VAT Assessment Annulment: Simulated Operations and Lack of Substantiation in Commercial Establishment Transfer (CAAD 154/2017-T)

ARBITRAL DECISION[1]

The Arbitrator, Dr. Sílvia Oliveira, appointed by the Deontological Council of the Administrative Arbitration Center (CAAD) to form the Singular Arbitral Tribunal, constituted on 17 May 2017, with respect to the case identified above, decided as follows:

1. STATEMENT OF FACTS

1.1. A…, S.A., taxpayer no.…, with registered office at …, no.…, in…, … (hereinafter referred to as "Claimant"), submitted a request for arbitral pronouncement and constitution of a Singular Arbitral Tribunal on 3 March 2017, pursuant to the provisions of Article 4 and paragraph 2 of Article 10 of Decree-Law No. 10/2011, of 20 January [Legal Framework for Arbitration in Tax Matters (RJAT)], in which the Tax and Customs Authority (hereinafter referred to as "Respondent") is the respondent party.

1.2. The Claimant, having been notified "(…) of the Decision of the Honorable Director of Finance of Portalegre, of 13 December 2016, which dismissed the Administrative Review filed against the VAT assessment act (Value Added Tax) no. 2016…, relating to period 1303T, corresponding assessment of compensatory interest no. 2016…, VAT assessment act no. 2016…, relating to period 1306T, VAT assessment act no. 2016…, relating to period 1309T, corresponding assessment of compensatory interest no. 2016… and, as well, against the Correction Document no.…, relating to period 1312T (…)", hereby submits a request for arbitral pronouncement regarding those tax assessment acts and compensatory interest and "(…) against the Decision of the Honorable Director of Finance of Portalegre, of 13 December 2016 which dismissed the Administrative Review that preceded (…)" (emphasis added).

1.3. The request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD on 6 March 2017 and notified to the Respondent on the same date.

1.4. The Claimant did not proceed to appoint an arbitrator and therefore, pursuant to Article 6, paragraph 2, subsection a) of the RJAT, the undersigned was appointed as arbitrator by the President of the Deontological Council of CAAD on 27 April 2017, with the appointment being accepted within the timeframe and terms legally provided.

1.5. On the same date the parties were duly notified of this appointment and did not manifest the intent to refuse the appointment of arbitrators, in accordance with Article 11, paragraph 1, subsections a) and b) of the RJAT, in conjunction with Articles 6 and 7 of the Deontological Code.

1.6. Thus, in accordance with the provision in subsection c), paragraph 1, of Article 11 of the RJAT, the Arbitral Tribunal was constituted on 17 May 2017, and an arbitral order was issued on 18 May 2017, directing the Respondent to, "(…) within 30 days, respond, submit a copy of the administrative file and request, if so desired, the production of additional evidence".

1.7. On 22 June 2017, the Respondent submitted its Response, defending itself through denial and requesting the dispensing of witness testimony production as well as evidence through party statement "(…) to the extent that, underlying the (…) case files, only a matter of law is under consideration, expressed in the recognition of the legality of the correction based on the facts, ascertained in the course of tax inspection proceedings and not disputed", and further concluding that "(…) the present request for arbitral pronouncement should be adjudged without merit, with the order of law remaining as it is regarding the tax assessment acts impugned and the respondent entity being absolved from the request, all with the due and legal consequences".

1.8. On the same date, the Respondent attached the administrative file to the arbitral proceedings.

1.9. By order of this Arbitral Tribunal, dated 23 June 2017, "this Tribunal decided, in accordance with the procedural principles set forth in Article 16 RJAT, of the autonomy of the arbitral tribunal in the conduct of proceedings and in the determination of the rules to be observed [subsection c)] and of the free conduct of proceedings provided in Article 19 and 29, paragraph 2 of the RJAT":

• "Admit witness testimony and evidence through party statement, requested by the Claimant in the arbitral request";

• "Schedule a meeting for 12 July 2017, at 14:00, to be held at CAAD facilities in Lisbon, for purposes of examining witnesses presented by the Claimant, including party statement, regarding the facts indicated (…) in the arbitral request";

• "Decide at the aforementioned meeting on the possibility of dispensing with the presentation of written submissions".

On 3 July 2017 the Respondent submitted a motion requesting, "(…) due to the total unavailability of the schedules of both legal representatives appointed by the Respondent entity in the present arbitral proceedings (…)", "(…) the rescheduling of the meeting (…)", communicating "(…) the availability of both legal representatives appointed to appear at the witness examination proceedings on the 13th and 14th of the present month".

The Claimant submitted a motion on 4 July 2017 to "(…) indicate the matters of fact on which the testimony of the witnesses presented should be focused (…)".

By arbitral order of 4 July 2017 the date of the meeting, previously scheduled for 12 July 2017, was rescheduled to 13 July 2017, at 14:00, at CAAD facilities in Lisbon.

On 10 July 2017, the Claimant submitted a motion to manifest the total impossibility of its representative to be present at the meeting scheduled for 13 July 2017, proposing the dates of 5 or 6 September or other dates of convenience for all parties involved.

On the same date, by arbitral order, the Respondent was notified to, within 5 days, manifest its possibility of attendance on one of the dates suggested by the Claimant, and both Parties were notified that the date of 13 July 2017 for the holding of the aforementioned meeting was rendered void.

The Respondent submitted a motion on 14 July 2017, to manifest its possibility of attendance at CAAD, for purposes of holding the aforementioned meeting, on both days proposed by the Claimant.

Thus, by arbitral order dated 15 July 2017, the date of the aforementioned meeting was rescheduled to 6 September 2017, at 14:30, at CAAD facilities in Lisbon.

On 6 September 2017, the scheduled arbitral meeting was held at CAAD, in accordance with Article 18 of the RJAT, for purposes of examining the witnesses presented by the Claimant, as well as for the production of evidence through party statement, with audio recording of the statements and of which the corresponding minutes were drawn up, which form an integral part of the present case file.

In the context of the aforementioned meeting, the Tribunal notified the Claimant and the Respondent to, in that order and successively, submit written submissions within 15 days, with the timeframe for the Respondent commencing from the date of notification of the filing of the Claimant's submissions or the expiration of the timeframe allowed therefor (in case the former does not submit submissions).

Furthermore, in compliance with Article 18, paragraph 2 of the RJAT, the Tribunal designated 31 October 2017 as the date for issuing the arbitral decision.

Lastly, the Tribunal warned the Claimant that, until the date of issuance of the arbitral decision, it should proceed with the payment of the subsequent arbitration fee, in accordance with paragraph 3 of Article 4 of the Regulations of Costs in Tax Arbitration Proceedings and communicate such payment to CAAD (which it did on 10 October 2017).

On 21 September 2017, the Claimant submitted its written submissions, to reiterate the arguments presented in the arbitral request, based on the witness evidence produced at the 6 September 2017 meeting and concluding that "(…) the (…) request for arbitral pronouncement should be adjudged (…) substantiated with the necessary legal consequences (…)".

On 10 October 2017, the Respondent submitted its written submissions, to reiterate that "the legal conclusions contained in the Response submitted by the Respondent remain in totum" and that "the Claimant failed, with the evidence produced, to prove that the contract had been concluded with B…, or that the service had been provided by the latter, nor did it succeed in proving either that it had proceeded with the leasing of bare walls (…)", concluding that "(…) in light of the evidence produced (…) the request for arbitral pronouncement cannot proceed", holding that "(…) the arbitral request should be adjudged without merit because unproven, and consequently the Respondent absolved, pursuant to (…) the terms petitioned, all with the due and legal consequences".

2. GROUNDS FOR THE CLAIM

The Claimant supports its request, in summary, as follows:

Lack of Statement of Reasons of the VAT Assessment Acts

2.1. It begins by stating that "(…) it was notified of the VAT assessment act no. 2016…, relating to period 1303T, of the corresponding assessment of compensatory interest no. 2016…, of the VAT assessment act no. 2016…, relating to period 1306T, of the VAT assessment act no. 2016…, relating to period 1309T, of the corresponding assessment of compensatory interest no. 2016… and, as well, of the Correction Document no.…, relating to period 1312T, which constitute the object of the present Request for Arbitral Pronouncement (…)".

2.2. However, according to the Claimant, "from the analysis made of the said tax acts does not result sufficient, clear and congruent statement of reasons, either of fact or of law" since "in the tax acts notified there are not explicitly stated the grounds, either of fact or of law, that determined its issuance (…)", "(…) being only indicated a set of values (…) incomprehensible to a normal recipient (…)", "(…) without identifying (…) the concrete legal provisions on which that (…) assessment is based".

2.3. Indeed, the Claimant alleges that "(…) it is incumbent upon the Tax Administration the legal duty to make express reference to the applicable legal provisions, and that statement of reasons which does not contain this reference is always insufficient, and has the consequence of the voidability of the act", and therefore considers "(…) it is proper to conclude that the tax assessment acts now contested were carried out in violation of the applicable legal norms and principles (…), and should be annulled accordingly (…)".

The Facts

2.4. In this regard, the Claimant clarifies that "it is a joint stock company whose corporate purpose consists of the forestry exploitation of the Estate …", and that "one of the activities developed (…) consists in the valuation of a cork oak forest with a view to the extraction of cork from cork oaks for subsequent sale".

2.5. The Claimant proceeds by stating that "in 2013, faced with the need to carry out the work of cork extraction on the estate (…), it contacted a person in whom it placed trust (…)", "(…) for the purpose of cork extraction (…), having negotiated "(…) the respective terms (…)" "(…) for purposes of formalizing the corresponding contract (…)".

2.6. Thus, "on 1 July 2013, the Claimant concluded a cork stripping contract with the company B…, Lda. (…) which, at that time, was represented by Mr. C…, who stated that it was his company, having (…) created the conviction in the representatives of the Claimant that it would be that company by which the service would be invoiced".

2.7. It continues by stating that "pursuant to the said contract, commencing on 1 July 2013 the Claimant committed itself to pay the sum of € 3.45 per arroba, with payment being made according to the weighings and discounts made by the cork purchaser (…)", and the contracted service was "(…) effectively provided by Mr. C… and by a team under his coordination".

2.8. Now, according to the Claimant, "with the service contracted having been provided, the Claimant was confronted (…) with the corresponding invoice (…), in the amount of € 56,891.00, plus € 13,085.00 in VAT (…), issued by the company B…, Lda. (…), in accordance with the contract and in accordance with the work actually performed", and the Claimant proceeded "(…) to the payment of the said amount in two installments, through two checks, both issued to the order of the company (…)".

2.9. On the other hand, the Claimant states that "(…) as an ancillary activity to its main activity, the Claimant concluded (…), on 23 February 2010, a sublease contract having as its object the property corresponding to the ground floor right of the urban building located at …, no.…, parish of …, municipality of …, described in the Registry of Real Property of … under no.… and registered in the cadastre under article … of the said parish (…)".

2.10. Additionally, the Claimant states that "as appears from clause 1.3 of the sublease contract, the property identified (…) was previously leased to the Claimant by Bank D…, S.A. in the context of an Immovable Financial Lease Contract (…)", and that "among other aspects, it was stipulated (…) that the Second Contracting Party and Sublessee [would] obligate itself to proceed at its responsibility with all beneficial expenses of the coffee shop space, paintings, replacement of counters and sanitary ware, changes of doors, remaining in the first two years of contract, exempt from payment to the First Contracting Party and Lessor of the rent of € 250.00 (…), monthly".

2.11. The Claimant further clarifies that "these obligations were borne by the sublessee because although the property had been licensed (…) from 6 January 2010 for that purpose (…), the Claimant did not exploit it as a coffee shop".

2.12. Indeed, according to the Claimant, "at the time of the conclusion of the sublease contract there was no commercial establishment operating in the space in question", and that "at the time of the sublease, there was no material in the leased premises that was adequate for the operation of a coffee shop, namely machines and furniture (…)", "nor did such equipment ever appear in the depreciation schedule or in the list of elements that comprised the Claimant's assets", nor "(…) did the Claimant have workers in the leased premises dedicated to the operation of a coffee shop or any other type of commercial establishment".

2.13. In truth, the Claimant reiterates, "given that the activity (…) was centered on the agricultural exploitation of the Estate … and Mrs. E… had experience in the hotel and restaurant business, it decided to sublease the space so that the latter could establish a coffee shop there and thus develop its activity", and that "throughout 2013 (…) the Claimant issued receipts for the monthly rents paid by the sublessee, each in the total amount of € 250.00 (…)".

2.14. Now, the Claimant clarifies that "following a Tax Inspection Proceeding to which the company B…, Lda. was subjected, the Tax Administration also initiated a proceeding of the same nature with respect to the Claimant (…)", and it was notified, "(…) by Letter of 30 November 2015 of the Tax Inspection Services of the Finance Office of Portalegre, of the Project Tax Inspection Report, in which the Tax Administration argued that the VAT relating to the invoice issued by the company (…) could not be subject to deduction because (allegedly) it corresponded to an operation that was not carried out between the issuer of the document and the Claimant".

2.15. On the other hand, the Claimant further states that, in the context of the inspection procedure referred to above, "the Tax Administration further argued that the sublease of the property (…) identified was subject to VAT because it constituted an onerous transfer of the operation of a commercial establishment (…)".

2.16. The Claimant proceeds by stating that being notified to exercise the right to be heard, it did so in writing, and was subsequently "notified of the Tax Inspection Report (…), pursuant to which the understanding previously expressed in the Project Report was maintained" and the Claimant was notified, "upon completion of the inspection procedure (…) of the VAT assessment acts and compensatory interest acts now contested (…)"

2.17. By not accepting the assessments referred to, "the Claimant submitted, on 10 May 2016, (….), Administrative Review against those acts (…)", and the Claimant was notified "(…) to exercise the right to be heard on the Project Decision of the Administrative Review submitted, having chosen not to exercise that right to be heard".

2.18. Thus, the Claimant states that "(…) it was notified (…) of the Decision of the Honorable Director of Finance of Portalegre, of 13 December 2016, which dismissed the Administrative Review (…)":

2.18.1. "By understanding that there were credible indications that the cork stripping service was not carried out by the issuing entity of the invoice, considering therefore that there had been business simulation and, consequently, that the deduction of VAT contained in the invoice issued was prohibited (…)" and,

2.18.2. "With respect to the VAT incidence on the rents paid by the sublessee, the Tax Administration understood that it was not a bare walls sublease, given that supposedly the said space was equipped in a manner to provide the sublessee with added value, which, in turn, placed such operation outside the scope of the VAT exemption".

2.19. Now, "(…) the Claimant cannot accept the content of the said Decision, nor the grounds that presided over the issuance of the tax acts now contested" since it understands, with respect to the service provision invoiced by the company B…, Lda., that no simulated operation was verified and there was no intent to deceive third parties and, with respect to the sublease of the property identified, it understands that there is an absence of onerous transfer of the operation of a commercial establishment, for the reasons it develops throughout the arbitral request.

Illegality of the Assessment of Compensatory Interest

2.20. In this regard, the Claimant understands that "being subject to annulment, due to illegality, the tax assessment acts now in question, the assessments of compensatory interest (…) shall equally be subject to annulment, for the absence of one of its essential legal grounds or prerequisites: delay in the assessment of tax owed", adding that "(…) there is another legal prerequisite of the assessment of compensatory interest that lacks proper demonstration by the Tax Administration in the statement of reasons of the tax assessment acts: that the delay in the assessment of the tax was due to a fact imputable to the taxpayer (…)", concluding that "(…) the assessments of compensatory interest (…) contested are illegal, and should be annulled accordingly".

Illegality of the Decision Dismissing the Administrative Review

2.21. In this matter, the Claimant argues that "by reflecting an incorrect appreciation of the facts and the law (…), the Decision (…) that dismissed the Administrative Review is affected by illegality", adding that "this same Decision suffers from a procedural defect, due to lack of statement of reasons and omission of ruling, and should be annulled accordingly (…)".

Right to Compensatory Interest

2.22. In this regard, "although the present Claimant does not accept the VAT assessment acts and compensatory interest acts sub judice, it proceeded with their payment on 14 March 2016 (…)", and therefore understands that "(…) compensatory interest shall be owed (…) following the annulment of the assessment acts now contested".

2.23. Additionally, the Claimant also requests the examination of the witnesses it presents in the arbitral request, as well as the hearing of party statements.

3. RESPONSE OF THE RESPONDENT

3.1. The Respondent responded, defending itself through denial and sustaining that "(…) the present request for arbitral pronouncement should be adjudged without merit, with the order of law remaining as it is regarding the tax assessment acts impugned and the respondent entity being absolved from the request, all with the due and legal consequences".

3.2. The Respondent begins by stating that the motivations underlying the inspection procedure carried out with respect to the Claimant are those described in the Tax Inspection Report (RIT), to which it refers, and that, in the course of the inspection action, the inspection services of the Finance Office of Portalegre ascertained facts with relevance to what was requested by the Claimant.

3.3. Now, the Respondent clarifies that "in view of what is set forth in the RIT (…) the tax inspection services effected (…) corrections, in the area of VAT" in the year 2013, which it identifies.

3.4. The Respondent further clarifies that "following notification of the final inspection report (…)" the "additional assessments singled out here" were "issued", and that "by not accepting the same, the Claimant (…)" submitted "a request for administrative review (n.º …2016…), (…) to the Finance Office of … on 11/05/2016 (…)", which was dismissed on 13 December 2016 by the Director of Finance of Portalegre, with "the said dismissal decision (…) notified by letter, via registered mail with acknowledgment of receipt (…)".

3.5. The Respondent adds that, "on 03/03/2017, by not accepting the decision issued in the context of the administrative review procedure, the Claimant deduced the present request for arbitral pronouncement" with respect to which "the AT contends for the maintenance in the legal order of the disputed assessments, pursuant to (…) to be explained".

Regarding the Alleged Insufficiency of Statement of Reasons of the Assessment Acts

3.6. In this regard, the Respondent argues that "(…) the Claimant's thesis regarding the lack of statement of reasons of the impugned acts is without any merit" since "(…) as regards the statement of reasons of administrative acts (…) the act is reasoned when, by the motivation adduced, it proves apt to reveal to a normal recipient the reasons of fact and of law that determine the decision, enabling it to react effectively through legal means against the respective injury".

3.7. Now, the Respondent understands that "it is demonstrated that the Claimant understood perfectly the sense and scope of the act", "as results from the very legal-argumentative exercise it made both through the administrative review and through the present request for arbitral pronouncement".

3.8. Thus, the Respondent argues that "(…) it cannot be concluded otherwise (…) than that the formal defect of lack of statement of reasons does not occur if the very claimant expressly reveals having understood perfectly the logical and legal process that led to the taxation decision, recognizing having perceived the prerequisites concretely taken into account by the author of the act and the reasons why the taxed amounts were reached, showing the cognitive and evaluative path covered"[2], understanding that "(…) it is manifest and unquestionable that the Claimant demonstrates, throughout its request for arbitral pronouncement, a perfect understanding of the act now in question".

3.9. In this regard, the Respondent further states that "if there were a situation of lack or insufficiency of statement of reasons (…) the Claimant could resort to the mechanism provided in Article 37 of the Code of Tax Procedure and Process (CPPT) and request its respective notification or issuance of the certificate in conformity", and therefore "(...) having the Claimant not used that faculty granted by law, it becomes necessary to conclude that the acts referred to contained (…) all elements necessary for its complete understanding and that the purported defect it may have suffered was remedied".

Regarding the Alleged Absence of a Simulated Operation

3.10. In this matter, the Respondent argues that the Claimant has no reason to complain since the Respondent understands there is no simulated operation given that "(…) the Claimant assumes [that] it contacted Mr. C… to provide it with cork extraction services because he had done so in the past and successfully (…)" but the Respondent inferred, from the analysis it carried out, "(…) that the Claimant well knew that the service was being provided by Mr. C… and his employees duly insured, and not by the company B…, LDA.".

3.11. Indeed, according to the Respondent, "(…) in a (vain) attempt to justify this difference between actual service provision and the formalization thereof the Claimant admits that the service was provided by an entity different from the one that invoiced it, arguing that this fact is due to a subcontracting that, however, it fails to prove".

3.12. In truth, according to the Respondent "the Claimant itself assumes it is indifferent to formalize the cork extraction business with the company B…, LDA or with Mr. C… (…)", and that, in this regard, "(…) the Respondent takes a different understanding from the Claimant", since for "the Tax and Customs Authority to state in the documents (contract and invoice) that a certain service was provided by an entity when in fact it was provided by another constitutes simulation by alteration of the subjects (…)", "(…) by the fact that the service provider does not coincide with the company issuing the invoice in question".

3.13. Thus, the Respondent argues that "it does not confer the right to deduction of tax mentioned in invoices that do not correspond to true taxable operations" and "as such, it was incumbent upon the inspection procedure to verify (as it did verify) whether there were serious indications that the invoices did not correspond to such actual operations, as follows from the common VAT system, and was (correctly) transposed into the national legal order".

3.14. The Respondent reiterates that "it was incumbent upon the AT to merely call into question the truthfulness of the operations documented by the invoices, through the collection of factual indicia of their lack of credibility", citing for this purpose, in particular, the content of the Supreme Administrative Court Decision of 23 May 2007 (case no. 128/07), pursuant to which it is stated that "(…) it is for the taxpayer to prove the existence of tax facts which it alleged as the basis of its right, that is, the actual existence of the alleged transactions", concluding the Respondent in the sense that "(…) in seeking recognition of the right to deduction, the Claimant was unequivocally burdened with the proof of the constitutive facts of that right", "which it failed to do in the context of the inspection procedure nor in the administrative review procedure (…)".

3.15. Thus, for the Respondent should "(…) be resolved against the Claimant's claim (…) all the probative uncertainty regarding the constitutive facts of the right to which it claims".[3]

3.16. In these terms, the Respondent concludes that "in light of all that has been set forth, it becomes undeniable that the corrections effected are perfectly protected by law and are in accordance with the interpretation thereof made, both by the Court of Justice and by the superior courts of the national tax jurisdiction".

3.17. But also "in terms of Union Law, the case law is consolidated in the sense that there is a need to maintain the requirement regarding the verification of the prerequisites of the right to deduction", "under penalty of frontal violation of the principle of neutrality, thus of the subversion of the operation of the common VAT system and of total capitulation in the face of tax fraud and evasion".

Regarding the Alleged Absence of Onerous Transfer of the Operation of a Commercial Establishment

3.18. In this matter, the Respondent alleges that "in addition to what has already been set forth regarding the facts (…) it is only necessary to emphasize that (…) the establishment was licensed as a coffee shop, in all correspondence of the Claimant with the financial lessor, as well as in the contract concluded with its lessee, reference is made to the commercial establishment and in the copy of the SUBLEASE CONTRACT dated 23 February 2010, between the lessee A…, S.A and the sublessee E…, (…) can be read in the FOURTH CLAUSE (…) As consideration for the present sublease the Second Contracting Party and Sublessee obligates itself to proceed at its responsibility with all beneficial expenses of the coffee shop space, paintings, replacement of counters and sanitary ware, change of doors, remaining in the first two years of contract exempt from payment to the First Contracting Party and Lessor of the rent of €250.00 (…) monthly. (…) The payment referred to in the preceding number shall only be made by the second Contracting Party, as of the 25th month following the opening of the coffee shop".

3.19. Thus, for the Respondent, "(…) it is easily inferred that although the sublessee became responsible for the adaptation of the space to proper operation as a coffee shop, she did so at the expense of the Claimant".

3.20. For the Respondent, "it is absolutely irrelevant that at the time of the conclusion of the contract the space was already completely equipped or not, being certain that it came to be at the expense of the Claimant, as well as irrelevant is that the bearing thereof by the latter was done prior to the conclusion of the contract or through the non-receipt of 24 months of rent", "just as irrelevant is that such elements appear in the Claimant's tangible fixed assets, for as is settled the accounting reality does not override, for purposes of taxation, the material reality" for, "accompanying the legal framework made by the Claimant and disagreeing only with one fact (the establishment was equipped at the expense of the Claimant), as the TIS rightly observed, the operation in question is subject to tax (VAT) and not exempt therefrom".

Regarding the Absence of Legal Grounds for the Request for Compensatory Interest

3.21. In this matter, according to the Respondent, "in the case in question and as has already been demonstrated, the situation does not occur that the law configures as being an error imputable to the services" and therefore the Respondent concludes that the request "(…) for compensation, for compensatory interest" should be without merit.

Regarding the Alleged Illegality of the Decision Dismissing the Administrative Review

3.22. In this respect, the Respondent reiterates that "as to the intended declaration of illegality of the decision that dismissed the administrative review now in question, it should be adjudged without merit for all the reasons of fact and of law to which (…) reference was made".

Regarding Witness Testimony

3.23. In this regard, according to the Respondent, with the Claimant having come "(…) to request the production of witness testimony as well as evidence through party statement (…)", the Respondent understands that such "(…) should be dispensed with to the extent that, underlying the present case files, only a matter of law is under consideration expressed in the recognition of the legality of the correction based on the facts, ascertained in the course of the inspection procedure and not disputed".

3.24. Now, for the Respondent, "being this the controversial question in the case files, the examination of witnesses would be nothing more than a useless act for the performance of the task of determining the sense and scope in which the law should be applied, with the practice of useless procedural acts being prohibited (…)".

4. PRELIMINARY ISSUES

4.1. The request for arbitral pronouncement is timely since it was submitted within the timeframe provided in subsection a) of paragraph 1 of Article 10 of the RJAT.

4.2. The parties have legal standing and capacity, are legitimate as to the request for arbitral pronouncement and are duly represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Regulatory Notice No. 112-A/2011, of 22 March.

4.3. The Tribunal is competent regarding the examination of the request for arbitral pronouncement formulated by the Claimant.

4.4. The cumulation of claims is legal, as the prerequisites required in Article 3, paragraph 1 of the RJAT are met, that is, the substantiation of the claims depends essentially on the examination of the same circumstances of fact and on the interpretation and application of the same principles or rules of law.

4.5. No exceptions have been raised that require ruling.

4.6. There are no nullities, and therefore it is now necessary to examine the merits of the claim.

5. MATTERS OF FACT

Facts Proven

5.1. The following facts are considered proven:

5.1.1. The Claimant is a joint stock company whose corporate purpose consists of forestry exploitation of the Estate of …, and one of the activities developed there "(…) consists in the valuation of a cork oak forest with a view to the extraction of cork from cork oaks for subsequent sale".

5.1.2. The Claimant has been registered, since 1 December 1996, in Corporate Income Tax (IRC) and in VAT, with the activity of "forestry exploitation" (CAE 002200), being classified, for VAT purposes, in the normal regime with quarterly periodicity and, for IRC purposes, in the regime for determining the collective taxable matter.

5.1.3. The Claimant was, in 2013, under an immovable financial lease contract concluded with Bank D… (no.…), Lessee of the property corresponding to the ground floor right of the urban building located at …, no.…, …, Municipality of …, described in the Registry of Real Property of … under no.… and registered in the cadastre under article … of the parish of….

5.1.4. The said property was licensed for the commercial activity of coffee shop, by the Municipal Chamber of …, from 6 January 2010.

5.1.5. The Claimant concluded, on 23 February 2010, with Mrs. E…, a Sublease Contract having as its object the property described in point 5.1.3., upon payment of a monthly rent of EUR 250.00.

5.1.6. In accordance with the contract referred to in the preceding point, responsibility for all beneficial expenses of the space, paintings, replacement of counters, sanitary ware and change of doors was of the Sublessee, with the latter being exempt from payment of rents in the first two years of the contract (24 months).

5.1.7. The Claimant concluded, on 1 July 2013, with the company B…, Lda., a cork stripping contract, pursuant to which it committed itself to pay the sum of EUR 3.45 per arroba, with payment being made according to the weighings and discounts made by the cork purchaser.

5.1.8. The service contracted (described in the preceding point) was materially executed by Mr. C… and his team.

5.1.9. The Claimant obtained with respect to the company B…, Lda., a certificate issued by the Head of the Finance Service of Alenquer, dated 1 July 2013, as well as a declaration from Social Security, of 19 June 2013, in which it was attested that the said company had its tax and contributory situation regularized.

5.1.10. The Claimant paid for the contracted service, invoiced through invoice no. 0005-B, of 8 August 2013, in the total amount of EUR 69,976.00 (EUR 56,891.00, plus VAT in the amount of EUR 13,085.00), through the issuance of two checks – no.…, of 3 August 2013, in the amount of EUR 15,000.00 and no.…, of 16 August 2013, in the amount of EUR 54,976.00).

5.1.11. The Claimant was the subject of an inspection action carried out in compliance with Service Order no. OI2015… (of 10 August 2015, of the Finance Office of Portalegre), of general scope and relating to the year 2013, whose inspection acts commenced on 22 September 2015 and ended on 27 November 2015.

5.1.12. From the said inspection action resulted, in the area of VAT, corrections in the year 2013 in the amount of EUR 14,371.19.

5.1.13. The Claimant was notified through Letter no.…, of 30 November 2015, of the Finance Office of Portalegre, of the Project Tax Inspection Report (RIT) and to exercise the right to be heard regarding its contents.

5.1.14. The Claimant submitted, on 16 December 2015, its respective right to be heard.

5.1.15. The Claimant was notified through Letter no.…, of 6 January 2016, of the Finance Office of Portalegre, of the RIT in which the understanding previously defended by the Respondent was maintained (see point 5.1.13., supra).

5.1.16. Consequently, the Claimant was notified of the following additional VAT assessments, of tax in the total amount of EUR 14,371.19 and of interest, in the total amount of EUR 1,174.14 [overall amount of EUR 15,545.33, of which EUR 14,905.86 (EUR 14,904.39 according to the Claimant) concern the corrections subject of the arbitral request (tax and interest)]:

5.1.17. The Claimant effected payment of all the assessments identified within the deadline for voluntary payment thereof (14 March 2016).

5.1.18. The Claimant submitted, on 11 May 2016, administrative review against the additional tax and interest assessments identified in point 5.1.16., supra.

5.1.19. The Claimant was notified through Letter no.…, of 17 November 2016, of the Finance Office of Portalegre, of the project decision to dismiss the administrative review identified above as well as to pronounce itself in the context of the right to be heard.

5.1.20. The Claimant did not exercise the right to be heard regarding the project to dismiss the administrative review identified above.

5.1.21. The Claimant was notified by Letter of 14 December 2016 regarding the decision to dismiss the administrative review (no. …2016…), since the Respondent understood that:

a) There was "sufficient statement of reasons for the corrections that gave rise to the additional VAT assessments, the content of which is contained in the report of the inspection procedure, in which the claimant participated in writing and orally";

b) "There were credible indications that the cork stripping service was not carried out by the entity that issued the invoice, and thus there was simulation of business between persons, with the burden of proof that such service provision had been carried out by the company B…, Lda. falling upon the claimant, which it failed to achieve", and therefore, there occurred the "impossibility of the claimant to proceed with the deduction of VAT contained in the 05-B invoice issued by B…, Lda. (…) having concluded that the service was effectively provided by another entity that is not the issuer of the invoice";

c) "The lease of the property located at …, … –…, does not consist of bare walls, being present on the premises other equipment (counters) that provide the lessee with added value, placing such operation outside the scope of the exemption advocated in paragraph 29 of art. 9 of CIVA. In this manner, such service provision is subject and not exempt from VAT, and therefore tax should be assessed at the normal rate applying to the value of the consideration obtained (…)";

d) There was "sufficient statement of reasons for the assessment of compensatory interest, with all applicable legal norms being indicated, there being the taxpayer's culpability for at minimum having a negligent action in failing to verify the contours of a business it concluded with an entity distinct from the one that provided the service, having prior knowledge that the same would be carried out by Mr. C… and not by the company B…, Lda.".

5.2. No other facts were proven that could affect the merits decision of the claim.

Reasoning Regarding the Matters of Fact Proven

5.3. Regarding the matters of fact proven, the conviction of the Arbitral Tribunal was based, in addition to the free evaluation of the positions assumed by the Parties (on matters of fact), on the content of the documents attached to the case file, not contested by the Parties, on the analysis of the administrative file attached by the Respondent, as well as on the evidence produced in witness testimony and party statements.

Facts Not Proven

5.4. No facts occurred as unproven with relevance for the arbitral decision.

6. LEGAL GROUNDS

6.1. As described above, at the genesis of the request for arbitral pronouncement are the tax assessment acts of VAT, as identified in point 5.1.16., supra, which had their origin in the corrections that the Respondent effected, in the context of a tax inspection carried out with respect to the Claimant, for the year 2013, as referred to above in points 5.1.11. and 5.1.12.

6.2. In the arbitral request under analysis, the corrections are at issue respecting:

6.2.1. The alleged improper deduction of VAT (mentioned in invoice issued by the company B…), in the year 2013, in the amount of EUR 13,085.00, because the same results, according to the Respondent, from a simulated operation, and,

6.2.2. The alleged failure to assess VAT, by the Claimant, in the year 2013, in the total value of EUR 690.00, regarding the value of the monthly rents (EUR 250.00/month) debited to Mrs. D. E…, with respect to the lease of the immovable property described in points 5.1.3. and 5.1.4., supra.

6.3. Consequently, by not agreeing with the said tax and interest assessments, the Claimant submitted administrative review (which was the subject of a dismissal decision, as per point 5.1.21., supra), followed by submission of a request for arbitral pronouncement, pursuant to which it petitions that it be adjudged substantiated, because proven, and in consequence:

6.3.1. Be annulled "(…) the decision of the (…) Director of Finance of Portalegre, dated 13 December 2016, which dismissed the administrative review no. …2016… and, as well, the VAT assessment act no. 2016…, relating to period 1303T, and corresponding assessment of compensatory interest no. 2016…, the VAT assessment act no. 2016 …, relating to period 1306T, the VAT assessment act no. 2016 …, relating to period 1309T, and corresponding assessment of compensatory interest no. 2016 …, and the correction document no.…, relating to period 1312T (…)";

6.3.2. Be ordered "the refund of the amount paid, plus compensatory interest".

6.4. Regarding the grounds that the Respondent presents to support the alleged improper deduction of VAT referred to in point 6.2.1., supra, the Claimant states that "on 1 July 2013, (…) it concluded a cork stripping contract with the company B…, Lda. (…) which, at that time, was represented by Mr. C…, who stated that it was his company, and thus created the conviction in the representatives of the Claimant that it would be that company by which the service would be invoiced", and therefore "pursuant to the said contract (…) the Claimant committed itself to pay the sum of € 3.45 per arroba (…)", and the contracted service was "(…) effectively provided by Mr. C… and a team under his coordination" (see points 2.6. and 2.7., as well as points 5.1.7. and 5.1.8., supra) (emphasis added).

6.5. Thus, according to the Claimant, "with the service contracted having been provided, the Claimant was confronted (…) with the corresponding invoice (…), in the amount of € 56,891.00, plus € 13,085.00 in VAT (…), issued by the company B…, Lda. (…), in accordance with the contract and in accordance with the work actually performed", and the Claimant proceeded "(…) to the payment of the said amount (…), through two checks, both issued to the order of the company (…)" (see points 2.8. and 5.1.10., supra).

6.6. On the other hand, and regarding the grounds presented by the Respondent to support the alleged failure to assess VAT regarding the value of the monthly rents invoiced in 2013 to Mrs. D. E…, with respect to the lease of the immovable property described in point 5.1.3., supra, the Claimant states that "(…) it concluded (…), on 23 February 2010, a sublease contract having as its object the property (…) described (…)" but since "at the time of the conclusion of the sublease contract there was no commercial establishment operating in the space in question" [since "(…) there was no (…) any material that would be adequate for the operation of a coffee shop, namely machines and furniture (…)", "nor (…) did the Claimant have workers in the leased premises dedicated to the operation of a coffee shop or any other type of commercial establishment"], "(…) the Claimant issued receipts for the monthly rents (…), each in the total amount of € 250.00 (…)", framing the operation as an operation exempt from VAT (see points 2.9. and 2.12., supra).

Regarding the Alleged Existence of a Simulated Operation

6.7. In these terms, taking into account the above, and regarding the first of the corrections referred to (point 6.2.1., supra), it is important to determine:

6.7.1. Whether the Respondent presented sufficiently strong indications of simulation in the cork extraction operation, documented in the invoice issued by the company B…, Lda., identified in the case file;

6.7.2. The burden of proof;

6.7.3. Whether the Claimant demonstrated the truthfulness of the operation documented by the said invoice and if, being the assessment act legal, the deduction of VAT paid by the Claimant is also legal, in light of the provisions of Article 19, paragraph 3 of the VAT Code.

6.8. Preliminarily, it should be noted that VAT (introduced into the Portuguese tax system by Decree-Law No. 394-B/84, of 26/12), can be defined as an indirect tax both from a legal and from an economic point of view, repercussible (the tax burden is transferable to the final consumer) and its respective tax fact has a transitory or accidental character.

6.9. Indeed, VAT is a general tax on consumption, insofar as it applies (in principle) to all transfers of goods and services with onerously provided characteristics (cf. Article 1 of the VAT Code) and is equally characterized as a multi-phase tax because it applies to all phases of the economic circuit, from production to the final consumer, being non-cumulative, insofar as in each phase of the economic circuit it taxes only the added value, that is, the increase in value that goods or services come to have in the phase they are in, thus avoiding the cumulative effect of tax on tax.

6.10. In addition to the characteristics pointed out in the two preceding points, VAT also presents the characteristic of neutrality given that, through the mechanism of deductions, the tax will be borne entirely by the final consumer, making it fiscally irrelevant the number of phases that make up the economic circuit.

6.11. Finally, it should be noted that the assessment of the tax is made by economic operators who proceed to self-assessment and pass on to the customer the tax assessed upstream, and the indirect subtractive method should be used in determining the added value, in accordance with Article 19 of the VAT Code.[6]

6.12. In these terms, a tax act always has as its basis a specific situation of fact, which is provided for, abstractly and typically, in tax law as generating the tax right, and such factual and concrete situation is defined as a tax fact, which only exists from the moment all legally provided prerequisites for such are verified.

6.13. Indeed, the tax norms that contemplate the tax fact are those relating to actual incidence (which define its objective elements), and so only with the practice of the tax fact does the tax obligation arise.[7]

6.14. Thus, the existence of the tax fact constitutes, therefore, a condition "sine qua non" of the determination of the taxable matter and of the assessment effected.

6.15. With respect to value added tax, the tax fact that is its basis consists of any transfer of goods or provision of services, for valuable consideration, that is carried out within the national territory (cf. Article 1 of the VAT Code).

6.16. Also pursuant to the VAT Code the general obligation of taxpayers to have accounting adequate to the determination and inspection of the tax derives from that established in Article 28, paragraph 1, subsection g), thus explaining that subjects, who under law are obligated to have organized accounting, must also observe certain accounting obligations with the objective of obtaining security and clarity in the record of operations arising from the application of the VAT Code and necessary for the calculation of the tax, as well as to permit its inspection.[8]

6.17. Also regarding the specific VAT regime, it will equally be said that the legislator resorts to presumptions that establish legal proof for certain particular facts, which imply a true inversion of the burden of proof and are explained by the nature of this tax.[9]

6.18. Finally, given the specificity of VAT, it must also be stated that the Tax Administration cannot effect changes to the quantification of the tax base of this tax, without it being demonstrated that omissions or inaccuracies were committed in the record of purchases or in the record of sales of the subject liable for tax in question.[10]

6.19. In the case under analysis, and regarding the first of the corrections referred to above (point 6.2.1.), it is important, first of all, to delineate the concept of "simulated business", and subsequently, there will be a need to analyze and distribute the burden of proof so as to determine whether the Parties succeeded in demonstrating the facts they invoked, in the terms legally adequate.

6.20. Pursuant to paragraph 3, Article 19 of the VAT Code, "tax resulting from a simulated operation or in which the price contained in the invoice or equivalent document is simulated may not be deducted" (emphasis added).

6.21. In accordance with Article 11, paragraph 2 of the General Tax Law (LGT), "whenever, in tax norms, terms proper to other branches of law are used, they should be interpreted in the same sense that they have there, unless another is directly derived from the law".

6.22. Thus, in view of the said legal provision, if another sense does not derive from tax law, the terms should be understood that Tax Law utilizes the concepts developed by other branches of law in the same sense that they have there, with the interpreter-applier not having the general faculty to alter them.

6.23. Given that tax law states nothing regarding the concept of "simulation", it should be understood that the tax legislator adopted the term or concept in the same sense that it has in the branch of law that developed it, namely, in Civil Law.

6.24. Now, the concept of simulation is defined in Article 240, paragraph 1 of the Civil Code, pursuant to which one can read that "if, by agreement between declarer and recipient of declaration, and with the intent to deceive third parties, there is divergence between the contractual declaration and the real will of the declarer, the business is said to be simulated" (emphasis added).[11]

6.25. Thus, from the above it follows that there are three characteristic elements of simulation, as indicated below:

6.25.1. The divergence between will and declaration;

6.25.2. Agreement or collusion between the parties, and

6.25.3. The intent to deceive third parties.[12]

6.26. Thus, first of all, simulation presupposes that the external aspect of the contractual declaration (the declaration) and its internal aspect (the will) do not coincide.

6.27. In general terms, this divergence between will and declaration can be:

6.27.1. Absolute, in cases where the declarer, not wishing to conclude any legal business, says he wishes to do so and concludes a legal business, or,

6.27.2. Relative, when the declarer, wishing to conclude a legal business, says he wishes to and concludes a different legal business.

6.28. Indeed, the identification of the divergence, whether absolute or relative, presupposes the identification of the real will of the declarer and its comparison with the contractual declaration produced.

6.29. In these terms, in absolute simulation, under the guise of the declaration there is hidden no contractual will, but rather the absence of any contractual will, and in relative simulation, on the other hand, under the guise of the declaration is hidden a contractual declaration different from it, the legal business that corresponds to the real will of the declarer, designated as the concealed business.

6.30. On the other hand, simulation also presupposes that (i) there be no error in the declaration, (that is, that the declarer knows of the divergence between his declaration and his will) and that (ii) there be no mental reservation (that is, that the recipient of the declaration also knows of it).

6.31. However, the concept of simulation requires, however, more than the mere awareness or representation of the declarer about the divergence between his will and his declaration since, for one to speak of simulation it is also necessary the existence of an agreement or a meeting of wills regarding the simulation itself between the two subjects (declarer and recipient of declaration).

6.32. Thus, a fraudulent agreement about the divergence itself is also a constitutive element of the concept of simulation between one and the other, an agreement that is designated a simulatory pact that manifests itself, paradigmatically, in a counter-declaration in which the Parties declare their real will or their will to be bound pursuant to the terms of the simulated business.

6.33. Finally, and once the divergence between declaration and will is verified, as well as agreement regarding it, in order to speak of simulation it is still necessary to verify whether or not there is fraudulent intent in the simulatory pact, intended to deceive and harm third parties.

6.34. In this regard, when the simulatory pact aims only to deceive, but not to harm third parties, the simulation is said to be innocent, but the simulation will be qualified as fraudulent when the simulatory pact is intended not only to deceive but also to harm such third parties.

6.35. Having analyzed all the requirements required by law for the configuration of an operation as being simulated, it is important to understand whether, in the case under analysis, these same requirements are met.

6.36. In truth, in the case, it is important to ascertain whether the Respondent collected, in the matter of tax inspection, indications of simulation that are apt to call into question the presumption of truthfulness enjoyed by the Claimant's written records.

6.37. Indeed, the Respondent invokes in the Tax Inspection Report various facts to support the understanding that "the service contained in invoice no. 0005-B of 2011-08-08 of B…, Lda. was executed by a third person, not by B…, Lda.", concluding "(…) for the existence of strong, objective and credible indications that, with the parties having concluded a certain legal business (…) concluded another different from that", having understood the Respondent that this was "(…) a relative simulation (…)", that is, one in which under the guise of the declaration is hidden a contractual declaration different from it, the legal business that corresponds to the real will of the declarer, designated as the concealed business (see point 6.29., supra) (emphasis added).

6.38. For purposes of the described in the preceding point, the Respondent bases its position on the following facts:

6.38.1. "From consultation of the AT information system, it is verified that, on 2014-12-29, the company B… Lda. was (…) ceased in VAT (…) effective as of the date of 2012.12.11, corresponding to the date of its commencement of activity" and,

6.38.2. On the other hand, "(…) in the declaration of F… – Companhia de Seguros, SA, submitted (…) it appears as insured, Mr. C… (…) and not the company B…, Lda."

6.39. In these terms, the Respondent concluded in the Tax Inspection Report that "there are strong objective and credible indications that a simulated business occurred through substitution of persons, since (…) it gathered clear, congruent and sufficient indications that the business was conducted between (…)" the Claimant and Mr. C…, and not between the Claimant and B…, Lda. (emphasis added).

6.40. Thus, in the view of the Respondent, the indications gathered point to the conclusion that a simulated operation was committed by the Claimant conducive to the commission of tax fraud.

6.41. Let us see, then, whether the facts described constitute "(…) strong objective and credible indications (…)" of the existence of a simulated operation.

6.42. In this regard, as stated in a decision of the Court of Appeal of Coimbra of 11 April 2014 (no. 00142/08.4BEBRG), when the indications regarding the invoice issuer point to the fact that he was not the one who provided the services, thus existing indications of the falsity of the invoices, such circumstance does not permit, by itself, the conclusion of the existence of simulation (emphasis added).

6.43. "In this matter, it is believed to be pertinent (…) the contribution of the Decision of this Tribunal of 31-01-2014, Case no. 01380/05.7BEBRG (…), referring that (…) it does not constitute a requirement of the right to deduction, in internal operations, that it was the invoice issuer who (…) provided the services", and that "what constitutes a requirement of that right is that it was the user who acquired these (…) services", as "(…) results from paragraph 1 of Article 20 of the Code of Value Added Tax, according to which only the tax that has applied to (…) services acquired can be deducted" (emphasis added).

6.44. The decision proceeds by further stating that "thus, the factual indicators that the invoice issuer does not have the capacity to provide the service are not enough, by themselves, to prevent the deductibility of the tax mentioned in that invoice, if there are no reasons to call into question the provision of that service by a third party" (emphasis added).

6.45. In truth, "it may, at first glance, seem strange that the legislator abstracted from the underlying relationship documented in the invoice which, to be subjectively true, would have to exist between those two subjects (the invoice issuer and the invoice user)", "but there is a reason for such: it is that the legislator also abstracts from the underlying relationship to demand the tax from the issuer".

6.46. "Indeed, and pursuant to Article 2, paragraph 1, subsection c), of the same code, the tax can also be demanded from the invoice issuer who incorrectly mentions it there (…)" and "(…) this happens precisely because the recipient of the invoice also does not cease, for that reason, to have the right to use it, in the exercise of his right to deduction".[13]

6.47. Thus, "the existence of the underlying relationship between those two subjects not being a requirement of the deductibility of the tax, this can only be prevented by an exclusion norm" and, in this regard, "the Value Added Tax Code contains several norms that especially exclude the right to deduction, but only one of them interests us to analyze here: paragraph 3 of its Article 19", "because it was based on that norm that the tax administration carried out the impugned corrections" (emphasis added).

6.48. "And according to this norm, tax resulting from a simulated operation or in which the price contained in the invoice or equivalent document is simulated may not be deducted".

6.49. Now, in the case under analysis, the entity targeted by the said norm is the acquirer of the services provided (that is, the Claimant), being this the taxpayer that the legislator intends to prevent from distorting economic operations, with the sole intent of exercising the right to deduction.

6.50. In this regard, and in its defense, repeating, the Claimant alleges in the arbitral request that "(…) it concluded a cork stripping contract with the company B…, Lda. (…)", "which, at that time, was represented by Mr. C…, who stated that it was his company, having thus created the conviction in the representatives of the Claimant that it would be that company by which the service would be invoiced", clarifying that "the service contracted was effectively provided by Mr. C… and a team under his coordination" (see point 6.4., supra) and that, "(…) in no way did the Claimant suspect that the company that Mr. C… materially represented was not acting in good faith".

6.51. In these terms, "with the service contracted having been provided, the Claimant was confronted by Mr. C… with the corresponding invoice (…) issued by the company B…, Lda. (…) in accordance with the contract and in accordance with the work actually performed", and the Claimant proceeded "(…) to the payment of the said amount in two installments, through two checks, both issued to the order of the company B…, Lda. (…)", as per point 5.1.10., supra.

6.52. Now, in this regard, in tax matters, the question of the distribution of the burden of proof between both Parties in assessing the legality of the exercise of the right to deduction will be crucial.

6.53. On this matter, Article 74, paragraph 1 of the LGT provides with interest, pursuant to which "the burden of proof of the facts constitutive of the rights of the tax administration or of taxpayers falls upon those who invoke them".[14]

6.54. Thus, and taking as a model the tax assessment procedure initiated by the Tax Administration, the latter will have the burden of demonstrating the occurrence of the facts from which the right to assessment derives (the facts-prerequisites of the existence, qualification and quantification of the tax fact) and the taxpayer (the Claimant) will have the burden of demonstrating the facts that prevent, modify or extinguish that right.

6.55. However, the Supreme Administrative Court decision of 2003-05-07 (case no. 01026/02), following the understanding of another decision of the same Court of 2002-04-17 (case no. 026635), "established case law in the sense that the burden of proof of the existence of the tax facts alleged as a prerequisite of the right to deduction of value added tax falls upon the taxpayer" being that, "the reason for this understanding is (…)" that "(…) contrary to what normally happens, where the tax administration asserts the occurrence of the fact from which the right to taxation derives, in this case it is the taxpayer who asserts the tax fact from which the right to deduction derives and the tax administration that calls its occurrence into question" (emphasis added).

6.56. However, as stated by the Court of Appeal of Coimbra decision identified above (point 6.42.), "it should be emphasized (…) that this rule of the burden of proof only truly operates after the tax administration has gathered and invoked grounded indications that the tax fact did not occur (in the case, that it did not occur between the subjects mentioned in the invoice) (…)", "and therefore, when the right to deduction is based on declaration of the taxpayer presented pursuant to law, the tax administration that intends to rebut the occurrence of the fact on which that deduction is based by invoking simulation of subjects, does not have to demonstrate that the simulatory agreement existed (which would be very difficult to demonstrate, in most cases), but has to gather objective indicators that such agreement should have existed (...)" (emphasis added).

6.57. Thus, considering the situation being examined in the case file, it will be necessary to understand that for there to be simulation it would be necessary that the tax administration had gathered elements relating the user of the invoices (the Claimant) to the fraud scheme, that is, that indications had been gathered that the user of the invoices (Claimant) participated or that knew or should have known that the issuer of the invoices was not the true provider of the contracted services (insofar as it can happen that the user of false invoices does not know, nor has the possibility to know, of the falsity).

6.58. Indeed, "if it is accepted that the burden of the Public Treasury is satisfied by the gathering of indications of falsity regarding the invoice issuers, it would mean that the users of false invoices, who do not know that they are false, could not deduct costs that they actually incurred, without having participated in any fraudulent scheme" (emphasis added).

6.59. In these terms, it will be said that such innocent users will always be able to provide proof of the truthfulness of the transactions, with the burden of proof of the falsity falling upon the tax administration, and, once such burden is fulfilled, the burden of proof of the truthfulness of the transactions will then fall upon the taxpayer.

6.60. "But it is easily understood that such proof, in these circumstances, of fraud upstream, which it ignores, will be impossible for the user of the invoices to prove anything beyond what results from its accounting, and which, it should not be forgotten, enjoys a presumption of truthfulness".

6.61. Indeed, "if there was fraud and the user of the invoices ignores it, it cannot prove that the goods were acquired from the invoice issuers, because they were not; nor can it prove that it acquired them from another, because for this user of invoices the goods were bought from the issuer, ignoring the actual seller".[15]

6.62. In that case, what the user of the invoices can do, in these circumstances, is merely clarify how the negotiations developed and with whom they developed, as occurred throughout the presentation of the arbitral request, as well as during the hearing of party statements delivered by Mr. Eng. G… (Administrator, initially presented as retired in the arbitral request, as a witness, but heard as a Party at the 6 September 2017 meeting), by Dr. H… (President of the Board of Directors of the Claimant) and with the examination of witness Mr. I… (presented as a tractor driver in the arbitral request but identified as responsible for the Estate of …, at the examination).

6.63. Indeed, in the case under analysis, the Tribunal understood as proven, in light of the evidence produced at the said meeting, that the Claimant had no knowledge, at the date to which the facts reported, that Mr. C… was distinct from the company B…, being the latter a mere invoice issuer with dubious purposes since this was always viewed by the Claimant as the coordinator of the cork extraction work from the cork oaks that had been contracted, deeming him a person experienced in that service, trusting in him.

6.64. As stated by Dr. H…, if they had known of the "problem" in 2013 they would not have contracted the service, and after becoming aware of it, they never contracted it again due to the loss of trust that occurred.

6.65. In this case, if it is accepted that the user of the invoice (the Claimant) see the costs disregarded without the tax administration somehow linking it to the fraudulent scheme, it would be in violation of the principle of justice and would call into question the trust in commercial relationships.

6.66. Indeed, this understanding is in line with that of the Court of Justice of the European Union which, in the decision of 31 January 2013 (case C-642/11 regarding a question of VAT deductibility), referring to cases where irregularities occur in the sphere of issuers, pronounced itself in the following terms:

6.66.1. "Thus, it is for the authorities and national courts to refuse the right to deduction, if it is demonstrated, in light of objective elements, that that right is invoked fraudulently or abusively (v., in this sense, decision of 6 July 2006, Kittel and Recolta Recycling, C-439/04 and C-440/04, Coll., p.I-6161; and decisions, already cited, Mahagében and David, no. 42, and Bonik, no. 37)" (emphasis added).

6.66.2. "However, also pursuant to well-established case law, it is not compatible with the VAT deduction right regime provided for by Directive 2006/112 to sanction, with the refusal of that right, a taxpayer who did not know nor could have known that the operation in question was part of fraud committed by the supplier or that another operation included in the supply chain, prior or subsequent to that carried out by the said taxpayer, was tainted by VAT fraud (v., especially, decision of 12 January 2006, Optigen and o., C-354/03, C-355/03 and C-484/03, Coll., p. I-483, nos. 52 and 55; and decisions, already cited, Kittel and Recolta Recycling, nos. 45, 46, and 60, Mahagében and David, no. 47, and Bonik, no. 41)" (emphasis added).

6.66.3. "Furthermore, the Court of Justice declared, in nos. 61 to 65 of the Mahagében and David decision, already cited, that the Tax Administration cannot require in general terms that the taxpayer who seeks to exercise the right to VAT deduction, on one hand, verify that the invoice issuer, referring (…) to the services based on which the exercise of this right is requested, has the status of taxpayer, possesses the goods in question and is in a position to ascertain that there are no irregularities or fraud at the level of the upstream operators, or, on the other hand, possesses documents in this regard" (emphasis added).

6.66.4. "From this it follows that the national court that must decide whether, in a particular case, there is a taxable operation, with the Tax Administration having alleged in the proceedings that the existence of irregularities committed by the invoice issuer or by one of its suppliers, such as accounting omissions, must ensure that the evaluation of evidence does not lead to emptying of meaning the case law recalled (…) of the present decision, indirectly obligating the recipient of the invoice to carry out verifications with its contractor that, in principle, are not its responsibility" (emphasis added).

6.67. Now, as the Claimant alleges, it obtained evidence that the company B…, Lda. (with which it concluded, on 1 July 2013, a cork stripping contract and which came to issue an invoice, on 8 August 2013, for the service provided) had its tax and contributory situation regularized, in accordance with the certificate issued by the Head of the Finance Service of Alenquer (on 1 July 2013), as well as in accordance with the Social Security declaration of 19 June 2013 (copies of which were attached to the case file with the arbitral request – doc. no. 16).[16]

6.68. In the case under analysis, repeating, with it being demonstrated that the Claimant acquired the services in question, the Respondent would have to gather sufficient indications that it knew or should have known that the one providing the service to it was not the issuing entity of the invoice (company B…, Lda.).

6.69. And such not having occurred, we conclude that the Respondent did not gather indications that legitimize its action in the sense of not accepting the deduction of VAT mentioned in the invoice identified in the case file, issued by the company B…, Lda., since it did not fulfill the burden that fell upon it and thus the assessments that are the subject of the arbitral request are affected by illegality, and it is necessary to follow the position defended by the Claimant.

6.70. Therefore, in light of the lack of merit of the conclusions presented by the Respondent, taking into account the above, it is necessary to declare the illegality of the tax and interest assessment acts (underlying the correction examined here), for violation of Article 19, paragraph 3 of the VAT Code, with their consequent annulment.[17]

Regarding the Alleged Existence of Onerous Transfer of the Operation of a Commercial Establishment

6.71. In this regard, with respect to the second of the corrections referred to (point 6.2.2., supra), it is important to decide whether the Claimant is correct when it states that "(…) it concluded (…), on 23 February 2010, a sublease contract having as its object the property (…)" identified in the case file, being that "at the time of the conclusion of the sublease contract there was no commercial establishment operating in the space in question" and that "at the time of the sublease, there was no material in the leased premises adequate for the operation of a coffee shop, namely machines and furniture (…)", "nor did such equipment ever appear in the depreciation schedule or in the list of elements that comprised the Claimant's assets", nor "(…) did the Claimant have workers in the leased premises dedicated to the operation of a coffee shop or any other type of commercial establishment" (emphasis added), or,

6.71.2. The Respondent is correct when it states that "(…) the establishment was licensed as a coffee shop, in all correspondence of the Claimant with the financial lessor, as well as in the contract concluded with its lessee (…)" in which can be read that "as consideration for the present sublease the Second Contracting Party and Sublessee obligates itself to proceed at its responsibility with all beneficial expenses of the coffee shop space, paintings, replacement of counters and sanitary ware, change of doors, remaining in the first two years of contract exempt from payment to the First Contracting Party and Lessor of the rent of €250.00 (…) monthly", being that "the payment referred to in the preceding number shall only be made by the second Contracting Party, as of the 25th month following the opening of the coffee shop" (emphasis added).

6.72. For the Respondent, "(…) it is easily inferred that although the sublessee became responsible for the adaptation of the space to proper operation as a coffee shop, she did so at the expense of the Claimant", being "absolutely irrelevant that at the time of the conclusion of the contract the space was already completely equipped or not, being certain that it came to be at the expense of the Claimant (…)" (emphasis added).

6.73. "Just as irrelevant is that such elements appear in the Claimant's tangible fixed assets, for as is settled the accounting reality does not override, for purposes of taxation, the material reality".

6.74. In this regard, it is therefore crucial to analyze the positions assumed by the Parties so as to provide an answer to the question of whether the contract designated as sublease contract (concluded by the Claimant with the sublessee Mrs. E…), relating to the property identified in the proceeding (see point 5.1.3., supra), is:

6.74.1. A lease contract for immovable property and, as such, covered by the VAT exemption provided in Article 9 no. 30 of the VAT Code, as the Claimant argues, or if it is, on the other hand,

6.74.2. A service provision contract subject to VAT, and not exempt therefrom, pursuant to Article 1, paragraph 1, subsection a) of the VAT Code, as the Respondent argues.

6.75. Preliminarily, it should be noted that the general rule of the VAT Code, regarding objective tax incidence, is that contained in Article 1, paragraph 1, where it reads, in particular, that "the following are subject to value added tax: a) the transfers of goods and the provision of services carried out within the national territory, for valuable consideration, by a taxpayer acting as such (…)" (emphasis added).

6.76. On the other hand, the concept of transfer of goods is given to us by Article 3, paragraph 1 of the VAT Code, pursuant to which, "transfer of goods is generally considered the onerous transfer of corporeal goods in a manner corresponding to the exercise of the right of ownership" as well as the transactions listed in its paragraph 3.

6.77. The concept of service provision is given by Article 4, paragraph 1 of the VAT Code, in a residual manner, by referring that "the following are considered as service provisions: operations carried out for valuable consideration that do not constitute transfers, community acquisitions or imports of goods".

6.78. Now, being the contract under analysis concluded for valuable consideration, and not falling within the definition of transfer of goods in Article 3 of the VAT Code, it will have to be considered, under paragraph 1 of Article 4 of the VAT Code, as a service provision and, in a first analysis, it would be said that it is subject to VAT, pursuant to Article 1, paragraph 1 of that Code.

6.79. However, Article 9 of the VAT Code (exemptions in internal operations), provides for the VAT exemption of certain operations classifiable within the concept of service provision, among them, the lease of immovable property (no. 29), being in this provision of Article 9 of the VAT Code that the Claimant bases its claim of not being subject to VAT, the sublease contract of the commercial space identified in the case file (and to which relates a part of the assessments that are the subject of the arbitral request)

6.80. But, are we in the situation under analysis, truly before an immovable sublease contract, as the Claimant argues, or are we before an onerous transfer of the operation of a commercial establishment, as the Respondent argues?[18]

6.81. As already referred to, at point 6.21., pursuant to Article 11, paragraph 2 of the LGT, whenever tax norms use terms proper to other branches of law, they should be interpreted in the same sense that they have there, unless another directly derives from the law.

6.82. In paragraph 3 of that norm it is stated that, persisting doubt as to the sense of the norms of incidence to be applied, account shall be taken of the economic substance of the tax facts.

6.83. In this matter, the concept of lease is contained in Article 1022 of the Civil Code, defined there as the contract by which one of the parties obligates itself to provide to the other the temporary enjoyment of a thing, against remuneration, being designated as lease if it relates to immovable property (Article 1023 of the Civil Code).

6.84. And, regarding its scope, Article 1067 of the Civil Code provides that "the urban lease may be for habitation or non-habitation purposes", being that "unless otherwise stipulated, the leased premises may be enjoyed within its aptitudes, as they result from the license of use" and that "in the absence of a license of use, the lease is valid as habitation if the premises are habitable or as non-habitation if they are not, unless another destination has come to be given to it".

6.85. In the current version of Article 1060 of the Civil Code, "the lease is said to be a sublease, when the lessor concludes it based on the right of lessee that comes to it from a prior lease contract".

6.86. Following what is advocated by the above, the Claimant argues that being, in the case under analysis, before a sublease contract, this will be exempt from VAT, pursuant to Article 9, no. 29 of the VAT Code.

6.87. In this regard, and with reference to the above regulatory framework and to the exemption in question, Clotilde Celorico Palma argues that the exemption from payment of VAT regarding the lease of immovable property in the sense given to it by Article 1022 of the Civil Code, in the case of urban buildings, only applies if it is a matter of [text cut off in original]