Process: 14/2018-T

Date: September 17, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD arbitration case 14/2018-T addressed VAT deduction rights concerning a property subdivided into autonomous fractions and subsequently leased. The claimant company, owner of a property since 1989, subdivided it into seven autonomous fractions (A to G) in 2009, establishing condominium ownership. These fractions were leased with rents subject to VAT. The Portuguese Tax Authority issued 14 VAT assessments covering quarterly periods from 2013 to 2016, totaling approximately €169,000 in additional tax plus €20,600 in compensatory interest. The dispute centered on the Tax Authority's denial of VAT deduction rights, challenging the claimant's good faith and compliance with formal requirements. The case invoked fundamental principles of Portuguese and EU tax law, particularly the principles of trust (confiança) and good faith (boa-fé) in tax administration. The claimant sought annulment of all assessments and reimbursement of €190,222.19 plus compensatory interest. The arbitral tribunal, composed of three arbitrators appointed according to RJAT procedures, was constituted on March 22, 2018. This case exemplifies how taxpayers can consolidate multiple VAT assessment periods into a single arbitration proceeding under Portuguese tax arbitration rules, addressing systematic issues affecting several tax periods simultaneously rather than filing separate challenges for each quarterly assessment.

Full Decision

ARBITRAL DECISION (consult full version in PDF)

The arbitrators Cons. Jorge Manuel Lopes de Sousa (arbitrator-president, appointed by the other Arbitrators), Prof. Doctor Tomás Cantista Tavares and Prof. Doctor Nina Aguiar, appointed by the Claimant and the Respondent, respectively, to form the Arbitral Tribunal, constituted on 22-03-2018, agree as follows:

1. Report

A..., LDA, NIPC..., with registered office at Rua ..., n.º..., ..., ..., ...-... ... (hereinafter referred to as "Claimant"), came, in accordance with Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal for examination of the legality of the following VAT assessments and compensatory interest:

  • Assessment no. 2017..., relating to the period 201303T, in the amount of €21,710.38 (document no. 1), as well as the assessment of the respective compensatory interest in the amount of €3,649.72 (document no. 2) and respective account reconciliation statements (document no. 3);

  • Assessment no. 2017..., relating to the period 201306T, in the amount of €13,002.44 (document no. 4), as well as the assessment of the respective compensatory interest in the amount of €2,053.31 (document no. 5) and respective account reconciliation statements (document no. 6);

  • Assessment no. 2017..., relating to the period 201309T, in the amount of €11,337.35 (document no. 7), as well as the assessment of the respective compensatory interest in the amount of €1,677.30 (document no. 8) and respective account reconciliation statement (document no. 9);

  • Assessment no. 2017..., relating to the period 201312T, in the amount of €14,862.29 (document no. 10), as well as the assessment of the respective compensatory interest in the amount of €2,045.70 (document no. 11) and respective account reconciliation statement (document no. 12);

  • Assessment no. 2017..., relating to the period 201403T, in the amount of €5,987.23 (document no. 13), as well as the assessment of the respective compensatory interest in the amount of €1,033.41 (document no. 14) and respective account reconciliation statement (document no. 15);

  • Assessment no. 2017..., relating to the period 201406T, in the amount of €11,215.49 (document no. 16), as well as the assessment of the respective compensatory interest in the amount of €1,775.92 (document no. 17) and respective account reconciliation statement (document no. 18);

  • Assessment no. 2017... relating to the period 201409T, in the amount of €11,615.13 (document no. 19), as well as the assessment of the respective compensatory interest in the amount of €1,678.92 (document no. 20) and respective account reconciliation statement (document no. 21);

  • Assessment no. 2017..., relating to the period 201412T, in the amount of €12,971.78 (document no. 22), as well as the assessment of the respective compensatory interest in the amount of €1,697.01 (document no. 23) and respective account reconciliation statement (document no. 24);

  • Assessment no. 2017..., relating to the period 201503T, in the amount of €10,711.17 (document no. 25), as well as the assessment of the respective compensatory interest in the amount of €1,259.85 (document no. 26) and respective account reconciliation statement (document no. 27);

  • Assessment no. 2017..., relating to the period 201506T, in the amount of €9,669.60 (document no. 28), as well as the assessment of the respective compensatory interest in the amount of €1,006.24 (document no. 29) and respective account reconciliation statement (document no. 30);

  • Assessment no. 2017..., relating to the period 201509T, in the amount of €12,106.01 (document no. 31), as well as the assessment of the respective compensatory interest in the amount of €1,094.50 (document no. 32) and respective account reconciliation statement (document no. 33);

  • Assessment no. 2017..., relating to the period 201512T, in the amount of €13,814.66 (document no. 34), as well as the assessment of the respective compensatory interest in the amount of €997.43 (document no. 35) and respective account reconciliation statement (document no. 36);

  • Assessment no. 2017..., relating to the period 201603T, in the amount of €12,583.39 (document no. 37), as well as the assessment of the respective compensatory interest in the amount of €808.62 (document no. 38) and respective account reconciliation statement (document no. 39);

  • Assessment no. 2017..., relating to the period 201606T, in the amount of €7,474.40 (document no. 40), as well as the assessment of the respective compensatory interest in the amount of €382.94 (document no. 41) and respective account reconciliation statement (document no. 42).

The Claimant further seeks reimbursement of the sum of €190,222.19, plus compensatory interest.

The Respondent is the TAX AND CUSTOMS AUTHORITY.

The Claimant appointed as Arbitrator Prof. Doctor Tomás Cantista Tavares, pursuant to the provisions of article 6, no. 2, paragraph b), of the RJAT.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 10-01-2018.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of the RJAT, and within the time limit provided for in no. 1 of article 13 of the RJAT, the highest-ranking official of the Tax Administration service appointed as Arbitrator Prof. Doctor Nina Aguiar.

The Arbitrators appointed by the Parties agreed to appoint Counsellor Jorge Lopes de Sousa as arbitrator president, who accepted the appointment.

Pursuant to and for the purposes of the provisions of no. 7 of article 11 of the RJAT, the President of CAAD informed the Parties of this appointment on 02-03-2018.

Thus, in accordance with the provisions of no. 7 article 11 of the RJAT, with the time limit provided for in no. 1 of article 13 of the RJAT having elapsed without the Parties having anything to say, the Collective Arbitral Tribunal was constituted on 22-03-2018.

The Tax and Customs Authority submitted a response in which it argues that the request for arbitral pronouncement should be declared without merit.

On 21-06-2018, a meeting took place in which witness evidence was produced and it was decided that the case would proceed with written submissions.

The Parties submitted their submissions.

The Arbitral Tribunal was regularly constituted and is competent.

The parties possess legal personality and capacity and are legitimately represented (articles 4 and 10, no. 2, of the same statute and article 1 of Order no. 112-A/2011, of 22 March) and are duly represented.

There are no obstacles to examination of the merits of the case.

2. Factual Matters

2.1. Proven Facts

The following facts are considered proven:

  • Since 1989, the Claimant has been the owner of a property located at Rua ..., ..., ...;

  • The property in question was initially registered under article U. ...-..., with its property registry description subdivided into five different parts, because they were capable of independent use;

  • On 26-08-2009, the Claimant submitted a declaration seeking the registration of the autonomous fractions (A to G) into which such property had been subdivided;

  • As a result of such declaration, the Tax Authority proceeded with the requested amendment, with reference to the year 2008, with the said property thereafter being identified by no. U. ..., ..., consisting of autonomous fractions A to G;

  • The constitution of condominium ownership resulted from a deed executed on 28/09/2009 (having been registered the following day), approximately one month after the Mod. 1 IMI declaration had been submitted;

  • The different fractions of the property in question (at that time registered as independent parts of property U-..., because condominium ownership had not yet been constituted) were leased (1st lease agreement) with the respective rents being subject to VAT, on the following dates:

    • Fraction A - 12-06-2009;
    • Fraction B – 12-06-2009;
    • Fraction C - 10-03-2009;
    • Fraction D - as no lease agreement was entered into, this Fraction did not contribute to the VAT deduction claimed by the Claimant;
    • Fraction E - 01-02-2012;
    • Fraction F - 11-08-2010;
    • Fraction G - 30-05-2008.

  • The Tax and Customs Authority carried out an inspection of the Claimant, pursuant to external service order no. OI2016..., of 13-04-2016;

  • In that inspection, a Tax Inspection Report was prepared, which is part of the administrative file, whose content is hereby reproduced, in which the following is noted, among other things:

III. DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO TAXABLE MATTER

*[...]

III-1. VALUE ADDED TAX

III-1.1. IMPROPER EXERCISE OF THE RIGHT TO VAT DEDUCTION IN THE USE OF THE OPTION TO WAIVE THE EXEMPTION PROVIDED IN NOS. 4 AND 6 OF ART. 12 OF THE VAT CODE AND THE RRIIOBIM

As a result of analysis of information available internally, both in physical support and in the Tax Authority databases, as well as the accounting information made available and other clarifications provided by the representatives of A..., LDA., it is verified that the VAT deducted shown in the VAT statements of the tax periods pertaining to the economic period of 2013, both by way of acquisitions of goods and provision of services carried out in the economic period of 2013 itself, and by way of reporting of VAT credit calculated in VAT statements of tax periods prior to the economic period of 2013 (reported VAT credit recorded in Field 61 of the VAT statement) stems essentially from the use of the option to waive VAT exemption pursuant to nos. 4 and 6 of article 12 of the VAT Code and in the RRIIOBIM, that is, from the activity of leasing real property, as a mixed taxable person with actual allocation of all goods, classified for VAT purposes.

That is, the total amount of VAT deducted by the taxable person materialized in the economic period of 2013 arises from passive operations of acquisition of goods and provision of services performed in the scope of the activity subject and not exempt, as well as from passive operations of acquisition of goods and provision of services performed, in the same economic period or in a prior economic period, related to the real property leased in relation to which the same considered having legitimately exercised the option to waive the VAT exemption established in nos. 4 and 6 of article 12 of the VAT Code and in the RRIIOBIM.

Similarly, the taxable person exercised the right to deduction of VAT borne on acquisitions of goods and provision of services which, not being allocated to a specific activity or property, correspond to goods or services of common use and incapable of being subject to actual allocation, by applying a deduction percentage "pro rata" provided for in paragraph b), of no. 1 of article 23 of the VAT Code.

III-1.1.1. ON THE REAL PROPERTIES UNDERLYING THE EXERCISE OF THE RIGHT TO VAT DEDUCTION CARRIED OUT IN THE SCOPE OF THE ACTIVITY OF LEASING REAL PROPERTY

In the context of application of the actual allocation method in tax deduction, it is verified that the VAT deduction carried out in the scope of the activity of leasing real property is based on the VAT borne on the acquisition of goods and provision of services related to certain industrial warehouses located on Rua ..., of the parish of ..., municipality of ..., hereinafter better identified, which have been leased by the owner A..., LDA., since a time prior to the economic period under analysis.

Terms in which the assessment of the legitimacy of the exercise of the right to VAT deduction borne requires analysis of the initial moment to which the use of the option to waive VAT exemption in real property leasing operations is attributed, carried out pursuant to nos. 4 and 6 of article 12 of the VAT Code and of the RRIIOBIM, since the exercise of the right to deduction of VAT borne in subsequent tax periods depends on the correct tax classification of the initial operation, for it is based on this that the taxable person becomes able to benefit from the provision in paragraph a), of no. 1 of article 20 of the VAT Code only and solely in relation to property operations thus classifiable, and not to the entirety of real property leasing operations carried out by the taxable person.

*[...]

III-1.1.1.1. LEGAL AND TEMPORAL FRAMEWORK OF THE PHYSICAL REALITY THAT PROPERTY ARTICLES U-... ... AND U-...-? ... REPRESENT

By consultation of the Tax Authority database at the level of real property assets, it is verified that:

  1. The real property currently registered in the urban property registry of the parish of..., municipality of..., under article..., autonomous fractions A to G (U-...-? ...

17), succeeded the previously registered in the same urban registry under article ... (U-... ...).

*[...]

  1. With respect to property U-... ..., the following is highlighted:

2.1. Being the property of A..., LDA., at least since 1989, as the incorporating company of B..., LDA., in the incorporation merger process carried out.

2.2. It was subdivided in five distinct property registry articles due to the susceptibility of independent use it possessed, specifically those identified in the table that follows:

[...]

  1. Effectively, the registration of article U-...-? ... resulted from submission to the Tax Authority, by the taxable person, of DMod1-IMI no....., of 2009-08-26, reporting the registration of the autonomous fractions of an improved property, from whose content the following facts are highlighted:

3.1. The reported property does not correspond to a "single building," but rather to the buildings ("properties") corresponding to the autonomous fractions into which the U-... ... was declaredly (by the taxable person) subdivided, identified by letters A to G.

3.2. The parent property identified, U-... ..., is described as coming from property U-... ..., already identified.

3.3. In terms of dates, the taxable person declares:

[...]

  1. As a result of processing of the said DMod1-IMI, the properties in question were registered by reference to the year 2008, pursuant to paragraph b), of no. 1 of article 10 of the IMI Code, that is, on the basis of the earliest of the dates identified in Table 6.

4.1. The determination of the taxable property value (VPT) was performed by reference to the economic period of 2009, pursuant to no. 4 of article 37 of the IMI Code, that is, taking into account the date of the declaration made by the taxable person, since, according to the date of completion of the works previously identified, the submission of the DMod1-IMI was considered to have been carried out beyond the time limit provided for in no. 1 of article 13 of the IMI Code, in view of the classification of its obligation in paragraph b), of no. 1 of article 13 of the IMI Code.

4.2. It is thus verified that, in light of the data declared by the taxable person, and disregarding any other fact hereinafter set forth with relevance to the determination of the date on which the taxable person should legally proceed to report the physical reality existing for purposes of taxes on property, the delay in the registration of the real property reality reported by the taxable person through the said DMod1-IMI no. ...., of 2009-08-26, resulted from its own incorrect conduct, and not from a fact attributable to the Tax Authority.

  1. Contrary to what is noted in point 4.2., but which equally does not benefit the taxable person, it is the case that on the date the registration of the autonomous fractions of property U-... ... is reported, through the identified DMod1-IMI, the condominium ownership from which the qualification with autonomous fractions of the so-called autonomous fractions resulted, had not yet been constituted.

5.1. Effectively, in light of the content of registration no. ... of the Land Registry corresponding to the parent property under analysis, the constitution of condominium ownership was registered at the competent Land Registry through submission no...., of 2009-09-29, on the basis of the deed of constitution of condominium ownership executed on 2009-09-28 at the Notarial Office located at ..., ..., n.º ...-..., of the parish of....

5.2. That is, the reality reported on 2009-08-26 through DMod1-IMI no... did not correspond on that date to a legally existing reality, but solely to an actual physical reality, which pursuant to articles 1414 and following of the Civil Code (CC), did not integrate, on that date, the concept of autonomous fraction.

5.3. Note that:

5.3.1. Pursuant to no. 1 of article 1417 of the CC, condominium ownership requires to be constituted, namely "by legal transaction, acquisitive prescription, administrative decision or judicial decision, rendered in an action for division of commonly owned property or in inventory proceedings."

5.3.2. Being that according to no. 1 of article 1416 of the CC, either by "lack of legally required requisites" which leads to "nullity of the constitutive title of condominium ownership," or by lack thereof, it determines "subjection of the property to the regime of co-ownership, by attribution to each co-owner of the share that has been assigned to him pursuant to article 1418 or, in the absence of assignment, of the share corresponding to the relative value of his fraction."

  1. Consequently, and notwithstanding, on the date of submission of DMod1-IMI no...., 2009-08-26, as well as since the earliest of the dates identified in Table 6, that of 2008-07-22 corresponding to the date of completion of the works, the property registered in the property registry under article U-... ... possessed parts capable of independent use which, by integrating the concept of property as defined in article 2 of the IMI Code, had to have been registered in the respective urban property registry pursuant to no. 3 of article 12 of the IMI Code.

6.1. Fact which contends with what is noted in the previous point 4.2., that is, that the physical reality which the previous article U-... ..., now identified by article U-...-? ..., constituted, had to have been reported to the Tax Authority at a much earlier date than that in which it was identified by way of the DMod1-IMI, albeit only as part of a property capable of independent use.

6.2. Without the need that the existence of autonomous fractions in the said old article U-... ... be recognized from that date, as results from the legal concept already highlighted.

  1. Thus, what is noted in the previous points 4.2. and 6.1. serves only, and independently of the matter hereinafter set forth as grounds for the proposed tax corrections, to counter what was alleged by the taxable person in justification of the difficulties experienced in requesting the certificates of waiver of VAT exemption pursuant to and for purposes of the RRIIOBIM, that is, that they resulted from the conduct of the Tax Authority, namely through the untimely processing of the information made available by the taxable person, such that it would be possible for it to electronically request the necessary certificates of waiver of VAT exemption.

What is described in the previous points is reflected in the content of the real property lease agreements entered into by the taxable person by reference to the physical reality represented, in different time periods, by articles U-... ... and U-...-? ..., obtained both from the Financial Service of the area of the taxable person's headquarters and the area of the properties at issue, the Financial Service of ..., as well as from the taxable person itself, since the specific identification of the contract object differs depending on the date on which they were executed.

Concretely, in real property lease agreements executed before the legal constitution of condominium ownership, the contract object is described as being "…a warehouse, designated by the letter "A", located at Rua ..., n.º…", but always maintaining reference to property article U-...- ... . That is, the content of the contract does not result in identification of the existence of a legal and fiscally described autonomous fraction in the Land Registry and registered in the property registry with the Tax Authority, which occurs only in real property lease agreements executed after the date of execution of the condominium ownership deed already identified, and by using the nomenclature U-...-? ... .

From the content of the real property lease agreements analyzed, it is further highlighted that only in those executed in the year 2010 or later is there a mention of the existence of the authorization for use permit issued by the City Council of ... on 2010-07-06, whereas in those executed earlier, only the existence of the building permit no. .../07, of 2007-01-02, issued by the same municipal entity is identified.

III-1.1.1.2. REAL PROPERTY LEASE AGREEMENTS ENTERED INTO BY A..., LDA., RELATED TO THE PHYSICAL REALITY REPRESENTED BY PROPERTY ARTICLES U-... ... AND U-...-? ...

As mentioned in a previous section, the assessment of the legitimacy of the exercise of the deduction right in question depends on the recognition or non-recognition, by the Tax Authority, of the verification of the legally required requisites for the exercise of the option of waiver of VAT exemption regulated in nos. 4 and 6 of article 12 of the VAT Code and the RRIIOBIM on the date to which the execution of the real property lease agreement is attributed with respect to which such option was used.

Thus, prior to the exposition of the factual and legal matters pertaining to the analysis and verification of compliance with the legally required requisites, in this section the real property lease agreements for non-residential purposes entered into by A..., LDA., relating to the physical reality represented by property articles U-... ... and U-...-? ..., the only ones entered into by A..., LDA., that are relevant to the waiver of VAT exemption under analysis.

For simplification and for easier understanding, in the points that follow, the identification of the most relevant facts of the real property lease agreements entered into that are relevant for the analysis is provided, taking as reference the property registry identification that each of the warehouses currently holds with the Tax Authority.

1. U-...-A ...:

1.1. Corresponding to a warehouse intended for storage on the ground floor and services at the floor level, located at Rua ..., n.º..., of the parish of ..., municipality of ..., designated by the letter "A".

1.2. The identification of which is performed using the following expressions:

1.2.1. "…has as its object a warehouse, designated by the letter "A", located at Rua ..., n.º..., ..., ...…".

1.2.2. "… which is part of the urban property of which the First Contracting Party [A..., LDA.] is the legitimate owner and possessor, located in ... or ..., parish of..., municipality of ..., registered in the respective registry under article ..., described in the Land Registry of ... under no. .../... and registered there in her favor by entry G-1".

1.3. Real property lease agreement for non-residential purposes executed (see Annex I):

1.3.1. On 2009-06-12.

1.3.2. With the lessee company C..., LDA., holder of NIPC... (C..., S.A.), currently corresponding to the company name D..., S.A., according to the Tax Authority database.

1.3.3. For an effective term of five years, beginning on 2009-06-01 and ending on 2014-05-31, successively renewed for periods of three years, unless the parties object.

1.3.4. By receiving an annual rent of "Euros 48,000.00 (forty-eight thousand euros), plus VAT at the legal rate in force, payable monthly in twelve parts of Euros 4,000.00 (four thousand euros), plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

1.3.5. Being immediately advanced the amount corresponding to two monthly rents, albeit the receipt being conditional on good collection of the respective means of payment.

1.4. From the other clauses, it is highlighted that, although the lessee attests to the good state of conservation of the building, the need to perform specific works necessary to resolve infiltrations and the association of warehouses "A" and "B" is immediately stipulated, as well as authorized the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

1.5. The real property lease agreement mentions the existence of "building permit no. ../07, issued on 2 January 2007, by the City Council of ...", and further the commitment of A..., LDA., to deliver to the lessee the respective authorization for use within fifteen days of its issuance, that is, not from the contract date but from a future date unknown to both parties.

That is, this real property lease agreement is executed at a time prior to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority, a situation that is safeguarded in the drafting of the agreement itself; but subsequent to the completion of the improvement declared, on which the use of the option to waive VAT exemption under analysis is based.

2. U-...-B ...:

2.1. Corresponding to a warehouse intended for storage on the ground floor and services at the floor level, located at Rua ..., n.º..., of the parish of ..., municipality of ..., designated by the letter "B".

2.2. The identification of which, in any of the agreements, is performed using the following expressions:

2.2.1. "…has as its object a warehouse, designated by the letter "B", located at Rua ..., n.º..., ..., ... …".

2.2.2. "… which is part of the urban property of which the First Contracting Party [A..., LDA.] is the legitimate owner and possessor, located in ... or ..., parish of ..., municipality of... a, registered in the respective registry under article ...º, described in the Land Registry of ... under no. .../... and registered there in her favor by entry G-1"

2.3. First agreement, executed after completion of the property improvement works (see Annex II):

2.3.1. Real property lease agreement for non-residential purposes executed:

2.3.1.1. On 2009-06-12.

2.3.1.2. With lessee company C..., S.A..

2.3.1.3. For an effective term of five years, beginning on 2009-06-01 and ending on 2014-05-31, successively renewed for periods of one year, unless the parties object to renewal.

2.3.1.4. By receiving an annual rent of "Euros 33,600.00 (thirty-three thousand six hundred euros), plus VAT at the legal rate in force, payable monthly in twelve parts of Euros 2,800.00 (two thousand eight hundred euros), plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

2.3.1.5. Being immediately advanced the amount corresponding to two monthly rents, albeit the receipt being conditional on good collection of the respective means of payment.

2.3.2. From the other clauses, it is highlighted that, although the lessee attests to the good state of conservation of the building, the need to perform specific works necessary to resolve infiltrations and the association of warehouses "A" and "B" is immediately stipulated, as well as authorized the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

2.3.3. The real property lease agreement mentions the existence of "building permit no. .../07, issued on 2 January 2007, by the City Council of ...", and further the commitment of A..., LDA., to deliver to the lessee the respective authorization for use within fifteen days of its issuance, that is, not from the contract date but from a future date unknown to both parties.

2.4. Second agreement (see Annex III):

2.4.1. Real property lease agreement for non-residential purposes executed:

2.4.1.1. On 2012-02-29.

2.4.1.2. With lessee company C..., S.A..

2.4.1.3. For an effective term of five years, beginning on 2012-03-01 and ending on 2012-06-30, successively renewed for periods of one year, unless the parties object to renewal.

2.4.1.4. By receiving an annual rent of 1,700.00 € (one thousand seven hundred euros) in the first four months, and 2,800.00 € (two thousand eight hundred euros) in the remaining months, amounts always plus VAT at the legal rate in force, according to the statement made by the parties in the agreement, payable by bank transfer on the first day of the month prior to which it relates.

2.4.1.5. Being immediately advanced the amount corresponding to two monthly rents, albeit the receipt being conditional on good collection of the respective means of payment.

2.4.2. This real property lease agreement continues to contain reference to the existence of "building permit no. .../07, issued on 2 January 2007, by the City Council of ...".

2.4.3. In support of the complementarity of the two identified agreements, it is the case that in clause eighteen of this second agreement it is stated that the lessee delivers to the lessor "in guarantee and security of proper performance of the obligations resulting from this agreement and the lease agreement, executed on 12 June 2009, which had as its object the lease of fraction "B"", a bank guarantee in the amount of 16,800.00 €.

Thus, also in relation to the physical reality represented, for simplification, by the nomenclature U-...-B, the real property lease agreement is executed at a time prior to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority, a situation that is safeguarded in the drafting of either agreement.

It is certain that the same is equally subsequent to the completion of the improvement declared, on which the use of the option to waive VAT exemption under analysis is based.

It is further highlighted that the second agreement is not relevant for purposes of examination of the matter under analysis, given in particular the provision in paragraph a), of no. 2 of article 2 of the RRIIOBIM.

3. U-...-C ...:

3.1. Corresponding to a warehouse intended for storage on the ground floor and services at the floor level, located at Rua ..., n.º..., of the parish of ..., municipality of ..., designated by the letter "C".

3.2. The identification of which is performed using the following expressions:

3.2.1. "…has as its object a warehouse, designated by the letter "C", located at Rua ..., n.º..., ..., ... …".

3.2.2. "… which is part of the urban property of which the First Contracting Party [A..., LDA.] is the legitimate owner and possessor, located in ... or ..., parish of ..., municipality of ..., registered in the respective registry under article ..., described in the Land Registry of ... under no. .../... and registered there in her favor by entry G-1"

3.3. Real property lease agreement for non-residential purposes executed (see Annex IV):

3.3.1. On 2009-03-10.

3.3.2. With lessee company E..., LDA., holder of NIPC..., currently corresponding to the company name F..., LDA., according to the Tax Authority database [F..., LDA. (E...)].

3.3.3. For an effective term of five years, beginning on 2009-06-01 and ending on 2014-05-31, successively renewed for periods of one year, unless the parties object to renewal.

3.3.4. By receiving an annual rent of "Euros 36,000.00 (thirty-six thousand euros), plus VAT at the legal rate in force, payable monthly in twelve parts of Euros 3,000.00 (three thousand euros), plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

3.3.5. Being that on the date of execution of the lease agreement, the early payment of 6,000.00 € is made, "relating to the rents of June and July 2009, plus VAT at the legal rate in force", which presupposes the effective beginning of the lease agreement of the property in question.

3.4. From the other clauses, it is highlighted that the lessee attests to the good state of conservation of the building, and immediately authorized is the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

3.5. The real property lease agreement mentions the existence of "building permit no. .../07, issued on 2 January 2007, by the City Council of ...".

Also this real property lease agreement is executed at a time prior to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority, a situation that is safeguarded in the drafting of the agreement itself, but subsequent to the completion of the improvement declared, on which the use of the option to waive VAT exemption under analysis is based.

3.6. With respect to this warehouse, it is further known the execution on 2014-01-17, that is, beyond the economic period covered by this inspection procedure, of a real property lease agreement for non-residential purposes of limited duration with company G..., UNIPESSOAL, LDA., holder of NIPC..., to be in effect between 2014-02-01 and 2017-01-31, in which the property is correctly identified in accordance with the current description in the Land Registry and property registry inscription, and subjecting to VAT at the legal rate in force the value of the agreed rent.

4. U-...-D ...:

4.1. Property in respect of which no real property lease agreement is known to have been executed, and which did not contribute to the VAT deduction value claimed under the said waiver regime.

5. U-...-E ...:

5.1. The identification of which is performed in the following manner:

5.1.1. A..., LDA., "is the owner and legitimate possessor of an urban property intended for storage and industrial activity with a covered area of 1117 m2, uncovered area of 244 m2, located at Rua ..., n.º..., in the parish of ..., municipality of ... …".

5.1.2. "…described in the First Land Registry of ... under no...., registered in the respective urban registry under article ... E …".

5.1.3. "… for which the Authorization for Use Permit no. .../10, issued on 06 July 2010 by the City Council of ... was issued …".

5.2. Real property lease agreement for non-residential purposes executed (see Annex V):

5.2.1. On 2012-02-01.

5.2.2. With lessee company H..., LDA., holder of NIPC ... (H..., LDA.).

5.2.3. For an effective term of two years, beginning on 2012-02-01 and ending on 2014-01-31, successively renewed for periods of one year, unless the parties object to renewal.

5.2.4. By receiving an annual rent of 25,500.00 € in the first year, resulting from ten installments of 2,550.00 € each, "plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

5.2.5. At the time of execution of the lease agreement, the lessee proceeds to early payment of the amount of 5,100.00 €, "plus VAT at the legal rate in force", corresponding to two months of rent.

5.3. From the other clauses, it is highlighted that the lessee attests to the perfect state of conservation of the building, and immediately authorized is the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

Given what is described, this is a real property lease agreement executed at a time subsequent to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority.

6. U-...-F...:

6.1. The identification of which is performed in the following manner:

6.1.1. "…establish this real property lease agreement of limited duration, which has as its object the set consisting of the autonomous fractions designated by the letters "F" and "G" located at Rua ..., respectively, n.º... and …, parish of..., Municipality ... …".

6.1.2. "…registered in the registry under articles ... "F" and … described in the Land Registry of ... under no...., and registered there for A..., LDA. by A.P. 23 of 2006-07-19 …".

6.1.3. "… with authorization for use permits numbers .../10 and …, issued on 06 July 2010 by the City Council of ... …".

6.2. Real property lease agreement for non-residential purposes executed (see Annex VI):

6.2.1. On 2010-08-11.

6.2.2. With lessee company I..., S.A., holder of NIPC..., currently designated as J..., LDA. [J..., LDA. (I...)].

6.2.3. For an effective term of six years, beginning on 2011-01-01 and ending on 2016-12-31, successively renewed for periods of one year, unless the parties object to renewal.

6.2.4. By receiving a total annual rent of "Euros 96,000.00 (ninety-six thousand euros), plus VAT at the legal rate in force, payable", "in relation to fraction "F", monthly in twelve parts of Euros 2,500.00 (two thousand five hundred euros), plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

6.2.5. Being that on the date of execution of the lease agreement, early payment of 2,500.00 € is made, "relating to the rent of January 2011, plus VAT at the legal rate in force", which presupposes the effective beginning of the lease agreement of the real property in question.

6.3. From the other clauses, it is highlighted that, although the lessee attests to the good state of conservation of the building, the need to perform specific works necessary to resolve specifically detected problems and the association of warehouses "F" and "G" is immediately stipulated, as well as authorized the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

6.4. It is further highlighted that in the executed lease agreement, the sublease is immediately authorized in favor of the "companies "K..., S.A.", "L..., S.A.", "M..., S.A.", "N..., S.A.", "O..., S.A.", "P..., Lda.". "Q..., Lda.", companies that participate in or are participated in by" the lessee outgranting party.

6.4.1. Note that only as a result of this provision is it understood that from the economic period of 2011 onwards, receipts are known from the company N..., S.A., holder of NIPC..., which according to the accounting records made, invoices processed and further clarifications obtained, relate to the commitments assumed by lessee company J..., LDA. (I...).

Given what is described, this is a real property lease agreement executed at a time subsequent to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority.

7. U-...-G...:

7.1. Corresponding to a warehouse intended for storage on the ground floor and services at the floor level, located at Rua ..., n.º..., of the parish of ..., municipality of ..., designated by the letter "G".

7.2. First agreement executed (see Annex VII):

7.2.1. In which the identification is performed using the following expressions:

7.2.1.1. "…has as its object a warehouse, designated by the letter "G" …".

7.2.1.2. "… which is part of the urban property of which the First Contracting Party [A..., LDA.] is the legitimate owner and possessor, located in ... or ..., parish of ..., municipality of ..., registered in the respective registry under article ..., described in the Land Registry of ... under no. .../... and registered there in her favor by entry G-1"

7.2.2. Real property lease agreement for non-residential purposes executed:

7.2.2.1. On 2008-05-30.

7.2.2.2. With lessee company R..., S.A., holder of NIPC ... (R..., S.A.).

7.2.2.3. For an effective term of five years, beginning on 2008-07-01 and ending on 2013-06-30, successively renewed for periods of one year, unless the parties object.

7.2.2.4. By receiving an annual rent of "Euros 85,200.00 (eighty-five thousand two hundred euros), plus VAT at the legal rate in force, payable monthly in twelve parts of Euros 7,100.00 (seven thousand one hundred euros)", payable by bank transfer on the first day of the month prior to which it relates.

7.2.2.5. Being that on the date of execution of the lease agreement, early payment of two months of rent is made, which presupposes the effective beginning of the lease agreement of the property in question.

7.2.3. From the other clauses, it is highlighted that the lessee attests to the good state of conservation of the building, and immediately authorized is the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

7.2.4. The real property lease agreement mentions the existence of "building permit no. .../07, issued on 2 January 2007, by the City Council of ...".

Given the date of execution of this lease agreement, it is verified that the same was executed already during the course of the property improvement works identified as U-... ..., albeit slightly before the date of completion of works declared by the taxable person in the highlighted DMod1-IMI.

Notwithstanding, the month of beginning of validity of the agreement corresponds to that to which the date of completion of the property improvement works is attributed, identified as U-... ..., on which the use of the option to waive VAT exemption under analysis is based.

Like other lease agreements already described, the same appears to be prior to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority, a situation that is safeguarded in the drafting of the agreement itself.

7.3. Second agreement executed (see Annex VI):

7.3.1. In which the identification of the contract object is performed in the following manner:

7.3.1.1. "…establish this real property lease agreement of limited duration, which has as its object the set consisting of the autonomous fractions designated by the letters … and "G" located at Rua ..., respectively, n.º … and ..., parish of..., Municipality ... …".

7.3.1.2. "…registered in the registry under articles … and ... "G" described in the Land Registry of ... under no...., and registered there for A..., LDA. by A.P. 23 of 2006-07-19 …".

7.3.1.3. "… with authorization for use permits numbers … and .../10, issued on 06 July 2010 by the City Council of ... …".

7.3.2. Real property lease agreement for non-residential purposes executed:

7.3.2.1. On 2010-08-11.

7.3.2.2. With lessee company I..., S.A., holder of NIPC ....

7.3.2.3. For an effective term of six years, beginning on 2011-01-01 and ending on 2016-12-31, successively renewed for periods of one year, unless the parties object.

7.3.2.4. By receiving a total annual rent of "Euros 96,000.00 (ninety-six thousand euros), plus VAT at the legal rate in force, payable", "in relation to fraction "G", monthly in twelve parts of Euros 5,500.00 (five thousand five hundred euros), plus VAT at the legal rate in force", payable by bank transfer on the first day of the month prior to which it relates.

7.3.2.5. Being that on the date of execution of the lease agreement, early payment of 5,500.00 € is made, "relating to the rent of January 2011, plus VAT at the legal rate in force", which presupposes the effective beginning of the lease agreement of the property in question.

7.3.3. From the other clauses, it is highlighted that, although the lessee attests to the good state of conservation of the building, the need to perform specific works necessary to resolve specifically detected problems and the association of warehouses "F" and "G" is immediately stipulated, as well as authorized the performance of works by the lessee with a view to adapting the space to the activity knowingly to be carried out, which revert to the owner in case of contract termination.

7.3.4. It is further highlighted that in the executed lease agreement, the sublease is immediately authorized in favor of the "companies "K..., S.A.", "L..., S.A.", "M..., S.A.", "N..., S.A.", "O..., S.A.", "P... Unipessoal, Lda.". "Q..., Lda.", companies that participate in or are participated in by" the lessee outgranting party.

7.3.4.1. Also in this case, only as a result of this provision is it understood that from the economic period of 2011 onwards, receipts are known from the company N..., S.A., holder of NIPC..., which according to the accounting records made, invoices processed and further clarifications obtained, relate to the commitments assumed by lessee company J..., LDA. (I...).

Given what is described, this is a real property lease agreement executed at a time subsequent to the reporting to the Tax Authority of its object, as well as the legal existence of the corresponding autonomous fraction that was later reported to the Tax Authority.

However, being the second real property lease agreement relating to the object of the contract in question, given in particular the provision in paragraph a), of no. 2 of article 2 of the RRIIOBIM, the same is not relevant for purposes of examination of the matter under analysis.

[...]

III-1.1.2. VERIFICATION OF COMPLIANCE WITH FORMAL-LEGAL REQUIREMENTS FOR THE EXERCISE OF THE RIGHT TO VAT DEDUCTION IN THE USE OF THE OPTION TO WAIVE THE EXEMPTION PROVIDED IN NOS. 4 AND 6 OF ART. 12 OF THE VAT CODE AND RRIIOBIM, IN RELATION TO REAL PROPERTY LEASE AGREEMENTS ENTERED INTO BY A..., LDA., RELATED TO THE PHYSICAL REALITY REPRESENTED BY PROPERTY ARTICLES U-... ... AND U-...-? ...

As to the legal and factual matters relevant to the consideration whether the requisites legally required of the taxable person are met or not to make use of the option to waive VAT exemption in the operations of transfer or leasing of property provided for and regulated in nos. 4 to 6 of article 12 of the VAT Code and RRIIOBIM, it is verified that:

III-1.1.2.1. OBJECTIVE AND SUBJECTIVE CONDITIONS

  1. On the qualification of the leased property:

1.1. Pursuant to article 2, no. 1, paragraph a) of the RRIIOBIM and no. 4 of article 12 of the VAT Code, the use of the waiver option under analysis depends on the property underlying the same being an urban property or an autonomous fraction thereof, or, in the case of transfer, land for construction.

1.2. Now, as results from the exposition in previous sections, in four of the ten real property lease agreements identified in Table 7, on the date of their execution what existed, both legally and communicated to the Tax Authority, was the property described in the property registry as corresponding to article U-... ..., which was composed, in reality, only of parts with economic autonomy capable of independent use.

1.3. Terms in which it is immediately verified that in relation to the said four real property lease agreements the requirement of qualification of the contract object was not met.

1.4. In an intrinsic manner, the provision in paragraph c), of no. 1 of article 2 of the RRIIOBIM (entirety of the real property) is not considered to be met.

  1. As to ownership, paragraph b), of no. 1 of article 2 of the RRIIOBIM requires that the property object of the lease agreement be registered in the property registry in the name of the owner, and that the same is not intended for housing.

2.1. As to destination, effectively each of the buildings in question is not intended for housing.

2.2. As regards ownership, what is verified is that the physical reality represented by property articles U-... ... and U-...-? ..., in the years relevant to this analysis, were registered as being owned by A..., LDA..

2.2.1. This consideration is valid if one observes the terminology used in the drafting of each of the real property lease agreements entered into at each moment by A..., LDA..

2.2.2. But which is not entirely valid if one observes the actual physical reality existing that should have been the subject of registration with the Tax Authority immediately after completion of the property improvement works performed, since such reality was not communicated to the Tax Authority, and consequently, was not registered in the property registry as being owned by the lessor, on the date of performance of the real property lease agreements in question.

2.2.2.1. Fact which is set aside in view of what is stated regarding the verification of the requirement addressed in point 1, relating to the qualification of the contract object.

  1. As to the allocation of the buildings object of the agreement, independent of the other requisites, it is possible to verify that each of the lessee entities is registered for the exercise of an activity subject to tax and not exempt therefrom, with no evidence that it was not allocated to those same purposes, which is why the compliance with the requirement of paragraph d), of no. 1 of article 2 of the RRIIOBIM is not ruled out.

  2. The assessment of compliance with the provision in paragraph e), of no. 1 of article 2 of the RRIIOBIM, that is, verification of the minimum limit of the annual rent value practiced, which must be more than one twenty-fifth of the VPT of the leased property, is conditioned by the date on which the reality object of the lease was effectively reported by the taxable person.

4.1. Therefore, verification of compliance with such a requisite is only possible if the VPT resulting from the evaluation performed through processing of DMod1-IMI no...., of 2009-08-26 is considered, that is, by taking into account the VPT of property articles U-...-?..., which produced effects reported to the year 2008, as already explained in a previous section.

4.2. Notwithstanding such production of effects, regarding the already mentioned four cases in which on the date of execution of the real property lease agreement only article U-... ... was registered, such requisite is not considered verified, since the only known VPT was that of property article U-... ....

4.2.1. Also as to these, verification of this requisite is set aside in view of what has been concluded regarding the qualification of the contract object, in point 1.

  1. On the serial number of the real property lease executed, which for the present case matters, pursuant to paragraph b), of no. 2 of article 2 of the RRIIOBIM, "the waiver is only permitted when" "there is in question the first transfer or lease of the property after it has been subject to major transformation or renovation works, which resulted in a change of more than 30% of the taxable property value for purposes of Municipal Property Tax", "when it is still possible to deduct, in whole or in part, the VAT borne on such works."

5.1. Terms in which the valuation of the change in VPT is only possible if the VPT of each of the property articles U-...-?... is considered, and consequently, only after the date on which such reality was reported by the taxable person through DMod1-IMI no...., of 2009-08-26.

5.1.1. Even if the production of effects to the year 2008 that resulted from that DMod1-IMI is considered, for all that has been already set forth, on a date prior to the date of execution of the deed of constitution of condominium ownership, the property articles do not integrate the concept of autonomous fraction, but only the concept of part of property with economic autonomy capable of independent use.

5.2. Taking into account that verification of this requisite is subsequent to the others addressed in points 1 to 4, the already highlighted four real property lease agreements are immediately to be disregarded.

5.3. Beyond those, and proceeding to consider the real property lease agreements executed after the actual registration of the autonomous fractions corresponding to property articles U-...-?..., three other agreements executed are not in conditions to contribute to the benefit of the option to waive VAT exemption under study, because they configure a second agreement in relation to the same physical reality existing after completion of the property improvement works.

5.4. By contrast, only two of the lease agreements executed meet this condition.

  1. Regarding the subjective conditions established in article 3 of the RRIIOBIM:

6.1. Beyond what has been highlighted regarding the lessee entities, as to the taxable person A..., LDA., one should consider the requisite of paragraph a), of no. 1 of article 3 of the RRIIOBIM to be met, given the exception regime established in no. 3 of the same normative, since in the economic periods subsequent to completion of the property improvement works, its principal activity, in fact, was that relating to the leasing of real property.

6.1.1. That is, it is not required to comply with the ratio of 80% between the volume of active operations conferring the right to deduction and the total business volume, since the activity it habitually carries out has as its object the acquisition of properties for sale or for leasing, thus ruling out the provision in paragraph a), of no. 1, and no. 2 of article 3 of the RRIIBOIM.

6.2. As to the provision in paragraphs b) and c), of no. 1 of article 3 of the RRIIOBIM, its compliance is clear on the part of A..., LDA., given what has been set forth in a previous section.

In the table that follows, what has been concluded is summarized regarding some of the objective and subjective requisites addressed in the preceding points, namely those which more determinatively contribute to the assessment of the verification of compliance with the legally required requisites in the matter under analysis by A..., LDA..

[Table omitted for brevity]

III-1.1.2.2. CERTIFICATE OF WAIVER OF VAT EXEMPTION AND THE MOMENT AT WHICH THE WAIVER OF VAT EXEMPTION PROVIDED IN PARAGRAPHS 29) AND 30) OF ART. 9 OF THE VAT CODE TAKES EFFECT

Regarding the moment at which the exercise of the waiver of VAT exemption in the leasing of real property takes effect, article 5, no. 1 of the RRIIOBIM provides taxatively that "the waiver of exemption only operates at the moment the purchase and sale or lease agreement is executed, or, in the case of a financial lease agreement relating to property to be constructed, at the moment the lessor takes possession of the property, provided that the taxable person is in possession of a valid waiver certificate and that the conditions for the waiver of exemption established in this regime continue to be met at that moment," being that, according to no. 3 of the same normative, "the exercise of the waiver of exemption without the conditions referred to in no. 1 being met produces no effects."

That is, it is a necessary condition for the parties executing the real property lease agreement to be able to use the option to waive VAT exemption in the lease of the property object of the agreement, possession at the moment of execution of the agreement of a valid waiver certificate issued by the Tax Authority.

In the same sense as what is highlighted, there is the provision in no. 5 of article 4 of the RRIIOBIM, according to which "the certificate issued is valid for six months and has the sole effect of entitling the taxable persons intervening in the operation to have manifested to the Directorate-General of Taxes the intention to waive the exemption of VAT in that operation and to have declared that the conditions legally provided for the waiver to take effect are met."

That is, in view of the meaning conferred on the certificate under examination by that normative, the obtaining thereof requires to be prior to the performance of the operation in relation to which it is intended to exercise the right to waive the VAT exemption provided for in paragraphs 29) and 30) of article 9 of the VAT Code.

As to the formalities of the request for waiver of VAT exemption, they are provided for in article 4 of the RRIIOBIM, and their processing is based on computer terms, and exclusively in this manner, it being certain that no. 3 of that normative provides that in case of inconsistency of information made available by the taxable person and by the Tax Authority, at the central level, issuance of the certificate depends on the action of the chief of the Financial Service of the area of the taxable person's headquarters, namely the taxable person.

Situation in which the resolution of the difficulties enumerated by the taxable person A..., LDA., when formulating its requests for VAT waiver certificates would fall.

In this respect, given the elements made available by the taxable person, even after notification for the purpose (see Annex VIII), it is verified that in none of the cases underlying, and relevant to the assessment of the legitimacy of the exercise of the waiver of VAT exemption practiced by the taxable person, the taxable person is in possession of a certificate of waiver of VAT exemption validly issued by the Tax Authority on the date of execution of the real property lease agreement corresponding to the physical reality object of the agreement in question (see Annex IX).

It is further highlighted that in response to that postal notification, the taxable person did not document the moment in which it made the requests for certificates of waiver of VAT exemption that it needed to timely comply with the legally required requisites, limiting this evidence to the letter addressed to the Tax Authority on 2009-11-03 (see Annex X).

[Table 9 omitted for brevity]

Explaining Table 9, we have:

a) Corresponds to the date appearing in printouts of internet pages where the status of the request for certificate of waiver of VAT exemption in question appears.

b) Although it has not been displayed, given that the taxable person A..., LDA., repeatedly makes requests for certificates of waiver of VAT exemption whenever the previously obtained is about to expire, it is admitted that this may exist, which however does not contribute to the validity of the use of the corresponding option, because what is at issue is the execution of a second agreement relating to the same real property object.

Thus, in the table that follows is presented, in summary, the result of the assessment of the possession, or non-possession, by A..., LDA., of a valid certificate of waiver of VAT exemption on the date of execution of each of the real property lease agreements for non-residential purposes executed in relation to the physical reality represented by property articles U-... ... and U-...-? ....

[Table 10 omitted for brevity]

That is, as results from Table 10, in relation to the real property lease agreements that are actually relevant for the assessment of the legitimacy of the use of the option to waive VAT exemption pursuant to nos. 4 and 6 of article 12 of the VAT Code and the RRIIOBIM, in the exercise of the right to VAT deduction in the economic period covered by this inspection procedure and in prior periods, on the date of execution of any of them, the taxable person A..., LDA., did not possess a certificate of waiver of VAT exemption validly issued by the Tax Authority.

Terms in which it is concluded that the right to VAT deduction thus exercised, either through use of the method of actual allocation of all goods and services, or through use of the "pro rata" deduction percentage method provided for in paragraph b), of no. 1 of article 23 of the VAT Code, is not legitimate, and its effects should be purged from the VAT statements submitted by the taxable person, namely those relating to the tax periods included in the economic period of 2013.

It is further noted that, in this context, given the provision in no. 3 of article 45 of the LGT, combined with the fact that a tax assessment cannot be issued relating to tax periods on which the statute of limitations institute provided for in nos. 1 and 4 of said article 45 of the LGT has occurred, A..., LDA., loses the right to report the VAT credit shown in Field 61 of the VAT statement submitted by reference to the first quarter of the economic period of 2013, in the amount of 150,824.86 € (one hundred fifty thousand eight hundred twenty-four euros and eighty-six cents), since the total VAT deducted in economic periods prior to 2013 in use of the option to waive VAT exemption under study exceeds that reported credit value.

Effectively, according to the clarifications provided by the representatives of A..., LDA., the VAT deduction resulting from the use of the option to waive VAT exemption pursuant to nos. 4 and 6 of article 12 of the VAT Code and the RRIIOBIM, according to application of the method of actual allocation to passive operations of acquisition of goods and provision of services carried out in the scope of the activity of leasing real property, conducted in tax periods prior to the economic period of 2013, amounts to the total value of 274,115.15 € (two hundred seventy-four thousand one hundred fifteen euros and fifteen cents), as results from the breakdown shown in the following table (see Annex XI).

[Table 11 omitted for brevity]

Given the information contained in the VAT statement submitted for tax periods prior to the first one identified in the previous table, the values deducted through acquisition of fixed assets do not appear materially relevant, accepting by that means that the said deduction is not resulting from passive operations of acquisition of goods and provision of services intended for the activity of leasing real property.

III-1.1.2.3. LIMITATION TO THE EXERCISE OF THE RIGHT TO VAT DEDUCTION IN THE USE OF THE OPTION TO WAIVE THE EXEMPTION PROVIDED IN PARAGRAPHS 29) AND 30) OF ART. 9 OF THE VAT CODE, IN ACCORDANCE WITH THE PROVISION IN ART. 8 OF THE RRIIOBIM AND ART. 99 OF THE VAT CODE

As noted in section II-4.1.4 of this report, A..., LDA., was subject to an inspection procedure relating to tax periods of VAT prior to the economic period now under analysis, namely the tax periods between the first quarter of the year 2006 and the second quarter of the year 2008, from which resulted the formulation of tax corrections to the VAT borne and deducted, because it related to the sector of real property leasing, and as such, conducive to the performance of active operations subject but exempt from VAT pursuant to paragraphs 29) and 30) of article 9 of the VAT Code. Correction corrected by the taxable person either in tax terms, voluntarily, or in accounting terms, since the total VAT deducted thus corrected, along with other VAT borne, contributed, and contributes, to the debit balance of the SNC account "2431 – State and other public entities – Value Added Tax – VAT borne," which is the basis for part of the VAT deductions subsequently carried out over the various economic periods, of which a substantial part of the VAT deductions itemized in the previous Table 11 is an example.

Thus, and notwithstanding what has been concluded in accordance with the exposition set forth in the preceding sections, particularly in section III-1.1.2.2 immediately preceding, according to which the VAT deduction performed is qualified as improper, it is important to highlight the fact that when performing the exercise of the right to deduct VAT in use of the option to waive VAT exemption under study, A..., LDA., did not fully comply with the provision in no. 3 of article 8 of the RRIIOBIM and no. 2 of article 98 of the VAT Code, because it did not limit the exercise of the right to VAT deduction to that borne in the four years immediately prior to the moment in which, pursuant to no. 1 of article

Frequently Asked Questions

Automatically Created

What is the right to VAT deduction under Portuguese tax law and when can it be denied?
Under Portuguese tax law, the right to VAT deduction is governed by articles 19-25 of the VAT Code (CIVA) and derives from EU Directive 2006/112/EC. Taxpayers engaged in taxable activities can deduct input VAT on goods and services acquired for business purposes. This right can be denied when: (1) formal requirements are not met, such as possession of valid invoices with mandatory information; (2) the expenses are not directly related to taxable economic activity; (3) there is evidence of fraud, abuse, or tax evasion; (4) specific exclusions apply under Article 21 CIVA (e.g., passenger vehicles, entertainment expenses); or (5) the principle of fiscal neutrality is violated. The Tax Authority bears the burden of proof when denying deduction rights based on substantive grounds beyond mere formal deficiencies.
How do the principles of trust and good faith apply to VAT assessments in Portugal?
The principles of trust (princípio da confiança) and good faith (princípio da boa-fé) are constitutional principles in Portuguese tax law derived from Article 266 of the Portuguese Constitution and the General Tax Law (LGT). In VAT assessments, these principles require: (1) the Tax Authority to act consistently and not arbitrarily change interpretations that taxpayers reasonably relied upon; (2) protection of legitimate expectations when taxpayers comply with administrative guidance or established practice; (3) proportionality in applying sanctions or corrections; and (4) consideration of taxpayer conduct and intent when assessing penalties or denying rights. Courts and arbitral tribunals increasingly invoke these principles to limit retroactive application of changed interpretations and to protect taxpayers who demonstrated objective good faith in their compliance efforts, even when technical deficiencies exist.
What was the outcome of CAAD arbitration case 14/2018-T regarding VAT liquidations?
While the complete decision text is not provided in the excerpt, case 14/2018-T challenged 14 VAT assessments totaling €169,060.92 plus €20,650.87 in compensatory interest, covering quarterly periods from March 2013 to June 2016. The claimant sought annulment of all assessments and reimbursement of €190,222.19. The case involved VAT deduction rights related to a property subdivided into autonomous fractions and leased with VAT-charged rents. The arbitral tribunal was constituted on March 22, 2018, with three arbitrators, proceeded with witness testimony on June 21, 2018, and allowed written submissions. The Tax Authority argued the request should be denied. The final outcome would address whether the Tax Authority properly denied VAT deductions and whether the principles of trust and good faith protected the claimant's position.
Can a taxpayer challenge multiple VAT assessment periods in a single CAAD arbitration proceeding?
Yes, Portuguese tax arbitration law explicitly permits taxpayers to challenge multiple assessment periods in a single CAAD proceeding when they involve related issues or systematic problems. This case demonstrates this principle, as the claimant consolidated 14 separate VAT assessments (covering 14 quarterly periods from 2013-2016) into one arbitration request filed under Decree-Law 10/2011 (RJAT). This approach is procedurally efficient and economical, avoiding duplicative proceedings and ensuring consistent resolution of identical legal issues affecting multiple periods. The RJAT framework accommodates such consolidated challenges, with the arbitration fee structure adjusted based on the total amount in dispute. Courts have consistently accepted this practice when the assessments share common factual and legal foundations, as occurs when the Tax Authority applies the same interpretation or correction methodology across multiple periods during an inspection.
What are compensatory interest charges on additional VAT assessments and how are they calculated in Portugal?
Compensatory interest (juros compensatórios) on additional VAT assessments in Portugal is regulated by Article 35 of the General Tax Law (LGT) and serves to compensate the State for delayed tax payment, not as a penalty. It accrues automatically when additional tax is assessed, calculated from the date the tax should have been paid until the assessment date at the legal interest rate (taxa de juros legais) established annually by ministerial order. For 2017-2018, rates ranged from 4-5% annually. In this case, compensatory interest totaled €20,650.87 on principal tax of €169,060.92, suggesting average delays of approximately 1-2 years across the periods. Calculation begins the day after the original payment deadline for each VAT return period. If assessments are annulled, the State must refund both the tax and any compensatory interest paid, plus remuneratory interest (juros indemnizatórios) on amounts unduly collected.