VAT Deduction Methods for SGPS Holding Companies: Real Allocation vs Pro Rata Under Articles 20 and 23 CIVA

ARBITRAL DECISION

The arbitrators, Judge José Poças Falcão (arbitrator-president), Professor Doctor Clotilde Celorico Palma and Doctor Emanuel Vidal Lima (arbitrators-rapporteurs), designated by the Deontological Council of the Centre for Administrative Arbitration ("CAAD") to form the Collective Arbitral Tribunal, constituted on 23 March 2015, hereby agree as follows:

I. REPORT

A... - INVESTIMENTOS, SGPS, S.A. (hereinafter "Group SGPS" or "Claimant"), legal entity no. …, with share capital of €…,…, registered under the same number in the 2nd Section of the Commercial Registry Office of ..., with registered office at Rua …, …, Parish of …, Municipality of ..., came, pursuant to article 2, no. 1, subparagraph a), of the Legal Framework for Arbitration in Tax Matters, approved by Decree-Law no. 10/2011, of 20 January (hereinafter "LFATM"), and article 99, subparagraph a), of the Code of Administrative Tax Procedure (CATP), applicable pursuant to article 10, no. 2, subparagraph c), of the LFATM, to submit the present request for arbitral decision having as its object, according to the Claimant:

A - The illegality of 12 (twelve) VAT Assessment Statements "VAT", as well as of 10 (ten) Assessment Statements of the respective default interest, issued by the Collections Services Directorate of the Tax and Customs Authority (hereinafter "TA") in 2014 and relating to the fiscal year 2011, as detailed below:

Regarding VAT:

Additional Assessment Note no. ...66;

Additional Assessment Note no. ...68;

Additional Assessment Note no. ...70;

Additional Assessment Note no. ...72;

Additional Assessment Note no. ...74;

Additional Assessment Note no. ...76;

Additional Assessment Note no. ...78;

Additional Assessment Note no. ...80

Additional Assessment Note no. ...82;

Additional Assessment Note no. ...84;

Assessment Note 2014 … and compensation number 2014 …;

Assessment Note 2014 … and compensation number 2014 ….

Regarding default interest:

Assessment Note no. ...67;

Assessment Note no. ...69;

Assessment Note no. ...71;

Assessment Note no. ...73;

Assessment Note no. ...75;

Assessment Note no. ...77;

Assessment Note no. ...79;

Assessment Note no. ...81;

Assessment Note no. ...83;

Assessment Note no. ...85.

(cf. Documents 1 to 22 attached with the petition).

B - The consequent attribution of indemnification interest, accrued on the amounts of the assessments above identified and from the dates of their respective payment.

The Claimant substantiated its request alleging, in summary:

a) The total value of the assessments now disputed is €121,267.44 (one hundred twenty-one thousand two hundred sixty-seven euros and forty-four cents), of which €116,917.89 concern VAT assessments and €4,349.55 relate to assessments of the respective default interest;

b) The assessment notes above identified concern arithmetic corrections officially made by the TA regarding the VAT deducted by the Claimant in 2011 and respective default interest, following an inspection procedure initiated by the TA in June 2013 and concluded during the year 2014 and which covered the fiscal year 2011;

c) The Claimant is a Limited Liability Holding Company ("SGPS"), incorporated under Decree-Law no. 495/88, of 30 December, which leads the Group A... and heads the three business areas of the Group: construction, concessions and real estate;

d) The Group SGPS has as its corporate purpose the holding and management of shareholdings in Group companies, as an indirect form of exercise of economic activities, as well as the provision of technical services of administration and management, communication and social responsibility, legal and tax services to the subsidiaries (cf. access code to the permanent certificate ...)

e) The Claimant performs a fundamental role in leading the continuous effort of growth and expansion of the Group A..., by virtue of its status as holding company of this multinational business group;

f) The SGPS carries out, simultaneously, operations subject to VAT that confer the right to deduction of the tax – namely, assistance and consultancy services in the areas of management and administration, communication and social responsibility, legal and tax services, which are provided to its subsidiaries - and operations exempt or not subject to VAT that do not confer the right to deduction of the tax – by way of example, the granting of loans and charging of bank expenses with guarantees provided to the subsidiary companies;

g) During the year 2011, the Claimant carried out various operations subject to tax and also operations not subject to tax that confer the right to deduction, an amount that reached €6,837,687.98,

h) On the other hand, it also carried out operations that do not confer the right to deduction, valued at €12,760,013.49;

i) In light of the above, Group SGPS is a mixed VAT taxable person;

j) The Claimant considered the amount of €6,837,687.98, mentioned above in article 16 [During the year 2011, the Claimant carried out various operations subject to tax and also operations not subject to tax that confer the right to deduction, an amount that reached €6,837,687.98], in the numerator of its deduction pro rata and, in the denominator, the amount of €19,597,701.47, corresponding to the total value of the operations carried out [cf. Document 23 attached]

k) With a view to providing the technical services of administration and management, communication and social responsibility, legal and tax services to the subsidiary companies, Group SGPS entered into contracts with these entities denominated "Agreements", some of which are resident, for tax purposes, in third countries;

l) The contracts in question regulate the provision of services of a diverse nature (by way of example, cf. Document 24 attached below, whose content is hereby fully reproduced);

m) Thus, Group SGPS proceeds to determine the amounts to be invoiced to its subsidiaries, based on the estimated expenses necessary for the provision of the said services (subject to tax) to the subsidiaries, and which are recorded in the cost centres identified below:

9215 – Marketing

9200 – Board of Directors

9208 – Sustainable Development

9214 – Institutional Communication

9210 – Legal Services

9213 – Organizational Change

9201 – Planning and Management Control

9212 – General Costs DCSO

9203 – Tax

9229 – Investor Relations Office

9205 – Secretary General

9206 – Audit and Analysis

n) In this manner, in 2011, for the provision of the services in question, Group SGPS prepared a budget where it foresaw incurring €6,403,107 in the cost centres above identified.

o) Nevertheless, in the cost centres mentioned, Group SGPS incurred in 2011 a total cost value of €5,608,516 (a value considerably lower than budgeted).

p) However, with regard to the provision of the services in question, Group SGPS charged to its subsidiaries the contractual amount stipulated, that is, a total of €6,000,000 (operation subject to tax for VAT purposes).

q) During the year 2011, the Claimant applied only the pro rata method for purposes of recovery of the VAT incurred, and, in the year in question, the percentage of definitive deduction reached 33%.

r) However, in the context of an internal procedure review, the Claimant verified that the methods and criteria adopted for the calculation of the VAT it had the right to recover were not the most adequate having regard to the applicable legislation.

s) Indeed, and in accordance with the VAT Code, specifically article 23 of this law, entities with restrictions on the right to deduct the tax must apply the method of direct allocation to the maximum of possible operations, whilst the pro rata method should be used as a residual criterion (i.e., in situations where the use of the direct allocation method is not feasible);

t) Now, in the said procedure review, the Claimant concluded that, on the one hand, the percentage of deduction adopted in the year 2011, as a mixed taxable person, was lower than correct, given the applicable legislation and jurisprudence and, on the other, that it should proceed to apply the method of direct allocation whenever possible;

u) In light of the above, the Claimant proceeded to a reformulation of the criteria for VAT deduction, namely the application of the direct allocation method, and further proceeded to recalculate the percentage of definitive deduction for the year 2011;

v) As a result of the application of the above-mentioned criteria, the Claimant proceeded to the following adjustments:

(1) Deduction at 100% of the VAT incurred with the inputs of 12 cost centres (identified in article 22 above, as well as in the table below), for being exclusively related to the conduct of operations that confer the right to deduction (e.g. assistance and consultancy services in the areas of management and administration, communication and social responsibility, legal and tax services provided to its subsidiaries);

Thus, VAT deduction was carried out, by the method of direct allocation, of the VAT incurred in the acquisition of resources recorded in the cost centres listed below:

DIRECT ALLOCATION

COST CENTRE

9215 – Marketing

9200 – Board of Directors

9208 – Sustainable Development

9214 – Institutional Communication

9210 – Legal Services

9213 – Organizational Change

9201 – Planning and Management Control

9212 – General Costs DCSO

9203 – Tax

9229 – Investor Relations Office

9205 – Secretary General

9206 – Audit and Analysis

(2) Non-deduction of the VAT incurred with the inputs of cost centre 9768 – "Financial Costs and Income", for being exclusively related to operations that do not confer the right to deduction (e.g. granting of loans to the subsidiaries) and,

(3) Application of the "pro rata" method (recalculated at 35%) in the deduction of the VAT incurred in the acquisition of "common" resources, which are recorded in the remaining cost centres identified in the table below, by being resources that are related, indistinctly, to both the taxed and non-taxed activity of the company.

Thus, VAT deduction was carried out, by the pro rata method, of the VAT incurred in the acquisition of resources recorded in the cost centres listed below:

PRO RATA

COST CENTRE

Headquarters Facilities

Consultants ...

Valuation of Shareholdings

Other Holding Expenses

External Audit

Fleet – Cards

Board Members – Other

Securities

Training - Holding

School Lost Time

Supervisory Board

Company Results

Concessions

… – Holding

x) As previously alluded to, during the years 2013 and 2014, the Claimant was subject to an inspection procedure, of general scope, which covered the year 2011.

z) In this context, the Claimant was notified of the draft report of the tax inspection, through which arithmetic corrections were proposed regarding VAT in the amount of €122,993.51 (cf. Document 25 attached below, whose content is hereby fully reproduced)

aa) Specifically, the arithmetic corrections proposed and subsequently actually implemented by the TA result from the following situations therein invoked:

Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code – €116,917.89; and

VAT not assessed – €6,075.63.

bb) It is noted that the Claimant, a VAT taxable person who carries out both taxed and non-taxed operations, during the year under analysis, incurred €449,665.12 in tax.

cc) Having proceeded to deduct VAT in the amount of €251,398.85.

dd) Thus, it did not deduct VAT that it incurred in the amount of €198,256.27.

ee) Given the corrections proposed by the TA, the now Claimant exercised its right to be heard under the principle of cooperation and the principle of participation, set out in article 60 of the General Tax Law ("GTL"), not accepting the corrections relating to the situation described in article 34 above in the context of point "i) Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code", in the amount of €116,917.89 (cf. Document 26 attached below, whose content is hereby fully reproduced).

ff) As for the correction described in article 34 of the PI, they result from the following situations therein invoked:

• Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code – €116,917.89; and

• VAT not assessed – €6,075.63.

gg) The Claimant agreed with the last [VAT not assessed - €6,075.63], as described in the right to be heard exercised, and immediately proceeded to the regularization of VAT in favor of the State, in the amount of €6,075.63, reflecting the amount in question in field 4 (VAT Assessed) of the substitute VAT declaration delivered for the period of September 2011 (cf. Document 27 attached below, whose content is hereby fully reproduced).

hh) On 17 July 2014, the now Claimant was notified, through Official Letter no. 2538 of 15 July 2014, of the final report of conclusions resulting from the tax inspection, in which the corrections described in article 34 above, in its point i - "Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code" are maintained (cf. Document 28 attached below, whose content is hereby fully reproduced).

ii) As a result of the above, additional assessments and assessment statements were issued, from which resulted a VAT amount payable of €116,917.89 and default interest of €4,349.55 (cf. Documents 1 to 22, attached below).

jj) On 10 and 29 October 2014, Group SGPS proceeded to the payment of the VAT and default interest amounts mentioned (cf. Document 29 attached below, whose content is hereby fully reproduced) but considers that such assessments are manifestly illegal and unjust, and the Claimant cannot accept the VAT corrections made by the TA, specifically with regard to the blanket exclusion of the right to VAT deduction in certain situations, whereby it seeks that the illegality of the assessment acts in the amount of €116,917.89 and respective default interest (in the amount of €4,349.55) be declared.

The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and immediately notified to the Respondent in accordance with legal terms.

Pursuant to and for the purposes of the provision in subparagraph a), no. 2 of article 6 of the LFATM, by decision of the President of the Deontological Council, duly communicated to the parties, within the legally foreseen deadlines, the undersigned were designated arbitrators, having communicated to the Deontological Council and to the Centre for Administrative Arbitration their acceptance of the assignment within the deadline stipulated in article 4 of the Deontological Code of the Centre for Administrative Arbitration.

The Tribunal was constituted on 23 March 2015, in accordance with the requirement of subparagraph c), no. 1 of article 11 of the LFATM.

The TA presented its response to the request for arbitral decision, expressing opposition based on the allegation, in essence and in summary:

a) analyzed the operations carried out by the Claimant, it is manifest that the same is characterized, for VAT purposes, as a mixed taxable person, since, on the one hand, it engages in activities that, undoubtedly, do not confer the right to deduct the VAT borne upstream, because they are excluded from the concept of economic activity for VAT purposes and, on the other, it carries out operations which, although having indirect repercussions in the main activity, present themselves as dependent and merely ancillary thereto, consisting of service provisions in accordance with the provisions of article 4 of the VAT Code, conferring the right to deduct VAT.

b) In the case of goods and services which are used by the taxable person to carry out both operations with the right to deduction, and operations without the right to deduction of VAT, the latter is only admitted as regards the part of VAT proportional to the amount relating to the first category of operations.

c) In such cases, the amount of deductible VAT must be determined by resorting to the methods provided for in the VAT Code and which were made concrete and explicit by Circular Letter no. 30103, of 23.04.2008, from the Office of the Sub-Director General, Area of Tax Management – VAT, through the definition of an allocation key based on objective imputation criteria and which the Claimant does not apply.

d) In that measure, with regard to the operations analyzed, and which according to the Claimant's understanding justify the deduction of the totality of VAT, as was demonstrated above, the VAT was improperly deducted in several of those operations, since, by their nature and purpose to which they are destined, they find justification in a framework of management of the Claimant's assets, with the objective of deriving therefrom profits that translate into interest, dividends or capital gains arising from the remuneration or appreciation of the shareholdings that the Claimant holds and that respect, exclusively, the conduct of the activity not subject/outside the scope of application of the tax - the management of shareholdings.

e) The amount of improperly deducted VAT with respect to those operations, by cost centre/profit is as follows:

f) It is important, finally, to emphasize that, if the Claimant were a pure holding company (that only exercises the activity of holding and management of shareholdings), it would not be able to deduct the VAT borne with the mentioned charges (despite having always to bear them), because it was completely barred from exercising the right to deduction since it would only exercise operations not subject or outside the scope of application of the field of the tax (art. 20 of the VAT Code, a contrario).

g) Now, the fact that, accessorily, the Claimant provides technical support services to the subsidiaries with tax assessment, only allows it to deduct the VAT borne for the conduct of operations that are found with a direct and immediate nexus with such service provisions, effectively taxed for VAT purposes.

h) Consequently, and, taking into account the principle of equality between taxable persons and treatment of operations for VAT purposes, and in obedience to the principles of neutrality of VAT and non-distortion of competition based on advantages or disadvantages fiscal, the VAT of the inputs mentioned in the previous table will not be deductible

i) in the period in question, it happened that:

• The Claimant deducted 100% of the VAT borne with inputs of a set of cost centres by understanding them to be exclusively related to the conduct of operations that confer the right to deduction (such as assistance and consultancy in the areas of management and administration, etc.);

• It used the pro rata method, in the percentage of 35%, to deduct the VAT incurred in the acquisition of common resources for being resources that are indistinctly related to both the taxed and non-taxed activity of the company.

j) The corrections resulted from the finding in the inspection process, that the Claimant, on the one hand, improperly deducted the VAT borne in the acquisition of goods and services assigned exclusively to its main activity of managing shareholdings, in violation of the provisions of articles 19 and 20 of the VAT Code (point III – 2.1 of the Tax Inspection Report), in the amount of €116,917.88.

k) And, on the other hand, violating subparagraph e) of no. 1 and no. 5 of article 2 of the VAT Code, it was found that the Claimant did not assess VAT, in its capacity as acquirer of financial advice services provided by an entity not resident in national territory, in the amount of €6,075.63 (point III – 2.2 of the Tax Inspection Report) – correction which was voluntarily regularized by the Claimant in the context of exercising the right to be heard, not forming part of the subject matter of the present proceedings.

l) Subsequently, once notified of the consequent additional assessments, the Claimant, not conforming to the same, came to present the request pending judgment.

m) The Claimant, in order to sustain its claim, comes to allege, in summary:

• The existence of a direct and immediate relationship between the resources inscribed in the cost centres and the services provided to the subsidiaries since that, in 2011, with regard to the provision of the services in question, it charged to its subsidiaries a total of €6,000,000 (operations taxed for VAT purposes), having incurred, in the said cost centres, a total value of €5,608,516;

• it deducted, in this manner, the totality of the tax incurred upstream in the acquisition of such resources, by applying the method of direct allocation, since the resources in question were acquired for the conduct of taxed operations;

• VAT that is deductible from the outset because the Claimant is not a pure holding company, but rather a mixed one, that is, it carries out both taxed operations and non-taxed operations that confer the right to deduction, providing services to the subsidiaries;

• Terms in which, the non-admission of the deduction of the VAT incurred for the provision of services would translate into a violation of the basic rules of the right to deduct the tax, as well as of the fundamental principle of neutrality, whereby the tax in question is effectively deductible in view of no. 1 of article 20 of the VAT Code;

• It further defends, the deductibility, by applying the pro rata method, of the expenses it incurred with consultancy services and other general holding expenses, in the measure in which:

• The charges recorded in the cost centres "Valuation of shareholdings" (€14,377.06), "Consultants ..." (€17,710.00), and "Securities" (€155.03) are general expenses of its activity, being related to its activity in general, namely, with the acquisition, by the Claimant, of consultancy services, with a view to the acquisition of shareholdings and other related operations;

• The costs "Other Holding Expenses" (€875.44) and "External audit" (€4,045.11), for being general expenses of its activity as a whole, in which it is impossible to distinguish the part that is destined to taxed operations and that other part destined to non-taxed operations for VAT purposes.

n) However, the arguments presented by the Claimant are manifestly without merit.

o) The corporate purpose of SGPS is limited, restricting it to the management of shareholdings, being barred from the possibility of conducting other activities than the service provisions provided for in its legal regime.

p) Hence, according to Mariana Gouveia de Oliveira[1] "[…] the management of shareholdings in other companies, as an indirect form of exercise of an economic activity, constitutes the only corporate purpose which, in the eyes of the law, any SGPS may have. For this reason, these are equated with pure holdings […]".

q) The Claimant has as its main activity the management of non-financial shareholdings.

r) The importance assumed by the distinction between the concepts of "economic activity" and "non-economic activity" for VAT purposes is to be emphasized;

s) Thus, the 2nd paragraph of no. 1 of article 9 of the VAT Directive[2] provides that economic activity shall be "any activity of production, commercialization or service provision, including extractive activities, agricultural activities and those of liberal professions or equivalent. In particular, the exploitation of a tangible or intangible asset with the aim of deriving revenues of a permanent nature is considered economic activity".

t) On the other hand, the Court of Justice of the European Community (now Court of Justice of the European Union)[3] defined that the following are outside the concept of economic activity:

Dividends from shareholdings;

Capital gains from the sale of shares or other negotiable securities;

Income from investments in investment funds;

Interest on bonds;

Interest due by the occasional grant of credit by holdings using the dividends distributed by the subsidiaries;

Capital contribution to companies;

Issuance of shares representing the capital of a commercial company

u) This is also the understanding upheld by the Tax Administration set out in Circular Letter no. 30103, of 23 April 2008, from the Office of the Sub-Director General, Area of Tax Management – VAT, where in its "Point VII – Concepts – B - Operations excluded from the concept of economic activity", it proceeds to a clarification of the meaning and scope of the provision of article 23 of the VAT Code, which came to apply, precisely, the Community discipline on the deduction regime, harmonizing it, and dispelling doubts raised by the previous wording of the article in question (making it compatible with no. 5 of article 17 of the Sixth Directive, which corresponds to article 173 of the VAT Directive).

v) From the Circular Letter cited above it follows that the following operations should be considered excluded from the concept of economic activity:

"B. Operations excluded from the concept of economic activity

The receipt of dividends or profits arising from the holding of shareholdings does not constitute the counterpart to operations within the scope of application of the tax, being operations not arising from an economic activity for VAT purposes, as a result of the mere ownership thereof and depending, in large measure, on random factors.

The same applies to capital gains resulting from the mere acquisition and disposal of such shareholdings, as well as other securities, including bonds, on the understanding that the simple acquisition and sale does not constitute the exploitation of an asset with a view to the production of an asset with a view to the production of revenues of a permanent character [...]

x) It is noted that, in the context described, the consideration of the profits or revenues above indicated as arising from operations not encompassed by the concept of economic activity, and therefore, outside the scope of application of VAT, is, as a rule, independent of the nature of the taxable person who receives them or of the activity pursued by this person, being also irrelevant whether or not such taxable person has direct or indirect interference in the management of the managed companies of the subsidiary companies.

z) The claimant engages, on the one hand, in activities which, undoubtedly, do not confer the right to deduct the VAT borne upstream, because they are excluded from the concept of economic activity for VAT purposes.

aa) And, on the other, carries out operations which, although having indirect repercussions in the main activity, present themselves as dependent and merely ancillary thereto, consisting of service provisions in accordance with the provisions of article 4 of the VAT Code, conferring the right to deduct VAT.

bb) In the case of goods and services which are used by the taxable person to carry out both operations with the right to deduction, and operations without the right to deduction of VAT, the latter is only admitted as regards the part of VAT proportional to the amount relating to the first category of operations.

cc) In such cases, the amount of deductible VAT must be determined by resorting to the methods provided for in the VAT Code and which were made concrete and explicit by Circular Letter no. 30103, of 23.04.2008, from the Office of the Sub-Director General, Area of Tax Management – VAT, through the definition of an allocation key based on objective imputation criteria and which the Claimant does not apply.

dd) With regard to the operations analyzed, and which according to the Claimant's understanding justify the deduction of the totality of VAT, this was improperly deducted in several of those operations, since, by their nature and purpose to which they are destined, they find justification in a framework of management of the Claimant's assets, with the objective of deriving therefrom profits that translate into interest, dividends or capital gains arising from the remuneration or appreciation of the shareholdings that the Claimant holds and that respect, exclusively, the conduct of the activity not subject/outside the scope of application of the tax - the management of shareholdings.

ee) The amount of improperly deducted VAT with respect to those operations, by cost centre/profit is as follows:

Pursuant to and with the grounds of the order of 7-8-2015, the meeting provided for in article 18 of the LFATM was dispensed with and the parties were notified for written final submissions, and, with extension of the deadline for the decision, the Tribunal set a date for issuance and notification of the decision to the parties.

Both parties submitted submissions, concluding, in essence, in the same manner as they did in their respective articles.

II – CASE MANAGEMENT

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to article 2 of the LFATM.

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

The proceedings do not suffer from any defects of nullity.

III - REASONING

A. MATTERS OF FACT

The Proven Facts

The essential proven facts are as follows:

1. The Claimant is a Limited Liability Holding Company ("SGPS"), incorporated under Decree-Law no. 495/88, of 30 December, which leads Group A... and heads the three business areas of the Group: construction, concessions and real estate;

2. It has as its corporate purpose the holding and management of shareholdings in Group companies, as an indirect form of exercise of economic activities, as well as the provision of technical services of administration and management, communication and social responsibility, legal and tax services to the subsidiary companies (cf. access code to the permanent certificate ...

3. The Claimant carries out, simultaneously, operations subject to VAT that confer the right to deduction of the tax – namely, assistance and consultancy services in the areas of management and administration, communication and social responsibility, legal and tax services, which are provided to its subsidiaries - and operations exempt or not subject to VAT that do not confer the right to deduction of the tax – by way of example, the granting of loans and charging of bank expenses with guarantees provided to the subsidiary companies;

4. During the year 2011, the Claimant carried out various operations subject to tax and also operations not subject to tax that confer the right to deduction, an amount that reached €6,837,687.98;

5. It also carried out operations that do not confer the right to deduction, valued at €12,760,013.49;

6. The Claimant considered the amount of €6,837,687.98 [referred to in article 16 of the initial petition and relating to various operations carried out in 2011, both subject and not subject to tax that confer the right to deduction], in the numerator of its deduction pro rata and, in the denominator, the amount of €19,597,701.47, corresponding to the total value of the operations carried out [cf. Document 23 attached with the IP];

7. With a view to providing the technical services of administration and management, communication and social responsibility, legal and tax services to the subsidiary companies, Group SGPS entered into contracts with these entities denominated "Agreements", some of which are resident, for tax purposes, in third countries;

8. The contracts in question regulate the provision of services of a diverse nature (cf., for example, Document 24 attached with the IP);

9. Thus, Group SGPS proceeds to determine the amounts to be invoiced to its subsidiaries, based on the estimated expenses necessary for the provision of the said services (subject to tax) to the subsidiaries, and which are recorded in the cost centres identified below:

9215 – Marketing

9200 – Board of Directors

9208 – Sustainable Development

9214 – Institutional Communication

9210 – Legal Services

9213 – Organizational Change

9201 – Planning and Management Control

9212 – General Costs DCSO

9203 – Tax

9229 – Investor Relations Office

9205 – Secretary General

9206 – Audit and Analysis

1. In this manner, in 2011, for the provision of the services in question, Group SGPS prepared a budget where it foresaw incurring €6,403,107 in the cost centres above identified.

2. Nevertheless, in the cost centres mentioned, Group SGPS incurred in 2011 a total cost value of €5,608,516;

3. However, with regard to the provision of the services in question, Group SGPS charged to its subsidiaries the contractual amount stipulated, that is, a total of €6,000,000 (operation subject to tax for VAT purposes);

4. During the year 2011, the Claimant applied only the pro rata method for purposes of recovery of the VAT incurred, and, in the year in question, the percentage of definitive deduction reached 33%;

5. However, in the context of an internal procedure review, the Claimant verified that the methods and criteria adopted for the calculation of the VAT it had the right to recover were not the most adequate having regard to the applicable legislation (article 23 of the VAT Code);

6. It thus considered the Claimant that entities with restrictions on the right to deduct the tax must apply the method of direct allocation to the maximum of possible operations, whilst the pro rata method should be used as a residual criterion (i.e., in situations where the use of the direct allocation method is not feasible);

7. The Claimant concluded that, on the one hand, the percentage of deduction adopted in the year 2011, as a mixed taxable person, was lower than correct, and, on the other, that it should proceed to apply the method of direct allocation whenever possible;

8. And, for this reason, it proceeded to a reformulation of the criteria for VAT deduction, namely the application of the direct allocation method, and further proceeded to recalculate the percentage of definitive deduction for the year 2011;

9. As a result of the application of the above-mentioned criteria, the Claimant proceeded to the following adjustments:

(1) Deduction at 100% of the VAT incurred with the inputs of 12 cost centres (identified in article 22 of the initial petition, as well as in the table below), for being exclusively related to the conduct of operations that confer the right to deduction (e.g. assistance and consultancy services in the areas of management and administration, communication and social responsibility, legal and tax services provided to its subsidiaries), with VAT deduction being thus carried out, by the method of direct allocation, of the VAT incurred in the acquisition of resources recorded in the cost centres listed below:

DIRECT ALLOCATION

COST CENTRE

9215 – Marketing

9200 – Board of Directors

9208 – Sustainable Development

9214 – Institutional Communication

9210 – Legal Services

9213 – Organizational Change

9201 – Planning and Management Control

9212 – General Costs DCSO

9203 – Tax

9229 – Investor Relations Office

9205 – Secretary General

9206 – Audit and Analysis

(2) Non-deduction of the VAT incurred with the inputs of cost centre 9768 – "Financial Costs and Income", for being exclusively related to operations that do not confer the right to deduction (e.g. granting of loans to the subsidiaries) and,

(3) Application of the "pro rata" method (recalculated at 35%) in the deduction of the VAT incurred in the acquisition of "common" resources, which are recorded in the remaining cost centres identified in the table below, by being resources that are related, indistinctly, to both the taxed and non-taxed activity of the company, with VAT deduction being carried out, by the pro rata method, of the VAT incurred in the acquisition of resources recorded in the cost centres listed below:

PRO RATA

COST CENTRE

Headquarters Facilities

Consultants ...

Valuation of Shareholdings

Other Holding Expenses

External Audit

Fleet – Cards

Board Members – Other

Securities

Training - Holding

School Lost Time

Supervisory Board

Company Results

Concessions

… – Holding

1. The Claimant was subject to a tax inspection procedure, of general scope, which covered the year 2011, and came to be notified of the draft report, through which arithmetic corrections were proposed regarding VAT in the amount of €122,993.51 (cf. Document 25 attached with the IP);

2. Such arithmetic corrections proposed and subsequently actually implemented by the TA result from the following situations therein invoked:

a) Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code – €116,917.89 and

b) VAT not assessed – €6,075.63;

1. The TA considered excluded from deduction, the operations described in the following table:

1. Given the corrections proposed by the TA, the now Claimant exercised its right to be heard [under the principle of cooperation and the principle of participation, set out in article 60 of the General Tax Law ("GTL")], not accepting the corrections relating to the situation described above in a) ["Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code", in the amount of €116,917.89" (cf. Document 26 attached with the IP)];

2. As for the correction described in 20 – b) [VAT not assessed – €6,075.63], the Claimant agreed with the same, as described in the right to be heard exercised, and immediately proceeded to the regularization of VAT in favor of the State, in the amount of €6,075.63, reflecting the amount in question in field 4 (VAT Assessed) of the substitute VAT declaration delivered for the period of September 2011 (cf. Document 27 attached with the IP);

3. On 17 July 2014, the now Claimant was notified, through Official Letter no. 2538 of 15 July 2014, of the final report of conclusions resulting from the tax inspection, in which the corrections described ["Exclusion of the right to VAT deduction in the situations detected, in view of the provisions of articles 20 and 23 of the VAT Code" (cf. Document 28 attached with the IP, whose content is hereby fully reproduced] are maintained;

4. As a result of the above, the additional assessments and assessment statements were issued, from which resulted a VAT amount payable of €116,917.89 and default interest of €4,349.55 (cf. Documents 1 to 22, attached with the IP);

5. On 10 and 29 October 2014, the Claimant proceeded to the payment of the VAT and default interest amounts previously mentioned (cf. Document 29 attached with the IP).

There are no other essential facts to consider, proven or unproven.

MOTIVATION

It should be noted that, with regard to matters of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, it being its duty to select the facts that matter for the decision and to discriminate the proven from the unproven matters (cf. art. 123, no. 2, of the CATP and article 607, no. 3 of the Code of Civil Procedure, applicable pursuant to article 29, no. 1, subparagraphs a) and e), of the LFATM).

In this manner, the pertinent facts for judgment of the case are chosen and defined according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) [cf. article 511, no. 1, of the Code of Civil Procedure, applicable pursuant to article 29, no. 1, subparagraph e), of the LFATM].

As regards the proven facts, the conviction of the Arbitral Tribunal was based on the set of documents attached, including the administrative process records which include the final report of the tax inspection to which reference is made, and the documentation presented was not contested.

It was also considered, in the assessment of evidence, the circumstance that there was no surprise in the articles presented, any essential controversy of the parties regarding the factual framework, circumscribing the latter to the underlying legal question: the illegality or not of the tax acts now under review for alleged disregard of the claimant's right to recovery/deduction of VAT, namely as a result of recalculation operations, by the methods of direct allocation (100%) and pro rata (35%) of percentages of definitive deduction for the year 2011.

B. THE LAW

Having fixed the matter of fact as proven, it is important to proceed to determine the law applicable to the underlying facts, in accordance with the above questions.

It is of particular interest to decide on the main question to be analyzed in the present proceedings, namely: to assess whether the corrections made that gave rise to the additional assessments are in conformity with the rules governing this tax at European and internal level, and whether the exercise of the right to deduct the tax borne with respect to the expenses in question should be accepted, the nuclear question in these proceedings.

Now, in the Tribunal's view, it was proven (cfr above, namely, 9., 10., 11. and 18. of the list of facts that were considered proven) that the expenses of the mentioned 12 cost centres are exclusively related to the conduct of operations that confer the right to deduction (e.g. assistance and consultancy services in the areas of management and administration, communication and social responsibility, legal and tax services provided to its subsidiaries), and that VAT borne with the respective inputs can be deducted at 100%, as the Claimant alleges.

Such expenses are, in fact, deductible for VAT purposes, taking into account the rules governing this tax in accordance with Union Law, with the respective transposition at internal level and with the administrative and judicial interpretation that has been conducted thereof, especially by the CJEU.

Indeed, as has been peacefully understood by the jurisprudence and is a corollary of the obligation of referral provided for in article 267 of the Treaty on the Functioning of the European Union (which replaced article 234 of the Treaty of Rome, former article 177), the jurisprudence of the CJEU has binding character for national courts, when it concerns questions connected with Union Law[4].

1. On the nature and scope of the exercise of the right to deduction

With regard to the exercise of the right to deduction in VAT, it is justified to make some preliminary considerations, both on the respective nature and on what concerns its scope of application and exercise by taxable persons, whereby we will here reproduce the general considerations already made by this same Tribunal in its Arbitral Decision relating to Proceedings no. 148/2012-T/CAAD and no. 18/2013 – T/CAAD.

As is well known, VAT is an indirect tax of Community matrix, pluriphase, which tends to affect every act of consumption (general tax on consumption)[5].

The right to deduction is an essential element of the functioning of the tax, and should guarantee its main characteristic – neutrality.

In reality, the right to deduction is embodied as the essential element of the functioning of the tax, the "cornerstone of the value-added tax system"[6], based on the so-called method of deduction of tax, method of tax credit, indirect subtractive method or also method of invoices. In accordance with this method, and consistently with the provision of article 19 of the VAT Code, through an arithmetic operation of subtraction, from the tax determined on sales and service provisions (outputs) and identifiable in their respective invoices, the tax borne on purchases and other expenses (inputs) is deducted. As determined by the 2nd paragraph, of no. 2, of article 1 of the VAT Directive (hereinafter VAT Directive)[7], "In each operation, VAT, calculated on the price of the good or service, is due, with prior deduction of the amount of tax that has directly affected the cost of the various elements making up the price." The mechanism of exercise of the right to deduction allows the taxable person to expunge from its charge the VAT borne upstream, not thus reflecting it as an operational cost of its activity, removing, in this manner, the cumulative or cascade effect, thus providing the economic neutrality of the tax.

In accordance with the provisions of the VAT Directive, the VAT Code determines, as a general rule, the deductibility of the tax due or paid by the taxable person in the acquisitions of goods and services made from other taxable persons.

The situations expressly excluding the right to deduction are exceptional and relate to specific cases enumerated by the national legislator in a taxative manner, in accordance with what is provided for in the VAT Directive, depending on the type of expenses in question[8].

The rules for exercise of the right to deduction of tax contemplate objective requirements, more linked to the type of expenses, subjective, relating to the taxable person, and temporal, relating to the period in which it is possible to exercise the right to deduction of VAT, which must be verified simultaneously in order to exercise the right to deduction[9].

As objective requirements for exercise of the right to deduction of tax we have, namely, the fact that the tax borne should appear on an invoice issued in legal form (that is, it should comply, in its requirements, with the general terms provided for in article 36, no. 5, of the VAT Code), that it is Portuguese VAT, and that the expense, in itself, confers the right to deduct VAT (that is, it should not be an expense excluded from the right to deduction, pursuant to the provision of article 21 of the VAT Code).

As subjective requirements for exercise of the right to deduction of tax it is determined, namely, that goods and services should be directly related to the exercise of the activity in question. In accordance with the provision of article 168 of the VAT Directive, transposed, in part, by article 20, no. 1, subparagraph a), of the VAT Code, the taxable person may deduct the VAT borne in the Member State in which it is established in transmissions of goods and service provisions, as well as in the assimilated operations in intra-Community acquisitions of goods and importations located therein, "When the goods and services are used for the purposes of its taxed operations (…) ".

This regulation, in accordance with the rules of Union Law, thus requires that there be a causal nexus between the good or service acquired (input) and the output taxed, in order for the VAT to be susceptible of being deductible.

That is, the VAT borne upstream in a certain operation is only deductible insofar as it can be related downstream with an operation actually taxed, and the relationship must be assessed in function of the reporting and inclusion of the cost borne, in the price of the taxed operation.

In this context the CJEU, in the Case BLP[10], concluded that the goods or services upstream must present a direct and immediate relationship with one or several operations subject to tax downstream, and that the right to deduct VAT presupposes that the expenses in question must constitute an integral part of the constitutive elements of the price of the taxed operations.

Inevitably, the analysis of the scope of that expression "(…) direct and immediate relationship (…)", should be carried out case by case, it being up to the national judicial bodies to apply the criterion to the facts of each proceeding that is presented to them and to take into account all the circumstances in which the operations in question are drawn [11].

Nevertheless, as concluded by the Advocate General in the Case Midland Bank, the use of the two adjectives "direct" and "immediate" cannot but mean a specially close relationship between the taxable operations carried out by a taxable person and the goods or services provided by another taxable person[12].

However, the density of that relationship can vary depending on the quality of the taxable person and the nature of the operations carried out and these variables can also have repercussions on the burden of proof of the existence of the relationship, which falls on the operator interested in the deduction.

Thus, in accordance with the jurisprudence of the CJEU, whenever a taxable person exercises economic activities intended to realize exclusively taxable operations, it is not necessary, in order to fully deduct the tax, to establish, for each upstream operation, the existence of a direct and immediate relationship with the specific operation subject to tax[13].

What the legislator merely requires is that the goods and services be used or be susceptible of being used "for the purposes of the own taxable operations". It is not necessary for there to be a relationship with a specific taxable operation, it being sufficient that there be a relationship with the activity of the company.

As for the adjective "immediate", this denotes a great temporal proximity between the two operations. However, this does not mean that the tax on the upstream operation must become due before the downstream operation has been carried out: it is sufficient that the period of time between the two operations is not too long, a fact that reinforces the financial character of the deduction.

Thus, in a first phase, one should assess whether the upstream operation subject to VAT presents a direct and immediate relationship with one or several operations that confer the right to deduction, presupposing the reporting of its cost in the price of the operations.

If this is not the case, it is then important to analyze whether the expenses incurred for the acquisition of the goods or services upstream form part of the general expenses linked to the whole of the economic activity of the taxable person, presupposing the incorporation of its cost in the prices of the goods or services supplied by the taxable person in the context of its economic activities.

Finally, as a requirement for exercise of the right to deduction we also have the temporal requirement, in terms of which "The right to deduction arises at the moment when the deductible tax becomes due", remaining, however, the cumulative requirement of possession of the invoice, or of the receipt of payment of VAT which forms part of import declarations.

In turn, in accordance with the rules of no. 1 of article 19 of the VAT Code, it is stipulated that the right to deduction is conferred, namely, by the tax due or paid by the taxable person in acquisitions of goods and services made from other taxable persons and the tax paid for the acquisition of the services referred to in subparagraphs e), h), i), j) and l) of no. 1 of article 2 of the VAT Code.

In accordance with no. 1 of article 20 of the VAT Code, the transmissions of goods and service provisions subject to tax and not exempt therefrom confer, namely, the right to deduct VAT and the transmissions of goods and service provisions consisting of operations carried out abroad that would be taxable if carried out in Portugal.

It is recognized unanimously by the jurisprudence of the CJEU that the mechanism of the right to deduction is an essential element of the functioning of VAT as was designed in the VAT Directives, playing a fundamental role in guaranteeing the neutrality of the tax and the equality of fiscal treatment[14]. Thus, it is constant jurisprudence of the CJEU that, being the right to deduction a fundamental element of the VAT regime, it is only possible to limit this right in cases expressly provided for by the VAT Directive and, even then, with respect for the principles of proportionality and equality, and it is not possible to empty the common VAT system of its content.

As is emphasized in the Judgment BP Soupergaz, the so-called indirect subtractive method, of invoices, of tax credit or system of fractionated payments, is the essential mechanism of functioning of this type of tax. As is referred to in the conclusions of this Judgment, "In this respect, the right to deduction provided for in articles 17 et seq. of the Sixth Directive, which forms an integral part of the mechanism of the value-added tax, cannot, in principle, be limited and is exercised immediately in relation to the totality of the taxes that fell on the operations carried out upstream, has an impact on the level of the tax burden and should be applied similarly in all Member States, so that only derogations expressly provided for by the directive are allowed"[15].

And in the Judgment Commission/France, the CJEU adds that, "The characteristics of the value-added tax (…) make it possible to infer that the regime of deductions is intended to free the entrepreneur entirely from the burden of VAT, due or paid, in the context of all his economic activities. The common system of value-added tax thus guarantees perfect neutrality as to the fiscal burden of all economic activities, whatever the purposes or results of those activities, on the condition that the said activities are themselves subject to VAT"[16].

It should also be noted that, as is emphasized in the Judgment Metropol, "59. The provisions which provide for derogations to the principle of the right to deduction of VAT, which guarantees the neutrality of this tax, are of restrictive interpretation"[17].

The scope of the right to deduction in VAT is so great, that it is clear in the jurisprudence of the CJEU that this should even be granted with regard to the so-called preparatory activities, not requiring that the activity has already begun in order to be able to deduct the VAT, and it can be deducted with regard to this type of activities[18].

It should be noted in this regard that, in accordance with the understanding of the CJEU, a position which has, moreover, already been subscribed to by the Tax Administration[19], the right to deduction, once acquired, subsists even if the projected economic activity does not give rise to taxable operations or the taxable person, for reasons beyond its control, has not been able to use the goods or services that gave rise to the deduction in the context of taxable operations[20].

As the CJEU emphasizes, it is the acquisition of the good by the taxable person, acting in that capacity, that determines the application of the VAT system and, therefore, of the deduction mechanism[21]. The taxable person acts in that capacity when acting for the purposes of his economic activity, within the meaning of article 9, no. 1, second paragraph, of the VAT Directive[22]. Furthermore, as is concluded in the Case Intiem, the mechanism of VAT deduction regulated by the Sixth Directive "must be applied in such a way that its scope of application corresponds, as far as possible, to the scope of the professional activities of the taxable person"[23].

That is, as the CJEU notes, the principle of neutrality of VAT, as regards the fiscal burden of the company, requires that investment expenditures incurred for the needs and objectives of a company be considered economic activities conferring an immediate right to deduct VAT[24].

It is also important to note that, in accordance with the jurisprudence of the CJEU, the principle of neutrality of VAT requires that the deduction of tax paid upstream be granted if the substantial requirements have been met, even if the taxable persons have neglected certain formal requirements. In this context, in accordance with the CJEU, as long as the Tax Administration has the necessary data to determine that the taxable person, as the recipient of the operations, is liable to VAT, it cannot impose, with regard to its right to deduction, additional conditions that could result in the absolute impossibility of exercising that right[25].

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

2. On the concept of economic activity and its relationship with the right to deduction relating to the acquisition of shareholdings

2.1 Jurisprudence of the CJEU

The CJEU has been classifying the operations developed by a VAT taxable person into non-economic activities, which should remain outside the VAT Directive, conferring no right to deduction, and into economic activities. Only economic activities are encompassed in the scope of the Directive, distinguishing themselves into non-taxed, taxed and exempt activities, and into taxed and non-exempt activities (i.e., effectively taxed).

As the Advocate General Mengozzi emphasizes in the Case VNLTO[26], considering the principle of neutrality that informs the common VAT system, a person should only bear VAT if it has been incurred on the goods and services it used for private consumption and not for its professional activities subject to tax.

That is, it is not possible to deduct the VAT borne upstream if this concerns an activity of the taxable person that does not have the nature of economic activity within the meaning of the VAT Directive.

As we referred above regarding the scope of the "direct and immediate relationship" between the inputs containing VAT subject to deduction and the taxed operations of the taxable person, the CJEU has been adopting an increasingly broad interpretation, namely, for the cases that now interest us with regard to the management of shareholdings, and the establishment of a causal nexus between the deductible VAT and a particular operation, individualized and concretized, cannot be accepted[27].

As we have seen, according to the jurisprudence of the CJEU, "a right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a given upstream operation and one or several downstream operations with right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constitutive elements of the price of the goods it supplies or the services it provides. These costs do, in fact, have a direct and immediate nexus with the whole of the economic activity of the taxable person"[28]. However, it is imperative that there be a relationship with the economic activity of the taxable person, the need for its unequivocal demonstration subsisting.

As was noted in the Case Cibo[29], "1) The interference by a holding company in the management of the companies in which it has taken shareholdings constitutes an economic activity within the meaning of article 4, no. 2, of the Sixth Council Directive 77/388/EEC of 17 May 1977, on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax: uniform basis of assessment, insofar as it implies the conduct of transactions subject to the value-added tax under article 2 of that directive, such as the supply, by the holding company to its subsidiaries, of administrative, financial, commercial and technical services.

1. The expenses incurred by a holding company with the various services it acquired in the context of taking a shareholding in a subsidiary form part of its general expenses, and therefore have, in principle, a direct and immediate nexus with the whole of its economic activity. Therefore, if the holding company carries out both operations with a right to deduction and operations without a right to deduction, it follows from article 17, no. 5, first paragraph, of the Sixth Directive 77/388 that only the part of the value-added tax proportional to the amount relating to the first category of operations can be deducted." (cfr. §§ 1 to 3 of the conclusions)

As the CJEU emphasizes in the Case I/S Fini and Skatteministeriet[30], the concept of taxable person is always linked to that of economic activity, and it is precisely this economic activity that justifies the qualification of the taxable person with the right to deduct. Now, if the exercise, in an independent manner, of an economic activity is, in itself, a condition of subjective incidence of this tax, therefore of the possibility of conferring the right to deduction and if the right to deduction is, as we have seen, the guarantor of the neutrality of the tax, the delimitation of that concept should necessarily be as broad as possible.

As provided for in article 9, no. 1, 2nd paragraph, 2nd part, of the VAT Directive, in the definition of VAT taxable person "(…) In particular, the exploitation of a tangible or intangible asset with the aim of deriving revenues of a permanent character is considered economic activity (…)."

Now, it is at the level of the management of shareholdings that there has been much discussion regarding the determination of the scope of this concept, and the conclusions of the Case EDM[31] are especially relevant in this context.

As noted by the Advocate-General Philipe Léger in his conclusions in this Case[32], "(…) it is constant jurisprudence that the simple exercise of the right of ownership by its holder cannot, by itself, be considered an economic activity".

Already before in the Case Polystar[33], relating to a pure holding company, the CJEU had concluded that the mere acquisition and holding of shareholdings, without intervention in the management of other companies, should not be considered an economic activity, within the meaning of the Sixth Directive, not conferring on its author the capacity of taxable person.

In the conclusions of the Case EDM[34] the CJEU further states that the simple sale of shares and other negotiable securities, such as interests in investment funds, as well as the income inherent in these funds, do not constitute an "economic activity" within the meaning of the Sixth Directive, and therefore are not encompassed in the scope of its application.

In accordance with this judgment, the simple taking of a financial shareholding in another company does not constitute an exploitation of an asset with the aim of deriving revenues of a permanent character, insofar as the possible dividend, fruit of such shareholding, results from the simple ownership of the asset and not the counterpart of any economic activity[35]. As regards the interest received by a holding company with respect to loans granted to its subsidiary companies, these cannot, in accordance with the conclusions of that Judgment, be excluded from the scope of application of VAT.

In the same logic, the transfer of the said shareholdings does not equally fulfill the concept of economic activity, as is referred to in the Case Satam/Sofitam[36]. Not being the counterpart of an economic activity, within the meaning of the Sixth Directive, the receipt of dividends does not enter into the field of application of VAT, nor can it be qualified as a counterpart to any services provided by the SGPS to its subsidiary, which are consumed in an intervention in its management (e.g. technical support services for management).

It is of particular interest to emphasize that in the Case Floridienne and Berginvest[37], which has underlying a holding company, the CJEU states that the intervention in the management of the subsidiaries should be considered as economic activity, insofar as it implies transactions subject to VAT, such as the supply of administrative, accounting and computer services.

That is, it is of particular importance to underline that the CJEU, with regard to the acquisition of financial shareholdings, has already decided that the situation is different, falling within the exercise of an economic activity, in the case of the acquisition of a financial shareholding in a company being accompanied by "(…) direct or indirect interference in the management of the companies (…)"[38] in which the shareholding has occurred, without prejudice to the rights that the holder of the shareholding has in its capacity as shareholder or member[39], insofar as such interference implies the conduct of transactions subject to VAT in terms of the VAT Directive, such as the supply of administrative, accounting and computer services.

The CJEU distinguishes, in this measure, between holding companies that interfere, directly or indirectly, in the management of the subsidiaries, from those that do not[40].

As to the treatment to be accorded to the management (acquisition, holding and disposal) of shareholdings beyond the case of holding companies, in the context of shareholdings of a parent company in subsidiaries or associated companies, it follows from the jurisprudence of the CJEU that the operations relating to shares or shareholdings in companies are encompassed in the scope of application of VAT when carried out in the context of a commercial activity of negotiation of securities or when they constitute the direct, permanent and necessary extension of the taxable activity[41].

Being the acquisition of shareholdings a passive operation, in order to assess the deductibility of VAT relating to the expenses associated, we will necessarily have to analyze the extent to which that shareholding is held and what are the downstream operations that resulted from those expenses – will such operations be economic activities subject to and not exempt from VAT or not?

As refers Rui Bastos[42], "Thus, the acquisition of shareholdings from a pure investment perspective, with a view to obtaining revenues such as dividends, remits its holding to outside the concept of economic activity, and acquisition in a context of commercialization of securities would remit to the exercise of an activity subject, although exempt.

The same should not occur in a context of acquisition of a shareholding that represents the natural and necessary extension of the commercial or industrial activity of the acquiring company, in a context of business restructuring or in a process of expansion, opting for the acquisition of a subsidiary, rather than the constitution of a permanent establishment, the same not occurring in a context of intervention in the management of the subsidiaries and, concomitantly, in activities taxed by them."

In the Case SKF, the CJEU, invoking the principle of equality of treatment and fiscal neutrality, concludes regarding the economic nature of shareholdings accompanied by interference by the parent company in the management of the subsidiaries, an extension that should be made to situations of transfer of shareholdings that put an end to that interference.

In the context of the transfer of shares, the CJEU considers in the Case SKF that the right to deduct the VAT paid upstream on service provisions intended to effect a transfer of shares[43] is conferred, by virtue of article 168 of the VAT Directive, if there is a direct and immediate relationship between the expenses related to the upstream service provisions and the whole of the economic activities (taxed) of the taxable person, the so-called "general expenses".

In that proceeding, the transfer of shares in question[44], carried out with a view to the restructuring of a group of companies by the parent company, was considered an operation of obtaining revenues of a permanent character of activities that exceed the framework of the simple sale of shares. This operation presented a direct nexus with the organization of the industrial activity exercised by the group and thus constitutes the direct, permanent and necessary extension of the taxable activity of the taxable person, and therefore that operation of sale of shares would be encompassed in the scope of application of VAT, susceptible of conferring the right to deduct VAT from the respective inputs.

The CJEU considers that these service provisions have a direct and immediate relationship with the whole of the economic activity of the taxable person, permitting the right to deduct the totality of the VAT of the said service provisions.

The question was debated whether the inputs associated with the disposal of shareholdings could be susceptible of permitting the deduction of VAT, via their qualification as general expenses of the activity, in the case where such disposal is not subject to VAT, a situation more frequent, as we have seen, in holding companies, or then, is subject but exempt, as happens with the parent company that manages a group of companies.

In the case of non-subjection, the Advocate-General, relying on the conclusions of the Case Krettztechnik, no. 36, considers this type of expenses susceptible of being qualified as general expenses, thus possessing a direct and immediate relationship with the whole of the economic activity of the taxable person, enabling their deduction.

On the contrary, in the case where the disposal of shareholdings qualifies as exempt from VAT, as happened in the Case SKF, the Advocate-General, relying on the conclusions of the Case BLP Group, considered that the VAT paid upstream of the service provisions acquired possess a direct and immediate relationship with the exempt operation, thus interrupting the VAT chain.

Now the CJEU, in the Case SKF, places the emphasis on the fact of knowing whether the company which is a VAT taxable person is or is not involved in the management of the companies in which a shareholding was taken, companies which develop taxed activities.

In this sense, the Tribunal considered that to refuse the right to deduct VAT paid upstream for consultancy expenses linked to a transfer of shares exempt by reason of the involvement in the management of the company whose shares are transferred and to admit this right to deduct for such expenses linked to a transfer which is situated outside the scope of application of VAT because they constitute general expenses of the taxable person would lead to a different fiscal treatment of objectively similar operations, in violation of the principle of fiscal neutrality[45].

As regards the deduction of VAT, the CJEU already concluded in the Case Kretztechnik[46] that in an issuance of shares (despite being, by itself, an operation which is not encompassed in the scope of application of VAT, given not qualifying as a transfer of goods or service provision) carried out in a context of capital strengthening for the benefit of the general economic activity of a company, it is considered that the costs of the service provisions acquired[47] by a company form part of its general expenses and are, as such, constitutive elements of the price of its products.

As the CJEU decided in this Case, "The right to deduct the VAT that fell on the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition have formed part of the constitutive elements of the price of the taxed operations downstream with the right to deduction (…).

However, a right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate relationship between a given upstream operation and one or several downstream operations with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constitutive elements of the price of the goods it supplies or the services it provides. These costs have, in fact, a direct and immediate relationship with the whole of the economic activity of the taxable person." (cfr. §§ 57 and 58)

"Finally, it is important to recall that the right to deduction is conferred with regard to the VAT paid upstream for service provisions carried out in the context of financial operations if the capital acquired with these latter operations has been used for the economic activities of the interested party. On the other hand, the expenses related to the upstream service provisions have a direct and immediate link with the economic activities of the taxable person in cases where they are exclusively attributable to economic activities carried out downstream and, therefore, are part only of the constitutive elements of the price of the operations encompassed by those activities (cf. judgment Securenta, already referred to, nos. 28 and 29).

It follows from the above that an answer should be given to the third question that the right to deduct the VAT paid upstream for service provisions intended to effect a transfer of shares is conferred, by virtue of article 17, nos. 1 and 2, of the Sixth Directive, as amended by its article 28 F, no. 1, and article 168 of the Directive 2006/112, if there is a direct and immediate relationship between the expenses related to the upstream service provisions and the whole of the economic activities of the taxable person." (cfr. §§ 71 to 73)

Also as regards the acquisition and holding of shares, the expenses incurred will be deductible as general expenses, insofar as they have "a direct and immediate nexus with the whole of the economic activity [of the holding company]", as could be the services of support for the management of its subsidiaries[48].

As we have seen, in the context of the acquisition and holding of shareholdings, the existence, by the participant, of a direct or indirect interference in the management of the participant conditions the framing within the scope of the economic activity of the holding companies, giving rise to the right to deduct the VAT borne with the expenses related upstream.

In this measure, being the acquisition an operation, by nature, passive, the deductibility of the VAT of the expenses associated, in whole or in part, thereto, would be, in strictness, conditioned to the manner in which the ownership thereof will be exercised in the future, that is, whether or not there will be

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