operations that give the right to deduction, since the amount of VAT paid by the company relating to the expenses incurred with the services in question does not directly burden the price of the downstream operations that give the right to deduction.

In summary, from CJEU case law it is clear that the exercise of the right to VAT deduction is a fundamental right, which cannot be limited except in cases expressly permitted by the norms of European Union Law or by the general principles of law accepted in this field, such as the principle of abuse of rights.

2. Application to the Concrete Case

In light of the above, it results that the fundamental issue that is important to resolve in this process is to know whether the Claimant, in its capacity as SGPS, develops an economic activity independently, which permits it to deduct the VAT levied on the following expenses:

a) Charges with the acquisition of legal services on studies on corporate matters and with the legal certification of accounts;

b) Charges related to the evaluation of assets in the scope of an exchange operation;

c) General expenses used in the pursuit of the various activities of the Claimant.

2.1 Charges with the Acquisition of Legal Services on Studies on Corporate Matters and with the Legal Certification of Accounts

It results from the facts ascertained that the charges with legal services on corporate matters and with legal audit of accounts are costs relating to the operation of the Claimant since its activity that consumes the most resources (which does not mean that it is the one that generates the most income), the provision of services to its investees, could not be exercised if the company did not bear the costs necessary for its adequate global operation.

In truth, it is understood that the costs are directly related to the provision of services by the Claimant to its investees, taking into account that the Claimant actively intervenes in all of its investees, providing them various management and administration services.

Taking into account European case law on the matter (See point 1.1.3 of the Decision), in the case of active holdings, such as the Claimant, the right to deduction exists as long as the goods or services acquired are used for the purposes of its taxed operations.

It also follows, for example, from Decision no. 316/2015 of 5 January 2016 of CAAD, that "the right to deduction arises from a relationship of use: if the resources were used by the Claimant in activities that give the right to deduction, the VAT will be deductible, regardless of the legal nature of holding company that the Claimant has and of the relative weight in terms of value generated by that activity in comparison with all income."

Now, in the case at issue, these are essential costs or expenses to the activity of the Claimant, as the legal services and legal certification of accounts are necessarily costs in the interest and in a logic of management and administration of the companies held.

As a consequence, it is understood that the VAT borne with those charges is directly related to the provision of support services to the management of the investees, which is an economic activity subject and not exempt from VAT.

Notwithstanding, it does not result from the documents attached to the proceedings, in particular from invoice no. 0147, that the Claimant acquired legal services on corporate studies. Indeed, the invoice in question does not meet the legal requirements imposed by article 36 of the VAT Code, not clearly containing a description of the services provided, being incongruent the consideration of that invoice as relating to legal services and its issuance by a commercial company and not by a lawyer, jurist or law firm.

In these terms it is concluded that the expense relating to alleged corporate studies is not proven, and cannot be accepted.

For its part, the expense related to legal certification of accounts is considered deductible as it constitutes an expense related to the realization of operations that give the right to deduction, and 100% of the VAT borne with the respective inputs may be deducted (See Decision no. 16/2016-T of 28 September 2016).

Thus, the tax act cannot, in this part, fail to be annulled for error in its factual and legal assumptions.

2.2 Charges Related to the Evaluation of Assets within the Scope of an Exchange Operation

It results from the evidence produced that the main activity of the Claimant that consumes the most resources is the provision of technical services of administration and management to its investees. The evaluation of assets, within the scope of an exchange operation, of entities held directly or indirectly by the Claimant is configured as a provision of technical services of administration and management by the Claimant.

Thus, and taking into account the grounds for the right to deduction already set out above, the expenses in question appear to have a direct link with the management operations carried out by the Claimant in the interest of the group, whether or not invoiced to the investees.

Indeed, the expenses with the evaluation of assets of entities held are related to the economic activity pursued by the Claimant, in the case, related to asset management.

As a consequence, it is understood that the Claimant should be able to deduct the VAT borne with the acquisition of those services, by virtue of the principle of neutrality (see, among others, the CJEU Judgments - Investrand, Midland Bank, Abbey National and the decisions delivered by CAAD no. 316/2015-T of 5.01.2016, 553/2015-T of 18.04.2016, 70/2014-T of 3.09.2014, no. 128/2012-T of 23.04.2012, among others).

2.3 General Expenses Used in the Pursuit of the Various Activities of the Claimant

From the facts ascertained, as proven, in the present proceedings it results that the Claimant declared the right to VAT deduction regarding general expenses borne related to the provision of services to its investees, which were integrated into the constituent elements of the prices charged within the scope of all its operations.

Taking into account that the activity of management of shareholdings had practically no expression, the Claimant considered a right to deduction of 100%.

The AT, however, understood that it was not possible for the Claimant to proceed with the full allocation of these expenses, having used the allocation key provided and used by the Claimant for corporate income tax purposes, fixing the real allocation ratio from there.

Notwithstanding, it is not possible to understand what were the criteria used by the AT to use the allocation key relating to the Claimant's transfer pricing, nor the reasons underlying the alteration of the proportions of that key.

Indeed, it results from the proven facts that the Claimant developed in 2013 the three activities that the specific legislation for SGPS permits it - it received dividends from investees and obtained gains and losses on the disposition of assets, received interest and provided technical and management services to investees. As a consequence, it is justified to apply the real allocation method for purposes of calculating the deductible VAT borne on consumption/inputs.

Indeed, the application of the real allocation method for allocation of the amounts of value added tax paid upstream between economic activities and non-economic activities implies the use of a formula that reflects, with the possible approximation, the proportion of use in each of the activities of the resources burdened with VAT, since, as is referred to in no. 2 of article 23 of the VAT Code, it is a matter of determining the "real allocation of all or part of the goods or services used, based on objective criteria that make it possible to determine the degree of use of these goods and services in operations that give the right to deduction and in operations that do not give that right".

In light of the evidence produced, it is not possible to conclude that the key applied by the AT to determine the allocation of the amounts of upstream paid VAT between economic activity and non-economic activity has adhesion to reality, considering that the resources used by the Claimant in activities of mere management of shareholdings were much less than those used in other activities.

Thus, given that the burden of proof regarding the correction performed fell on the AT, it is concluded that the allocation key adopted by the AT, based on the estimates of the Claimant for transfer pricing purposes, is not adequate to the correction of the right to VAT deduction by the Claimant.

3. Compensatory Interest

Being illegal the VAT assessments carried out based on the corrections referred to, the corresponding assessments of compensatory interest are also illegal, for the same reasons, which are integrated into the respective tax debts and depend on them, in accordance with and on the grounds provided in article 35, no. 8 of the General Tax Law (LGT).

4. Guarantee

The Claimant furthermore formulates a request for compensation for undue guarantee.

As results from the statement of facts fixed and in view of the documents attached, the Claimant provided a bank guarantee to obtain the suspension of the tax enforcement process relating to the collection of the debt of VAT additionally assessed.

In harmony with the provision of item b) of article 24 of the RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge is permitted is binding on the Tax Administration from the end of the period provided for the appeal or challenge, and the latter must, in the exact terms of the allowance of the arbitral decision in favor of the taxable person and until the end of the period provided for the voluntary execution of the sentences of the tax courts, "restore the situation that would exist if the tax act which is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose".

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124 of Law no. 3-B/2010 of 28 April, it is proclaimed, as a primary directive of the institution of arbitration as an alternative form of judicial resolution of conflicts in tax matters, that "the tax arbitration process should constitute an alternative judicial process to the process of judicial challenge and to the action for recognition of a right or legitimate interest in tax matters".

Although article 2, no. 1, items a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral courts that function in CAAD and does not make reference to constitutive (annulling) and condemnatory decisions, it should be understood, in harmony with the referred legislative authorization, that there are understood to be included in its competencies the powers that in judicial challenge proceedings are attributed to the tax courts in relation to the acts whose assessment of legality falls within their competencies.

Although the judicial challenge process is essentially a process of mere annulment (articles 99 and 124 of the Tax Procedure and Process Code - CPPT), condemnations of the tax administration may be delivered therein for the payment of indemnificatory interest and compensation for undue guarantee.

With regard to the request for condemnation for payment of compensation for provision of undue guarantee, article 171 of the CPPT establishes that "compensation in the case of a bank guarantee or equivalent indemnently provided shall be requested in the process in which the legality of the debt being executed is contested" and that "compensation must be requested in the appeal, challenge or appeal or in the case of the ground being subsequent within 30 days after its occurrence".

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of condemnation for payment of undue guarantee and is even, in principle, the appropriate procedural means for formulating such request, which is justified by obvious reasons of procedural economy, as the right to compensation for undue guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal and for arbitral award has as its corollary that it is in the arbitral process that the "legality of the debt being executed" will be discussed, so, as results from the express wording of that no. 1 of the said article 171 of the CPPT, it is also the arbitral process that is appropriate to consider the request for compensation for undue guarantee.

Indeed, the cumulation of requests relating to the same tax act is implicitly presupposed in article 3 of the RJAT, when referring to "cumulation of requests even if relating to different acts", which makes it clear that the cumulation of requests is also possible regarding the same tax act and the requests for compensation for indemnificatory interest and condemnation for undue guarantee are susceptible to being encompassed by that formula, so an interpretation in this sense has, at least, the minimum of verbal correspondence required by no. 2 of article 9 of the Civil Code.

The regime of the right to compensation for undue guarantee is contained in article 53 of the LGT, which establishes the following:

"Article 53

Guarantee in Case of Undue Provision

1. The debtor who, to suspend enforcement, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damages resulting from its provision, if it has been maintained for a period exceeding three years in proportion of the dismissal in administrative appeal, challenge or opposition to enforcement that have as their object the debt guaranteed.

2. The period referred to in the previous number does not apply when it is verified, in gracious appeal or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and may be requested in the actual process of appeal or judicial challenge, or autonomously.

4. Compensation for provision of undue guarantee shall be paid by offset against the tax revenue of the year in which the payment is made".

In the case at issue, it is clear that the errors of the VAT assessment act are attributable to the Tax Administration, as the corrections were of its initiative and the Claimant contributed in no way to those errors being committed.

For this reason, the Claimant is entitled to compensation for the guarantees provided.

IV. DECISION

On these terms, the members of this Arbitral Tribunal agree to:

– Judge the request for declaration of illegality of the act of additional VAT assessment corresponding to the value of VAT paid for legal and corporate services, in the amount of € 6,900, as without merit;

• Judge the request for declaration of illegality of the remaining acts of VAT assessment and corresponding compensatory interest identified in the process, in the value of €460,985.88, as with merit;

– Judge the request for recognition of the right of the Claimant to compensation for provision of undue guarantee with merit and condemn the Tax and Customs Authority to pay the Claimant the expenses borne with the provision of guarantee.

V. VALUE OF PROCESS

In accordance with the provision of articles 315, no. 2 of the CPC and 97-A, no. 1, item a) of the CPPT and 3, no. 2 of the Regulation of Costs in Tax Arbitration Processes, the value of the process is set at € 467,885.88.

VI. COSTS

In accordance with article 22, no. 4 of the RJAT, the amount of costs is set at € 7,344.00, with 98% charged to the AT and the remainder charged to the Claimant, in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Processes.

Lisbon, 19 December 2017

The Arbitrators

(José Baeta de Queiroz)

(Magda Feliciano)

(Leonor Fernandes Ferreira – with the voting statement that follows)

VOTING STATEMENT

Without prejudice to due respect for dissenting opinion, my understanding regarding the part relating to the cost of legal certification of accounts differs from the Decision, which is shown in section 2.1 of the Award.

On the other hand, although I agree with the Decision regarding the part relating to the deductibility of VAT relating to general expenses used in the pursuit of the various activities of the Claimant, which appears in section 2.3 of the Award, I have reservations in accepting that "it is not possible to understand what were the criteria used by the AT to use the allocation key relating to the transfer pricing of the Claimant, nor the reasons underlying the alteration of the proportions of that key".

The reasons that justify the two understandings in which I differ from the Award are set out below.

Cost with Legal Certification of Accounts

Regarding the expense related to legal certification of accounts, the Claimant considered it to be an expense exclusively related to the realization of operations that give the right to deduction, and 100 percent of the VAT borne with the respective inputs may be deducted. For its part, the AT understands that the cost of legal certification of accounts is a cost of the activity of management of shareholdings and, thus, the VAT borne by the Claimant with this expense is not deductible.

Having analyzed the legal assumptions, it stands out that in a management company for shareholdings (SGPS), the cost of legal certification of accounts (CLC) always exists, given that in the legal framework of these companies the national legislator so determined, when, in no. 2 of article 10 of Decree-Law no. 495/1988 of 30 December, it established that "all SGPS, whatever their type or structure, have the obligation to appoint an official auditor or a company of official auditors, in accordance with article 446 of the Commercial Companies Code".

This provision was later amended by Decree-Law no. 318/94 of 24 December, thereafter indicating that "SGPS must appoint and maintain an official auditor, from the beginning of activity, unless such appointment is already required to them in accordance with other legal provisions".

By so providing, the legislator extended the obligation of legal certification of accounts to all SGPS, whatever the corporate type (limited liability or public company), the structure or the size. The requirements of size established in article 262 of the Commercial Companies Code and applicable to limited liability companies are not taken into account in SGPS, in divergence with other companies that are not SGPS.

The obligation of legal certification of accounts derives directly from the very qualification as 'SGPS'. It does not depend, in SGPS, on the existence of legal certification of accounts and its cost on the activity or activities that the company effectively carries out, or may come to develop, so the VAT corresponding cannot be associated with one or another of those activities, whether the activity of provision of services to investees, management of shareholdings or other, but rather will respect that expense transversely to all activities of the company, without exception, or rather, to the company itself that qualifies as SGPS as such and will exist even if the company is without activity(ies) or out of operation.

Article 3 of article no. 446 of the Commercial Companies Code states that "the official auditor carries out the functions provided for in items c), d), e) and f) of no. 1 of article 420". In accordance with items c), d, e) and f) of no. 1 of article 420 of the Commercial Companies Code, it is incumbent on the official auditor, whether sole inspector or member of the inspection council:

"c) Verify the regularity of the books, accounting records and documents that serve as support for them;

d) Verify, when it deems appropriate and in the manner it considers adequate, the extent of the cash and the inventories of any kind of goods or values belonging to the company or received by it as collateral, deposit or other title;

e) Verify the accuracy of the documents of account statements;

f) Verify whether the accounting policies and valuation criteria adopted by the company lead to a correct evaluation of assets and results."

These verifications encompass books, accounting records and support documents that respect all activities carried out by a company.

Decree-Law no. 224/2008 of 20 November amended the Statute of the Order of Official Auditors, approved by Decree-Law no. 487/99 of 16 November, with article 44, no. 2 thereafter referring to:

"the legal certification of accounts expresses the opinion of the official auditor that the individual and or consolidated financial statements present, or do not present, in a true and appropriate manner, the financial position of the company or other entity, as well as the results of the operations and the cash flows, relating to the date and period to which they refer, in accordance with the identified financial reporting framework and, where applicable, that the financial statements comply, or do not comply, with the applicable legal requirements."

The new Statute of the ROC, approved by Decree-Law no. 140/2015 of 7 September in article 53, regarding the contractual relationship indicates, in no. 1, that:

"the official auditor carries out its audit/audit functions by virtue of legal, statutory or contractual provisions, by means of a contract for provision of services, reduced to writing, to be concluded within 45 days from the date of designation."

No. 2 of the same article clarifies that:

"the contracts referred to in the previous number have as reference the model fixed by the Order, specifying, at least, the nature of the service, its duration and the corresponding fees".

As for the fees of an auditor, where the costs of legal certification of accounts of an SGPS, subject to VAT, are included, article 59 of the Statute of the ROC stipulates, in no. 1 that:

"the determination of the time of work necessary for the execution of an audit service in accordance with current audit standards is the subject of regulation by the executive council of the Order". No. 2 of the same article refers that "in the exercise of any other functions provided for in this Statute or in other legal instruments, fees are set between the parties, taking into account in particular criteria of reasonableness that attend, in particular, to the nature, scope, depth and time of the work necessary for the execution of a service in accordance with current audit standards."

The amount of expenses with legal certification of accounts will therefore vary with the "nature, scope, depth and time of work necessary for the execution of a service in accordance with current audit standards".

The work of an auditor underlying the legal certification consists of giving an opinion on the set of financial statements which must reflect all activities carried out by the SGPS, and above all is related to the financial position and its elements, such as financial stakes, other assets and financing granted. And, for this reason, the cost of legal certification of accounts is a transversal cost to the various activities carried out by the SGPS, whether they are excluded or not from VAT taxation, but it is not determined by them. Therefore, the VAT borne with the costs of legal certification of accounts by an SGPS to be allocated among all those activities could only be deducted according to an objective allocation criterion.

The cost of legal certification of accounts in an SGPS depends on several factors, such as the nature, scope, depth and time of work necessary, aspects which are related to the concrete characteristics of each SGPS, in particular the complexity of each SGPS and of the group of companies it heads, the number of investees included in the group and with which it presents consolidated accounts, asset impairments of each investee, the equity equivalence methods to be applied, the application or otherwise of the special regime for taxation of groups of companies (RETGS), the existence of indirect and cross-shareholdings, the transactions and operations internal to the group. All these aspects are a consequence of decisions in the management of shareholdings, and also depend on the other activities that an SGPS may develop.

Having demonstrated that the cost of legal certification of accounts of the Claimant is a common cost, it should - by application of the real allocation method - the same be allocated among the various activities that the Claimant developed and the share of VAT corresponding to each one would be deductible or non-deductible, depending on whether that activity gives or does not give the right to deduction.

Indeed, point 4 of the Circular Letter [continues in original text - truncated for length]