Process: 153/2016-T

Date: November 15, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 153/2016-T addresses a crucial VAT classification dispute concerning dental prosthesis components in Portugal. The claimant, a dental products importer and distributor, challenged VAT assessment acts totaling €94,496.58 for 2012, arising from tax inspections covering 2011-2013. The company had been applying the reduced 6% VAT rate to sales of dental implants, abutments, and crowns while paying the normal rate on imports, creating refund requests. The Portuguese Tax Authority initially denied the reduced rate, arguing that individual components—implants, abutments, and crowns—were not prostheses themselves and could not fulfill prosthetic functions independently, thus excluding them from item 2.6 of List I of the VAT Code. However, during the arbitration proceedings, on 14 October 2016, the Director-General of the Tax and Customs Authority issued a revocation order, fundamentally reversing the administrative position. The new interpretation recognized that dental implant components collectively constitute prostheses eligible for the 6% reduced rate under item 2.6 of List I. Following this revocation, the Tax Authority requested dismissal of the arbitration as futile. Critically, the claimant requested continuation of proceedings specifically to secure recognition of the right to compensatory interest (juros indemnizatórios) on the unlawfully collected amounts. This case establishes important precedents: the Tax Authority's power to revoke assessment acts during pending arbitration when reconsidering legal interpretations, the substantive reclassification of dental implant systems as reduced-rate prostheses, and the taxpayer's preserved right to claim indemnity interest even after administrative revocation, compensating for the financial prejudice suffered during the period of wrongful tax collection.

Full Decision

ARBITRAL DECISION

I. REPORT

1. On 14.03.2016, A… Unipessoal, Lda., with single tax identification number … and registered at the Commercial Registration Office of Lisbon, with headquarters at Rua …, no. …, ..., …-…, …, …, Lisbon, requested the constitution of an Arbitral Tribunal pursuant to the terms and provisions of paragraph a) of section 1 of article 2 and paragraph a) of section 1 of article 10, both of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as RJAT);

2. In the said request for arbitral decision, the Claimant requested the declaration of illegality and annulment of the Value Added Tax (VAT) assessment acts nos. 2015…, 2015…, 2015…, 2015… and of Compensatory Interest nos. 2015…, all made by reference to the year 2012, from which results a total amount payable of €94,496.58 with the necessary legal consequences, namely, the refund to the Claimant of the amounts unduly offset and paid, plus the corresponding indemnity interest calculated in accordance with the law (documents nos. 1 to 5, attached to the request for arbitral decision);

3. 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 24.03.2016.

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

5. On 10.05.2016 the parties were duly notified of this appointment, and neither manifested willingness to refuse the appointment of arbitrators, in accordance with the combined terms of article 11, section 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

6. Thus, in accordance with the provision of paragraph c) of section 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 25.05.2016.

7. On 22.06.2016, the Respondent, duly notified for this purpose, submitted, pursuant to article 17 of the RJAT, its Reply.

8. On 05.07.2016, the Claimant submitted, pursuant to article 18 of the RJAT, its written submissions.

9. On 14.07.2016, the Respondent submitted its written submissions, where it reiterated the arguments presented in its reply.

10. By order dated 14.10.2016 issued by the Director-General of the Tax and Customs Authority, the revocation of the challenged acts was determined following the change in the understanding prevailing until that date "now considering that the components of bank prostheses – implant, abutment and crown – benefit from the application of the reduced rate of 6%, since they fall within the normative provision of item 2.6 of List I attached to the VAT Code".

11. Following the revocation of the challenged acts, the Respondent Entity requested the dismissal of the case on grounds of subsequent futility of the dispute.

12. Notified of the revocation of the acts, the Claimant requested the continuation of the proceedings for recognition of the right to indemnity interest.

II. PRELIMINARY RULING

13. The Tribunal is materially competent and is regularly constituted, pursuant to articles 2, section 1, paragraph a), 5 and 6, all of the RJAT.

14. The parties have legal personality and capacity, are legitimate and are represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

15. There are no nullities and preliminary matters affecting the entire proceedings, therefore it is now necessary to decide on the claim.

III. FACTUAL MATTER

a. Proven Facts

Based on the elements contained in the file and the administrative proceedings joined to the case, the following facts are considered proven:

i. The Claimant is a company whose corporate purpose is the trade, import, export and representation of products for application in the medical-dental, medical-orthopedic, surgical-dental, prosthetic-dental and laboratory areas, implants, precision instruments and tools, as well as training in the said areas (cf. document 12 attached to the arbitral request).

ii. The materials transacted are, predominantly, manufactured and imported from abroad (Brazil) to Portugal, where they are sold (cf. document 12 attached to the arbitral request).

iii. In the importation of products, the Claimant bears the application of the normal rate of VAT and in the sales it makes of these goods, the Claimant charges VAT at the reduced rate.

iv. Following the refund request made by the Claimant for the year 2013, and under Internal Orders OI2014…, OI2014… and OI2014…, all with Orders of 29.09.2014, the Claimant was subject to a tax inspection of partial scope, covering VAT for the years 2011, 2012 and 2013, which took place between 23.10.2014 and 19.11.2014 (cf. document 12 attached to the arbitral request).

v. The tax inspection was determined with the objective of "verifying whether the Taxpayer (TP) trades in goods that consist of parts, pieces or accessories of dental prostheses and the classification, made by it, in the transmissions it makes of such goods, that is, which VAT rate was applied" (cf. document 12 attached to the arbitral request).

vi. The Claimant was notified, through Office no. …, of 28.11.2014, of the Draft Tax Inspection Report and to, if it wished, exercise its right to prior hearing, which the Claimant did in a timely manner (cf. documents 10 and 11 attached to the arbitral request).

vii. The Final Tax Inspection Report (hereinafter, "Report") was notified to the Claimant through Office no. …, of 13.01.2015 (cf. document 12 attached to the arbitral request).

viii. From this inspection resulted corrections, in the context of VAT, of a purely arithmetic nature to the taxable matter, with reference to the years 2011, 2012 and 2013, in the amounts of €22,238.41, €93,115.26 and €79,777.43, respectively (cf. document 12 attached to the arbitral request).

ix. In the Tax Inspection Report, it is stated, among other things, that:

"The TP applies the reduced rate to the majority of materials traded, however, that is not the understanding of the tax administration expressed in binding information, as well as the most recent information no. … of 04/08/2014 clarifying the VAT rate applicable to the transmissions of dental implants and other pieces of connection or fixation of the dental prosthesis, requested from the Lisbon Finance Directorate to the VAT Department on 06/06/2014 and which is then partially reproduced below, being found in full in annex to this report (ANNEX IV).

On the matter in question, it should be said that the doctrine repeatedly disseminated by this Department has concluded by the non-application of the reduced rate of tax to implants and other connection pieces that allow the fixation of a dental prosthesis (called fixed implant prosthesis).

(...)

As a result, it is understood that goods that consist of parts, pieces and accessories of those prostheses are not covered by item 2.6, given that, in addition to not being prostheses, they are not apt to fulfill, considered individually, the function of replacing a part of the body or its function.

(...)

Making reference to what was alleged in the order, this Department added, in Information no. …, of September 1996, process I221 96003, provided to a medical equipment company, and in the face of a catalog of products traded by the applicant in that process (implant material and material for application of the same, namely cylinders, screws, abutments, crowns, bridges, etc.) that, 'in the assembly of the components contained in the said catalog, various combinations of the said material can be obtained depending on each case and according to what the patient needs, which makes it difficult to differentiate what are components and what are already complete implants', and that it has been 'the guidance of this Service that only complete devices can benefit from the reduced rate of 5% in their transmissions'.

(…)

And it concluded: 'Thus, although it is difficult to distinguish between components and complete prostheses (implants), it appears that when transacted complete (and we emphasize the information was given by reference to a catalog presented by the company in question, which included the prostheses themselves and the other materials for their fixation (such as implants and abutments) so as to constitute a unit of implant itself + connecting pieces + 'tooth', constituting a sales unit for those falling within item 2.5 of List I attached to the VAT Code, they are subject to VAT at the reduced rate. The transmissions of various separate components, parts and pieces, are subject to VAT at the normal rate'.

(...)

Item 2.6 applies, therefore, to the devices and prostheses in themselves, final product. In the case of implant prostheses, it applies to the artificial tooth (prosthesis).

The titanium implant and the abutment are only components, each performing the function for which they were designed, of support and fixation of the prosthesis, but which, in themselves, objectively considered, are not apt to perform or replace the function of the dental organ (masticatory function, verbalization and aesthetics).

It must be concluded that the transmission of the said pieces (of connection or implantation of the prosthesis) are taxed at the normal rate, by lack of classification in any of the lists attached to the VAT Code, namely in item 2.6 of List I".

x. The Claimant was notified of the VAT assessment acts nos. 2015…, 2015…, 2015…, 2015… and of the Compensatory Interest assessment act no. 2015…, all with reference to the year 2012, from which results a total amount payable of €94,496.58 (cf. documents nos. 1 to 5, attached to the Request for arbitral decision).

xi. Subsequently, and for collection of the amounts charged as tax and compensatory interest, of the periods subject to these proceedings and equally of other periods, Fiscal Execution Processes nos. …2015…, …2015…, …2015…, …2015…, …2015…, …2015…, …2015…, …2015…, …2015… and …2015… were instituted (cf. documents nos. 13 to 22, attached to the request for arbitral decision).

xii. Following the citation for the fiscal execution processes instituted for coercive collection of the amounts owed in the present proceedings, the Claimant promoted payment of these same amounts on 18 June 2015 (cf. document 29, attached to the request for arbitral decision).

xiii. As per entry record dated 26.05.2015, the Claimant presented an administrative claim against the said VAT assessment acts and compensatory interest (cf. document no. 7, attached to the request for arbitral decision).

xiv. The Tax Authority rejected the administrative claim presented, as notified through office no. …, of 17.12.2015 (cf. document no. 6, attached to the request for arbitral decision).

b. Unproven Facts

There are no facts relevant to the decision of the case that have not been proven.

c. Justification of the Factual Matter

The proven facts are based on the documents submitted by the parties to the proceedings, including the administrative proceedings, and which are not disputed.

IV. SUBJECT OF THE ARBITRAL DECISION

16. Given the revocation of the challenged assessment acts, this tribunal must rule on the request for dismissal of the case on grounds of subsequent futility of the dispute presented by the Respondent Entity and the recognition of the right to indemnity interest presented by the Claimant.

V. LAW

17. Regarding the recognition of the right to indemnity interest, it is necessary to decide whether, having determined the revocation of the acts during the pendency of the arbitral request, the right to payment of interest on the amount paid can still be recognized in the arbitral proceedings.

18. Indemnity interest corresponds to the realization of a right to indemnification that has its constitutional basis in article 22 of the Constitution of the Portuguese Republic. This provision establishes that the State and other public entities are civilly liable, jointly and severally with the holders of their bodies, officials or agents, for actions or omissions carried out in the exercise of their functions and as a result of that exercise, from which results the violation of rights, freedoms and guarantees or damage to others.

19. The obligation to pay indemnity interest has its basis in the institute of extracontractual civil liability of the State, constituting the counterpart of compensatory interest in favor of the Tax Administration. Thus, the nature of indemnity interest is substantially identical to that of compensatory interest, being, like these, an indemnification assigned on the basis of extracontractual civil liability. Indemnity interest is owed in favor of the taxpayer, intended to compensate it for the damage caused by an unduly paid tax obligation (cf. Decision of the Central Administrative Court of the South, given in Process no. 08862/15, on 10-09-2015 in www.dgsi.pt).

20. It is understood that, given the revocation of the acts during the pendency of the arbitral request, the right to payment of interest on the amount paid can still be recognized here, provided that the respective legal requirements are met.

21. Indeed, "(…) to consider in such a situation that the official annulment was not constitutive of the right to the indemnity interest requested was to place, as correctly noted by the respondent in its counter-argument, arbitrarily, in the hands of the Tax Administration the constitution of that same right whenever a service error occurred, which would constitute manifest abuse that the law cannot tolerate or consent to", therefore having been annulled the assessments by the Tax and Customs Authority "(…) during the pendency of the judicial challenge, instituted against such assessments and where, in addition to requesting the annulment of these tax acts, there was also a request for the condemnation of the TA in indemnity interest, this fact is in itself demonstrative of error imputable to the services and of payment of interest under article 43 of the LGT" (cf. Decision of the Supreme Administrative Court, given in Process no. 0574/14, of 07-01-2016, in www.dgsi.pt).

22. And, in the same sense, the arbitral decision given in Process no. 360/2014-T according to which "The contrary would be to grant the TA the possibility of avoiding payment of indemnity interest in cases where an error occurs that is imputable to it, it being sufficient for this to merely revoke the act within the period of its challenge.".

23. It is therefore necessary to determine whether in the present case the legal requirements are met for the right to indemnity interest to be recognized.

24. Now, article 43, section 1 of the General Tax Law (LGT) establishes that indemnity interest is due when it is determined, in an administrative claim or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than that legally due.

25. And in accordance with section 5 of article 24 of the Legal Regime of Tax Arbitration, payment of interest, regardless of its nature, is due in the terms provided for in the General Tax Law and in the Code of Tax Procedure and Process (CPPT).

26. For the recognition of the right to indemnity interest to take place, it is necessary that in the proceedings it is determined that in the assessment "there was error imputable to the services", understood as the "error concerning the factual or legal premises imputable to the Tax Administration".

27. In the present case, this requirement must be considered met by virtue of the revocation of the challenged acts having been determined by the change in the understanding of the Respondent Entity on the matter under consideration "now considering that the components of bank prostheses – implant, abutment and crown – benefit from the application of the reduced rate of 6%, since they fall within the normative provision of item 2.6 of List I attached to the VAT Code".

28. Therefore, the Tax Authority is condemned to the refund of the amounts paid and to the payment of indemnity interest accruing on the said amounts in accordance with article 43 of the General Tax Law.

29. Finally, by virtue of the revocation of the challenged assessment acts, the dismissal of the case is determined on grounds of subsequent futility of the dispute with regard to the request for annulment of these same acts on the basis of their illegality in the terms and for the purposes of article 277, paragraph e) of the Civil Procedure Code.

VI. DECISION

Therefore, the dismissal of the case is determined on grounds of subsequent futility of the dispute with regard to the request for annulment of the challenged acts, by virtue of their revocation in the terms and for the purposes of article 277, paragraph e) of the CPC and, likewise, the Tax Authority is condemned to the refund of the amounts paid and to the payment of indemnity interest accruing on the said amounts in accordance with article 43 of the LGT.

The value of the case is set at €94,496.58 (ninety-four thousand four hundred and ninety-six euros and fifty-eight cents), in accordance with article 32 of the Code of Procedure in the Administrative Courts and article 97-A of the CPPT, applicable by virtue of the provision in article 29, section 1, paragraphs a) and b), of the RJAT, and article 3, section 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Costs to the charge of the Respondent Entity in the amount of €2,754.00 in accordance with Table I of the RCPAT, and in compliance with the provision in articles 12, section 2, and 22, section 4, both of the RJAT, and the provision in article 4, section 4, of the said Regulation.

Notify.

Lisbon, 15 November 2016

The arbitrators

(José Baeta de Queiroz)

(Luís Menezes Leitão)

(Ana Moutinho Nascimento)

[Text prepared by computer, in accordance with article 131, section 5 of the Code of Civil Procedure (CPC), applicable by reference from article 29, section 1, paragraph e) of the RJAT, with blank verses and reviewed by the signing arbitrators].

Frequently Asked Questions

Automatically Created

What VAT rate applies to dental prosthesis components (implants, abutments, and crowns) in Portugal?
Following CAAD Process 153/2016-T, dental prosthesis components including implants, abutments, and crowns benefit from the reduced VAT rate of 6% in Portugal. The Tax and Customs Authority reversed its previous position, now recognizing that these components collectively fall within item 2.6 of List I annexed to the Portuguese VAT Code (CIVA), which covers prostheses. Previously, the tax administration had maintained that individual components did not qualify as prostheses and could not independently fulfill prosthetic functions, requiring application of the normal rate. The 2016 administrative revocation represents a significant interpretative shift favorable to dental product suppliers.
Can the Portuguese Tax Authority revoke its own VAT assessment acts during arbitration proceedings?
Yes, the Portuguese Tax Authority possesses the power to revoke its own VAT assessment acts during ongoing arbitration proceedings, as demonstrated in Process 153/2016-T. On 14 October 2016, while arbitration was pending before CAAD, the Director-General of the Tax and Customs Authority issued an order revoking the challenged assessment acts following a change in administrative interpretation regarding VAT rates applicable to dental prosthesis components. After revocation, the Tax Authority requested dismissal of the arbitration on grounds of supervening futility (inutilidade superveniente da lide). This administrative self-correction mechanism allows the Authority to rectify erroneous positions without awaiting final arbitral decision.
What are the legal grounds for claiming compensatory interest on unlawfully collected VAT in Portugal?
Portuguese taxpayers can claim compensatory interest (juros indemnizatórios) on unlawfully collected VAT under the principle that revocation or annulment of tax acts creates a right to restitution with interest. In Process 153/2016-T, despite the Tax Authority's voluntary revocation of the challenged acts, the claimant specifically requested continuation of arbitration proceedings to secure formal recognition of entitlement to indemnity interest. The legal basis stems from the constitutional and legal principle that taxpayers must be compensated for financial prejudice suffered through wrongful deprivation of funds, calculated according to statutory interest rates. Compensatory interest compensates for the time-value loss between wrongful collection and restitution.
How does CAAD arbitral tribunal process 153/2016-T affect the VAT classification of dental prosthetics?
CAAD Process 153/2016-T fundamentally altered the VAT classification framework for dental prosthetics in Portugal. The case prompted the Tax and Customs Authority to abandon its longstanding restrictive interpretation—which excluded individual implant components from reduced-rate treatment—and adopt a comprehensive approach recognizing that implants, abutments, and crowns together constitute prostheses under item 2.6 of List I of the VAT Code. This shift affects all dental product suppliers, dental laboratories, and dental clinics handling these materials. The precedent clarifies that prosthetic systems should be evaluated functionally and collectively rather than component-by-component, extending 6% reduced rate eligibility to the entire implant assembly system rather than only the final visible crown.
What happens when the Tax Authority changes its interpretation of reduced VAT rate eligibility during a pending arbitration case?
When the Tax Authority changes its interpretation of reduced VAT rate eligibility during pending arbitration, it may revoke the contested assessment acts through administrative order, as occurred in Process 153/2016-T on 14 October 2016. Following revocation, the Tax Authority typically requests dismissal of arbitration proceedings on grounds of supervening futility since the original acts no longer exist. However, taxpayers retain the right to request continuation of proceedings for specific purposes, particularly to obtain formal recognition of entitlement to compensatory interest (juros indemnizatórios) on amounts wrongfully collected, offset, or paid. The arbitral tribunal must then decide whether to dismiss the case or continue solely to adjudicate the interest claim, balancing procedural economy against the taxpayer's right to full restitution including time-value compensation.