CAAD 132/2018-T: VAT Deduction Rights for SGPS Holding Companies - Pro Rata Method vs Revenue-Based Allocation

ARBITRAL DECISION (consult full version in PDF)

I – Report

1. A... SGPS, S.A., legal entity no. ..., with registered office at ... ... ...-..., ..., hereby requests the constitution of an arbitral tribunal, pursuant to articles 2, no. 1, letter a), and 10 of Decree-Law no. 10/2011, of 20 January, to assess the legality of the tax acts consisting of VAT assessment in the amount of €155,340.62, and compensatory interest assessment in the amount of €22,997.31, relating to the years 2013 and 2014, further requesting condemnation to payment of indemnitory interest.

The request is grounded in the following terms.

The Petitioner is a holding company whose corporate purpose is the holding and management of social participations, as an indirect form of exercise of economic activities, engaging in activities of provision of management services to B..., S.A., granting of financing to C... S.R.L. and holding of social participations in such entities.

Thus, the Petitioner simultaneously carries out activities of provision of management services, which are subject to VAT and confer the right to deduct the tax, and financing operations, which are exempt from VAT and do not confer the right to deduct the tax.

Regarding the deduction of VAT incurred with expenses necessary to the development of its activity, the Petitioner uses, simultaneously and in accordance with article 23 of the VAT Code, the methods of actual allocation and pro rata.

The Petitioner understands, however, that the deduction of VAT applicable to resources of mixed use should be based on the pro rata method, calculated in accordance with article 23 of the VAT Code, and not as a function of the value of income obtained in each of the activities undertaken, as the Tax Authority intends.

On the other hand, the Tax Authority improperly corrected the VAT deducted with the acquisition of audit and consultancy services for the entities held by B... that are based in Romania, on the grounds that there is no "direct and immediate relationship between these expenses and the operations subject to VAT of the taxpayer". However, such work is indispensable to the sustainability of the Romanian held companies in the automobile construction sector and, consequently, to the sustainability of B... in the national and international market. And because these are management services that the Petitioner provides to such entity (activity that confers the right to deduction), they are fully deductible in VAT, and consequently the corrections proposed in the amount of €3,680.00 should be annulled.

Regarding the deduction of expenses with account revision and examination of individual and consolidated financial statements, the Petitioner considers that such expenses fall within the general expenses of the taxpayer, and therefore have a direct and immediate relationship with the entirety of its activity, and should be understood as deductible not only in relation to operations subject to tax and not exempt from it, but to all operations incurred for the pursuit of its activity (both taxed and untaxed).

It should therefore be applied to expenses with account revisions and examination of consolidated financial statements the method of deduction applied to "common resources", and therefore the corrections made in the amounts of €17,085.15 and €611.08, for the years 2013 and 2014, are also illegal.

With regard to consultancy and legal assistance services acquired within the framework of the project ..., the Tax Authority argues that such services are intended for the held company and the taxpayer itself and constitute resources of mixed use, but that it is not possible to distinguish to what extent such expenses were intended for taxed activity or untaxed activity. The Petitioner agrees that consultancy and legal assistance services constitute common resources pertaining to its activity as a whole, but understands that this does not preclude the application of the pro rata method for deduction of the tax, pursuant to article 23, no. 4, of the VAT Code. In this regard, the corrections made in the amounts of €55,557.90 and €189.21 for the years 2013 and 2014 should not be accepted.

The Tax Authority further made a correction of the taxable amount under CIT, in the exercise of 2013, regarding expenses with audit services to the Romanian entities of the B... Group, in the total of €16,000.00 on the grounds that such are expenses proper to the Romanian entities of the Group and cannot be considered as essential or necessary to permit the realization of income in the sphere of the Petitioner.

The Petitioner clarifies that it assumed these expenses as a Holding Company and in its capacity as entity responsible for the management and administration of the B... Group and passed them on through the fees charged for the provision of management and administration services that the Petitioner provides to its held companies. These are not expenses proper to the Romanian entities of the Group, but rather of B..., in so far as they aimed to attest to the financial health of its held companies, so that the latter would be in conditions to ensure the financial capacity of the Group. In these terms, it is imperative to conclude for full fiscal deductibility of such expenses here at issue, since what occurred was, in a first moment, the recognition of an expense with audit services of companies held by B... and, in a second moment, the passing on of such expenses to B...

The Tax Authority, in its reply, argues that the taxpayer, in so far as it carries out taxable operations (namely the provision of services to the held company and receipt of interest on loans granted) and non-economic activities (the mere holding and enjoyment of social participations), is a mixed taxpayer under VAT and, thus, what determines the VAT regime applicable to it are the operations actually carried out.

For VAT borne on acquisitions of goods and services to be deductible, these must have a direct and immediate relationship with the downstream operations that confer that right. If the tax is borne on the acquisition of goods or services exclusively allocated to operations subject to tax but without right to deduction, or to operations that under VAT do not fall within the exercise of economic activities, the right to deduction is not admissible. And thus, only when the taxpayer acquires services that are used for the purposes of providing technical services of administration and management to its held company does it have the right to deduct the VAT relating to such acquisitions, and further, the non-deduction of the entirety of VAT can be justified when such services are also used in activities not subject or exempt without right to deduction.

Considering that the taxpayer fully deducted the VAT in the services acquired and its activity is carried out through taxable and non-taxable operations, it was necessary to verify whether the VAT related to the acquisition of services that were connected with the activity subject to tax and not exempt, which is embodied in the provision of technical services of administration and management to its held company.

As to the audits of the financial statements of other entities, the Tax Authority understands that such expenses are proper to such entities and cannot even establish a direct and immediate relationship between the assumption of such expenses and the provision of services to B... And thus, such services not being intended for the taxpayer and not having been used by it for the performance of taxable operations, the corresponding VAT deduction is improper.

An identical situation occurs with the examination of its financial statements. As the entity heading a group of companies (B... Group), which comprises a set of subsidiaries and jointly controlled entities, the Petitioner has the need to present consolidated financial statements, and therefore the expenses with the examination of such statements are inherent to its main activity. However, such services result from legal conditions and are intended to serve the taxpayer in the entirety of its operations and do not correspond to mere technical and management services provided to its held company, and therefore fall outside the scope of the right to deduct VAT.

By deducting the entirety of VAT borne on the acquisition of such services, the Petitioner violated the provision of article 23 of the VAT Code, since the rule does not permit full deduction of VAT when these are services allocated to the performance of operations that in part do not confer the right to deduct VAT or that are allocated to the performance of operations not resulting from the exercise of an economic activity.

The Petitioner further deducted the entirety of VAT contained in a set of acquisitions of consultancy and legal assistance services that relate, in their generality, to the Project ... From analysis of the services provided it is verified that these relate to consultancy on the sale of B... and A..., on changes to the A... project, on alienations of participations, that is, on management decisions that affect both the decisions of the taxpayer and of its held company and fall within the scope of its activity as an entity managing and holding social participations. Having regard to the nature of such services, it is not possible to distinguish to what extent such expenses were intended for taxed activity or untaxed activity, in particular which are the services that will be used exclusively and for the benefit of the held entity. It can thus be concluded that these are services of mixed use, in the sense that they are used by the taxpayer within the scope of activity subject and not subject to VAT, and therefore the tax cannot be fully deducted.

As to the method of deduction of VAT on goods or services of mixed use, it is important to bear in mind that whenever goods or services partially allocated to the performance of operations not resulting from the exercise of an economic activity are at issue, the actual allocation of goods and services used, based on objective criteria that permit determination of the degree of use of such goods or services in such and in the other operations, is mandatory.

Given the nature of the activities carried out by the taxpayer and the impossibility of determining the degree of use of expenses for each of the activities undertaken by it, a criterion should be used based on the value of income obtained in each of the activities, and therefore the deduction of VAT should take into account the percentage resulting from the application of such criterion.

In the year 2013, the Petitioner further recorded expenses relating to audit services performed to D..., SRL and E... SRL, in the total value of €16,000.00, which correspond to expenses proper to such entities, that is, expenses inherent to the development of their activity. Further, their recharging to B... was not verified.

In so far as these are expenses attributable to other entities, they do not prove to be essential or indispensable for the realization of income in the sphere of the taxpayer, and therefore are not deductible, pursuant to no. 1 of article 23 of the CIT Code.

It concludes by the dismissal of the arbitral request.

1. No testimonial evidence was requested and, in the course of proceedings, the presentation of optional submissions was determined for successive periods.

In its submissions, the Tax Authority reaffirmed that the situation of the Petitioner cannot culminate in the recognition of tax credit, in light of CJEU jurisprudence and, in case of doubt, requested a preliminary ruling.

In response, the Petitioner considered that a referral to the CJEU is not necessary since this Tribunal has already ruled on the various issues raised.

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority pursuant to regulatory procedures.

Pursuant to letter a) of no. 2 of article 6 and letter b) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the mandate within the applicable time limit.

The parties were duly and timely notified of such appointment and did not manifest the will to refuse it, pursuant to combined articles 11, no. 1, letters a) and b), of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with letter c) of no. 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 1 June 2018.

The arbitral tribunal was regularly constituted and is materially competent, in light of articles 2, no. 1, letter a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

The parties enjoy legal personality and capacity, are legitimized and are represented (articles 4 and 10, no. 2, of the same statute and 1 of Ordinance no. 112-A/2011, of 22 March).

The joinder of claims is legal (article 3, no. 1 of RJAT).

The proceedings do not suffer from nullities and no exceptions have been raised.

It is incumbent upon this Tribunal to assess and decide.

II - Grounds

Factual Matters

1. The following facts are considered relevant to the decision of the case (bearing in mind that the Tribunal is not required to rule on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish proved from unproved facts – cf. article 123, no. 2, of CPPT and article 607, nos. 3 and 4, of CPC, applicable by virtue of article 29, no. 1, letters a) and e), of RJAT):

• The Petitioner is a holding company (SGPS) whose corporate purpose is the management of social participations.

• In VAT matters, the Petitioner is framed in the normal quarterly regime and, as a CIT taxpayer, is included in the general regime.

• In light of its corporate purpose, for the purposes of the operations undertaken, the Petitioner held, in the period between 31-12-2013 and 31-12-2014, participations corresponding to 50% of the social capital in companies C... and 100% in company B..., SA.

• The Petitioner entered into, on 02-01-2004, with the held company B..., a service provision contract, renewable for periods of one year, and which was amended on 02-01-2014, which established the provision of administrative and management services to such company, for the value of €85,000.00 per year, which, as a result of amendment, was increased to €150,000.00 per year, to take effect in the year 2014 and thereafter.

• As a result of such provision of services, the Petitioner recorded, in the exercise of 2013, to credit in account 7211 – B... the value of €100,000.00, as counterpart to debit of account 27219 - Debtors for accruals of income, in the total value of €123,000.00 (VAT included in the value of €23,000.00 – recorded to credit of account 2433).

• And in the year 2014 it recorded to credit of the same account 7211 the value of €150,000.00 plus VAT in the value of €34,500.00.

• The Petitioner entered into, on 01-06-2010, with its held company C..., a loan contract through which it lends the amount of €869,505.00, with interest at the 3-month euribor rate plus a margin of 2.5%, with a duration of two years.

• By virtue of the aforementioned loan contract entered into with the held company C..., the Petitioner obtains from it, since the year 2011, interest, having received the amount of €65,671.99, in the year 2013 and €24,601.59, in the year 2014.

• In the year 2014 the Petitioner received from its held company B..., the amount of €1,000,000.00, relating to dividends attributed in the periods of 2012 and 2013.

• The Petitioner entered into, on 01-02-2006, with its held company B..., a loan contract through which the latter would lend to it, in current account regime, an amount up to the limit of €2,000,000.00, with interest at market rates, with a duration of one year, renewable for an equal period.

• By virtue of the amounts made available to the Petitioner, under the aforementioned loan contract, it bore interest in the amount of €65,671.99, in the year 2013 and €24,601.59, in the year 2014.

• The Petitioner recorded as expenses relating to audit examination services of its financial statements and certification of its individual and consolidated accounts, as well as consultancy and legal assistance services to its held companies, the global amounts of €734,177.00, in 2013 and €24,875.00, in 2014, having deducted the VAT incurred thereon of €168,860.00 and €5,721.00, respectively.

• The aforementioned consultancy and legal assistance services relate to what the Petitioner designated as "Project...", which reports to advice on the sale of B... and A... and on changes to the Petitioner's own activity project.

• The Petitioner, for purposes of VAT deduction relating to inputs used in both activity subject and not exempt and in exempt and not subject activity, resorted to the pro rata method, which it calculated, in the years 2013 and 2014, with a percentage of 100%.

• The Petitioner was subject to a tax inspection procedure in compliance with Service Orders nos. OI2017... and OI2017..., of general scope in VAT and CIT matters, relating to the exercises of 2013 and 2014.

• Notified of the draft report, through memorandum no. ..., of 08-11-2017, the Petitioner exercised the right to be heard.

• Through memorandum no. ... of 13-12-2017 the Petitioner was notified of the Tax Inspection Report (RIT) and the following corrections to the taxable amount in CIT and VAT.

• The aforementioned corrections and respective grounds are contained in the RIT, attached to the administrative file and to the Petitioner's submissions, as doc. 1, whose content is deemed reproduced.

• In consequence of notification of the RIT, assessments relating to the exercise of 2013 of CIT and VAT, relating to the years 2013 and 2014, were issued, identified in the arbitral period, which were notified to the Petitioner.

1. It is not proved that the Petitioner proceeded to payment of the assessed taxes, in light of the absence of any proof of payment.

The Tribunal formed its conviction regarding the proved facts based on the documents attached to the petition and on the administrative file attached by the Tax Authority with the reply.

Matters of Law

PRELIMINARY FRAMEWORK – PRELIMINARY RULING

CORRECTIONS IN VAT

The Petitioner submits to the assessment of the Arbitral Tribunal corrections made by AT in CIT and VAT matters, and, regarding the latter, these relate, in summary, to two situations:

a) To the deduction of VAT incurred with expenses made on resources of mixed use which, according to it, should be based on the pro rata method, calculated in accordance with article 23 of the VAT Code, and not as a function of the value of income obtained in each of the activities undertaken, as the Respondent argues. It further disagrees with the terms in which the latter understands that the said pro rata should be calculated.

b) The admissibility of deduction of VAT borne by it with the acquisition of audit services intended for its held companies, or entities held by them, with account revision and examination of consolidated financial statements, as well as with consultancy and legal assistance services channeled to the so-called "Project...

Now, having regard to the issues raised in the present arbitral request concerning the mechanism of VAT deduction and, in particular, when exercised by Holding Companies (SGPS), some preliminary considerations on this matter must be made.

It is undisputed that the Petitioner is a SGPS – holding – that develops the activity of management of participations, receives dividends from its held companies, grants them and obtains loans from them and provides them with technical services of administration, management and advisory.

Article 1 of CIVA (in line with what article 2 of VAT Directive no. 2006/112/CE, of the Council, of 28-11-2006 defines) establishes that transmissions of goods and provisions of services performed in the national territory, on an onerous basis, by a taxpayer acting as such, are subject to VAT.

In turn, article 20, no. 1 of CIVA (in accordance with article 168 of VAT Directive) determines that "only the tax that has been borne on goods or services acquired, imported or used by the taxpayer for the performance of the following operations may be deducted... a) transmissions of goods and provisions of services subject to tax and not exempt from it".

Hence, as a rule, mixed SGPS carry out simultaneously activities that are subject to VAT and confer the right to deduct the tax, and others that, although subject, are exempt from VAT and do not confer the right to deduct the tax, and others, still, that are not even subject to tax.

That is, broadly speaking, one could say that, in principle, in mixed holdings, operations on shares and bonds (dividends, interest, transaction of shares and bonds), there will be no place for tax deduction, which will only be admissible in the provision of technical services of administration and management (provided, obviously, that they are subject to VAT, as a rule they are).

This is what occurs with the Petitioner when it resorts to goods of mixed use (allocated to operations subject and not subject to VAT and with or without right to deduction). The Petitioner argues that the deduction of VAT applicable to such resources should be based on the pro rata method, calculated in accordance with article 23 of the VAT Code, and not as a function of the value of income obtained in each of the activities undertaken, with recourse to actual allocation, as the Tax Administration contends.

It further states that, should the application of pro rata be admitted, there is a divergence of understanding as to the manner of its calculation, for the Petitioner understands that in the denominator, of its calculation, neither dividends received nor interest resulting from financing to held companies should be included.

On the other hand, it is discussed whether it is to be admitted that VAT contained in account revision and examination services of individual and consolidated financial statements and in audit and consultancy/legal assistance services to held companies is deductible.

In submissions, the Respondent raised the possible necessity of the Tribunal proceeding with a preliminary ruling to the CJEU, formulating the questions to be raised, concerning VAT, if so understood.

VAT is, in fact, a tax of European origin that has in the right to deduct an essential element in the functioning of the tax, so as to guarantee the characteristic of neutrality and non-cumulative tax.

To that extent, from CJEU jurisprudence it results clear that the exercise of the right to deduct VAT is an essential right that cannot be limited except in cases expressly permitted by the rules of European Union Law or by general principles of law accepted in this domain.

As has been understood, arbitral tribunals are part of the set of national courts. As such, given the exceptional nature of the recourse of the decision of arbitral tribunals in tax matters, the national legislator made clear in the preamble of Decree-Law no. 10/2011, that "in cases in which the arbitral tribunal is the last instance of decision of tax disputes, the decision is susceptible of preliminary ruling in compliance with §3 of article 267 of the Treaty on the Functioning of the European Union".

From this it follows that in case of doubt on the interpretation of legal norms of European law, the arbitral tribunal can and should resort to the mechanism of preliminary ruling. What is necessary is that doubts subsist on the interpretation of the text in question.

It happens that, given the already vast community jurisprudence and also national (both from common courts and arbitral), it appears to the Tribunal to be unnecessary to promote referral to the CJEU for interpretation of the issues raised.

The Tribunal understands, moreover, that the doubts raised by AT are directly answered by the Judgment of the CJEU of 06-09-2012, in case no. C-496/11 – Portugal Telecom (in line with what it had previously decided, on 26-05-2005, in case no. C-465/03 – Kretztechnik) when it states:

• "Article 17, nos. 2 and 5, of the Sixth Council Directive 77/388/CEE, of 17 May 1977, relating to the harmonization of the laws of the Member States concerning taxes on turnover – Common system of value-added tax: uniform taxable amount, should be interpreted to mean that a holding company such as that in the main proceedings, which, incidentally to its main activity of management of social participations of companies of which it holds all or part of the social capital, acquires goods and services which it subsequently invoices to said companies, is authorized to deduct the value-added tax paid upstream, on condition that the services acquired upstream present a direct and immediate nexus with downstream economic operations entitled to deduction. When the said services are used by the holding company to perform simultaneously economic operations entitled to deduction and economic operations not entitled to deduction, deduction is admissible only for the part of value-added tax that is proportional to the amount relating to the first operations and the national Tax Administration is authorized to provide one of the methods of determining the right to deduction enumerated in the said article 17, no. 5. When the said goods and services are used simultaneously for economic activities and for non-economic activities, article 17, no. 5, of the Sixth Directive 77/388 is not applicable and the methods of deduction and apportionment are defined by the Member States, which, in the exercise of this power, must take into account the purpose and economy of the Sixth Directive 77/388 and, to that end, provide a method of calculation that objectively reflects the part of real allocation of upstream expenses to each of these two activities".

The suggestion of the Respondent to proceed with referral is therefore not accepted.

METHOD OF DEDUCTION RELATING TO GOODS OF MIXED USE

The Petitioner is a SGPS, whose legal regime is established in Decree-Law no. 495/88, of 30 December (as amended by Decree-Laws no. 318/94, of 24 December and no. 378/98, of 27 November and by Law no. 109-B/01, of 27 December), which establishes in article 1 that such companies "have as their sole corporate purpose the management of social participations in other companies as an indirect form of exercise of economic activities" (no. 1), being that "participation in a company is considered an indirect form of exercise of the economic activity of such when it does not have occasional character and reaches at least 10% of the capital with voting rights of the held company, either alone or through participations of other companies in which the SGPS is dominant" (no. 2), and being considered "that participation does not have occasional character when it is held by the SGPS for a period exceeding one year (no. 3)".

It is permitted to them "the provision of technical services of administration and management to all or some of the companies in which they hold participations or with which they have entered into subordination contracts", which must "be the subject of a written contract, in which the corresponding remuneration must be identified" (article 4).

In the exercise of its activity, the Petitioner, given in particular to the provision of services to its held company, is, as already stated, a mixed holding and which, for VAT purposes, is what can be designated as a mixed taxpayer, in so far as it simultaneously carries out taxable and non-taxable operations in this tax.

As said, it is inherent in the mechanism of operation of VAT the right to deduction, which "arises from a relationship of use: if the resources were used by the Petitioner in activities that confer the right to deduction, VAT will be deductible, regardless of the relative weight in terms of value generated by that activity in comparison with the totality of income" (Arbitral Proc. no. 77/2012-T, of 27-12-2012).

What is reflected in article 20 of CIVA when it establishes that "only the tax that has been borne on goods or services acquired, imported or used by the taxpayer for the performance of the following operations may be deducted... transmissions of goods and provisions of services subject to tax and not exempt from it". Broadly speaking, one could say that, in principle, in SGPS in operations on shares and bonds (dividends, interest, transaction of shares and bonds), there will be no place for tax deduction, which will only be admissible in the provision of technical services of administration and management (provided, obviously, that they are subject to VAT, as a rule they are).

Now, when a mixed taxpayer is at issue – which, in the exercise of its activity, carries out operations that confer the right to deduction and others that do not – article 23 of CIVA applies, when defining the methods of tax deduction, either by actual allocation or pro rata.

The Respondent argues that the Petitioner acquires services that it uses in non-economic activities, in the case, the mere holding and enjoyment of social participations, concluding that "… In the case of goods or services of mixed use partially allocated to the performance of operations not resulting from an economic activity, the determination of the amount of non-deductible VAT relating to these cannot be based on the pro rata method provided for in no. 4 of article 23 of CIVA, and must obligatorily use actual allocation based on the actual use".

However, the Respondent's claim cannot proceed. Indeed, such matter has already been the subject of community decisions, reaching such conclusion from the combination of what was decided in the Judgments Polysar (Case no. C-60/90, of 20-06-1991), Floridienne/Berginvest (Case no. C-142/99, of 14-11-2000) and Welthgrove (Case no. C-102/00, of 12-07-2001), among other more recent ones.

It is said in the Polysar Judgment:

• "(…) the mere taking of participations in the capital of other companies does not constitute the exploitation of an asset for the purpose of earning income on a permanent basis, since the possible dividend, resulting from that participation, results from the mere ownership of the asset". Equal understanding was followed more recently, on 27-09-2011, in the Cibo Participations Judgment (Case no. C-16/00) and on 06-09-2012, in the Portugal Telecom Judgment (Case no. C-496/11).

Thus, "(…) article 4 of the Sixth Directive should be interpreted to mean that a holding company whose sole purpose is the taking of participations in other companies, not interfering, directly or indirectly, in the management of such companies, is not a VAT taxable person, and therefore has no right to deduction under article 17 of the Sixth Directive, without prejudice to the rights that the holding company has in its capacity as shareholder or member."

However, it comes to conclude that "the situation is different when the participation is accompanied by direct or indirect interference in the management of the companies in which the participation was taken, without prejudice to the rights that the holder of participations has in its capacity as shareholder or member". (emphasis ours)

In turn, it is said in the Welthgrove Judgment:

• "The intervention of a holding in the management of its subsidiaries constitutes an economic activity within the meaning of article 4, no. 2, of the Sixth Directive only in so far as it involves transactions subject to VAT under article 2 of that directive".

Or in the Floridienne/Berginvest Judgment:

Which understands that should be considered "as economic activity within the meaning of article 4, no. 2, of the Sixth Directive the intervention in the management of subsidiaries, in so far as it involves transactions subject to VAT under article 2 of that directive, such as the provision of administrative, accounting and computer services by Floridienne and Berginvest to its subsidiaries".

This means that the decision on the concept of economic activity has, thus, implicit a distinction between holdings that directly or indirectly interfere in the management of held companies, being considered that they do so in the case of providing administrative, accounting and similar services.

As results from the evidence, the Petitioner participates, through a service provision contract, in the management of its activities, whose remuneration is legally subject to VAT.

It thus results, manifest, that all activities undertaken by the Petitioner shall be considered, in light of VAT, as economic, there being, therefore, no impediment to it resorting to the pro rata method for the determination of the amount of deductible VAT relating to the inputs of its activity.

It must be said that the Securenta Göttinger Judgment, in Case no. C-437/06, of 13-03-2008, which the Respondent invokes, has underlying that the taxpayer simultaneously exercises economic activities and non-economic activities, which, as already concluded, does not occur in the case of the Petitioner.

Established that the application of the pro rata method by the Petitioner is legitimate, it must be ascertained whether the calculation applied by it is correct, which, in the case, resulted in a percentage of 100%.

Letter b) of no. 1 of article 23 of CIVA provides that "without prejudice to the provision of the previous letter, when it is a question of a good or service allocated to the performance of operations resulting from the exercise of an economic activity provided for in letter a) of no. 1 of article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations giving rise to deduction".

Establishing in no. 4 that "the deduction percentage referred to in letter b) of no. 1 results from a fraction which comprises, in the numerator, the annual amount, tax excluded, of operations giving rise to deduction pursuant to no. 1 of article 20, and, in the denominator, the annual amount, tax excluded, of all operations carried out by the taxpayer resulting from the exercise of an economic activity provided for in letter a) of no. 1 of article 2, as well as non-taxed subsidies that are not equipment subsidies".

Completing no. 5 that "in the calculation referred to in the previous number are not, however, included the transmissions of goods from the fixed assets that have been used in the activity of the company nor real property or financial operations that have an accessory character in relation to the activity exercised by the taxpayer".

The Petitioner argues that, in compliance with the provisions cited, in the calculation of the pro rata it considered only in the denominator the operations relating to the provisions of services to its held company B..., not having included dividends or interest obtained with the financing granted, and therefore calculated the pro rata of 100%.

We hold as established that the obtaining of dividends is excluded from the scope of VAT liability, whereas interest from loans are subject to tax but exempt from it, by application of article 9, no. 27, a).

The non-inclusion of dividends in that denominator is a matter that, at the jurisprudential level, is relatively settled.

A matter long addressed in the already cited Polysar Judgment, as well, at national level, in the Judgment of the TCA Sul of 11-11-2008 – Case no. 01897/07.

Indeed, if it were not so, we would be "transmuting VAT into an income tax", as Mariana Gouveia says ("VAT and Portuguese holding companies" – Review of Public Finance, Taxation and Development, vol I, no. 1, 2013, page 23).

And therefore no criticism deserves the action of the Petitioner in excluding from the percentage of calculation of the pro rata, the value of dividends.

A different matter will occur regarding the interest received by the Petitioner.

As was proved, that granted a loan to its held company, receiving from it regularly the agreed interest. Such situation is stable and regular, at least since the year 2011, the date on which the Petitioner began to receive them. That is, it results manifest that the Petitioner assumes the loan operation as forming an integral part of its economic activity.

It is not to be said that, as the Petitioner argues, the borrowed capital of €869,505.00 can be considered irrelevant or implies a very limited use of its resources, to conclude from there that such operation has a markedly accessory character. Further, the assessment of the limited use of resources is not, obviously, done from the side of income – as the Petitioner argues – but from the goods allocated; in the case, the €869,505.00.

Similarly, the invocation, by the Petitioner, of the Judgment of the TCA Sul, of 11-11-2008 – Case no. 1897/07, for the non-inclusion of interest received, does not proceed since in that decision it was not assessed the nature that these can take on, which, as seen, assumes a decisive character.

From which it is concluded that the Respondent has reason on this point, and interest obtained by the Petitioner must be included in the denominator of the percentage of calculation of the pro rata, and therefore the latter cannot be equal to 100%, but rather to 61%, for the year 2013, and 86%, for the year 2014.

AUDIT SERVICES, ACCOUNT REVISION AND CONSULTANCY LEGAL ASSISTANCE

As is established, the Petitioner does not limit its activity to the mere management of social participations, also providing services to its held companies.

However, the AT puts in question the admissibility of deduction of VAT borne by the Petitioner with the acquisition of audit services intended for its held companies, or entities held by them, with account revision and examination of consolidated financial statements, as well as with consultancy and legal assistance services channeled to the so-called "Project...".

It sustains such position on the grounds that, regarding the first two situations, on the one hand, these are expenses proper to such entities and, on the other, that such services are outside the scope of the technical services provision and management contract to its held company.

As regards the services allocated to the "Project...", on the grounds that "it is not possible to distinguish to what extent such expenses were intended for taxed activity and untaxed activity, in particular which are the services that will be used exclusively and for the benefit of the held entity… this set of services acquired are of mixed use, in the sense that they are used by the s. p. within the scope of its non-subject activity and within the scope of its subject and exempt and non-exempt activity (provision of technical services of management and administration to its held company and granting of credit) and therefore VAT cannot be fully deducted".

Let us see.

As is said in the Arbitral Decision of 03-09-2014, issued in Case no. 70/2014-T, "expenses relating to services related to the preparation, revision, conception and translation of the accounts report of the company and services related to the administration of the company pertain to the operation of the Petitioner as a SGPS, are necessary for its operation as a mixed holding that it is and, therefore, are to be considered constituent elements of the price of the services provided by the Petitioner to its held companies, since without the operation of the Petitioner such services could not be provided. There is, therefore, a direct and immediate nexus between such expenses and the economic activity of service provision by the Petitioner, which viabilizes the right to deduction, in light of the cited jurisprudence".

That decision referred to the already cited Judgment of the CJEU – Portugal Telecom, of 06-09-2012 when it states:

• "should it be considered that all the services acquired upstream have a direct and immediate nexus with downstream economic operations entitled to deduction, the taxpayer in question would have the right, under article 17, no. 2, of the Sixth Directive, to deduct the entirety of VAT that has burdened the upstream acquisition of the services in the main proceedings. This right to deduction cannot be limited by the mere fact that national regulation, by reason of the corporate purpose of such companies or their general activity, qualifies the taxable operations as accessory to their main activity".

• further adding that "a right to deduction is equally admitted in favor of the taxpayer, even in the absence of a direct and immediate nexus between a certain upstream operation and one or several downstream operations entitled to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods that it supplies or of the services that it provides. Such costs have, in fact, a direct and immediate nexus with the entirety of the economic activity of the taxpayer".

Such understanding was also followed by the STA, in Case no. 01148/11, of 03-07-2013 and by Arbitral Decisions nos. 449/2017, of 09-01-2018 and no. 269/2017-T, of 27-02-2018.

From which we conclude, in the same line, that deduction of VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided by the SGPS to its held companies entitled to deduction is to be admitted, or which, not having a direct and immediate nexus with certain services, is VAT borne with costs that form part of the general expenses of the same SGPS and that have a direct and immediate nexus with the entirety of its economic activity of service provision.

This is what manifestly occurs in the case of audit and account revision services provided by the Petitioner. Nor is it possible to envisage how such services cannot be considered as comprised within the scope of the technical services of management provided by it.

However, containing services that cannot be recharged in the sphere of its held companies, the Petitioner should determine the proportion of deductible VAT, which it did by resorting to the pro rata method which, as already demonstrated, does not merit criticism.

The same is to be said regarding the expenses incurred regarding the "Project...", all the more so since it is the Respondent itself that assumes that such expenses are recharged to both the sphere of the Petitioner itself and of its held company, and therefore being of mixed use, VAT cannot be fully deductible.

It is indisputable that there is no direct and immediate nexus between the operation that was intended to be carried out and the acquisition of such services, and much less, that the costs associated with them form part of the general expenses of the Petitioner, in which case the VAT borne could be fully deducted.

But, once again, the Respondent lacks reason, since the Petitioner, having regard to such circumstance, did not fully deduct the tax borne, but resorted to its partial deduction by application of percentage resulting from pro rata.

CORRECTIONS IN CIT

In the same manner as the Respondent understands that VAT contained in the services of revision and audit are not to be admitted because these are expenses proper to such entities themselves and, on the other, that such services are outside the scope of the technical services provision and management contract to its held company, it disregards the same for CIT purposes, in so far as it considers that such are not indispensable for the realization, by the Petitioner, of income subject to tax or for the maintenance of the producing source.

The concept of cost for CIT purposes is given to us by article 23 of CIRC, and we must bear in mind, in the case at hand, the wording of this rule prior to that introduced by Law no. 2/2014, of 16 January, which provided: "costs are those that are demonstrably indispensable for the realization of income subject to tax or for the maintenance of the producing source".

As is said in the Judgment of the TCA Sul, of 13-07-2016 – Case no. 09641/16: "the requirement of indispensability of a cost has been jurisprudentially interpreted as an indeterminate concept requiring case-by-case completion, as a result of an analysis from an economic-business perspective, in the perception of a relationship of economic causality between the assumption of a burden and its realization in the interest of the company, bearing in mind the corporate purpose of the commercial entity in question, and it being forbidden to the Tax Administration actions that place in crisis the principle of freedom of management and autonomy of the will of the taxpayer. Nevertheless, if the Tax Administration doubts on a sound basis the insertion of a certain expense in the corporate interest, the burden of proof that such operation falls within its corporate scope falls upon the taxpayer".

In that same line it has been understood that an indispensable cost does not have to directly imply the obtaining of income, since there are several costs that although they only medianly fulfill that function, nevertheless are not considered indispensable, pursuant to art. 23 of CIRC.

As above already stated, we cannot envisage how the Respondent can conclude that such costs cannot be comprised within the scope of service provision by the Petitioner to its held company. It is reiterated that expenses relating to services related to the preparation, revision and conception of audit services or related to the preparation of the accounts report of the company or its revision, pertain to the operation of the Petitioner as a SGPS, are necessary for its operation as a mixed holding that it is and, therefore, are to be considered constituent elements of the price of the services provided by the Petitioner to its held companies, since without the operation of the Petitioner such services could not be provided.

The correction intended by the Respondent therefore lacks foundation.

INDEMNITORY INTEREST

The Petitioner requests that the right to payment of indemnitory interest be declared.

Such right depends, in the first place, as stipulates article 43, no. 1 of LGT, on the improper payment of a tax obligation.

As results from the evidence, it was not proved that the Petitioner paid any of the assessed amounts, and therefore that essential requirement was not verified.

For such reason, the request of the Petitioner must necessarily be dismissed.

III – Decision

In view of the foregoing, the decision is as follows:

• To judge partially granted the arbitral request filed, and in consequence:

• To declare the illegality of the CIT assessment relating to the exercise of 2013;

• To declare the partial illegality of VAT assessments and corresponding compensatory interest, relating to the years 2013 and 2014, in the sense that the VAT deduction percentages to be adopted should be of only 61%, for the year 2013, and 86%, for the year 2014.

• To condemn both parties to payment of the costs of the proceedings, in the proportion of 59.69% by the respondent and 40.31% by the petitioner.

Value of the Case

The value of the proceedings is fixed at €194,337.93, pursuant to article 97-A, no. 1, a), of the Tax Procedure and Process Code, applicable by virtue of letters a) and b) of no. 1 of article 29 of the Legal Framework for Tax Arbitration and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Costs

The value of the arbitration fee is fixed at €3,672.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, pursuant to articles 12, no. 2, and 22, no. 4, both of the Legal Framework for Tax Arbitration, and article 4, no. 4, of the cited Regulation.

Notice to be served.

Lisbon, 1 February 2019

The President of the Arbitral Tribunal

Carlos Fernandes Cadilha

Arbitrator

Nuno Maldonado Sousa

Arbitrator

António Alberto Franco