SGPS VAT Deduction Rights and Shareholder Costs

Process: 16/2016-T

Date: September 28, 2016

Tax Type: IVA

Summary

Process 16/2016-T addresses the VAT deduction rights of an SGPS (Portuguese holding company) under Decree-Law 495/88 that performs three distinct activities: managing shareholdings (exempt), providing interest-bearing loans to subsidiaries (exempt), and rendering taxable technical administration services to investees. The Portuguese Tax Authority disallowed €562,160.26 in input VAT deductions across 2012's twelve tax periods, challenging three expense categories. First, the Authority rejected €112,359.60 in VAT on audit and statutory certification services, classifying these as inherent shareholder costs with no direct connection to taxable subsidiary services. Second, it disallowed €35,748.31 related to legal services for asset valuations, arguing these benefited related entities rather than the SGPS itself. Third, it applied Article 23(1)(a) of the VAT Code to recalculate the pro-rata deduction for €414,052.36 in general expenses, rejecting the company's cost allocation key that heavily weighted exempt financing costs. The central dispute involves whether an SGPS conducting predominantly taxable service activities can fully deduct input VAT on overhead expenses that also support minimal exempt shareholding management. The CAAD must determine if the claimant genuinely performs economic activities under VAT principles, distinguish legitimate business costs from non-deductible shareholder expenses, evaluate the appropriate pro-rata methodology when multiple activity types coexist, and assess whether procedural rights including the right of hearing (direito de audição) were properly observed during the additional assessment process. This case establishes critical precedent for SGPS VAT treatment when service provision materially dominates resource consumption despite generating lower revenues than exempt portfolio management.

Full Decision

ARBITRAL DECISION

The arbitrators, José Baeta de Queiroz (arbitrator-president), Clotilde Celorico Palma and Luísa Anacoreta (arbitrator members), designated by the Ethics Council of the Administrative Arbitration Center ("CAAD") to form the Collective Arbitral Tribunal, constituted on 29 March 2016, agree as follows:

I. STATEMENT OF FACTS

A…, SGPS, S.A. (hereinafter "A…" or "Claimant"), legal entity no. …, with registered office at Rua …, no. …, …-… Lisbon, has, pursuant to the provisions of articles 2, no. 1, paragraph a), 3, no. 1, and 10, no. 1, paragraphs a) and no. 2, of the Legal Regime of Arbitration in Tax Matters, filed the present request for arbitral pronouncement having as its object, according to the Claimant:

– The decision of dismissal, rendered by the Head of the Division of Management and Tax Assistance of the Large Taxpayers Unit, in the context of Gracious Complaint no. …2015… in which the legality of the acts of additional assessment of Value Added Tax (VAT), of the Statements of Assessment of the respective compensatory interest, and of the corresponding account reconciliation statements were discussed, all issued by the Director-General of the Tax and Customs Authority (hereinafter "TA") in 2014 and relating to the twelve tax periods of 2012, as detailed below:

Regarding VAT:

Additional Assessment Note no. 2014…;

Regarding compensatory interest:

Assessment Note no. 2014… to no. 2014…;

Regarding account reconciliation:

Assessment Note no. 2014… to no. 2014…;

The Claimant based its request on the following grounds, in summary:

a) The Claimant, a Management Company holding shares of companies ("SGPS"), subject to the legal regime established in Decree-Law 495/88, of 30 December, (i) manages shareholdings; (ii) makes interest-bearing loans to its investee companies; (iii) and provides to these latter technical services of administration and management.

b) Among the three activities that the Claimant performs, the provision of services to its investee companies is materially the most important, the one that consumes the majority of its resources (both working hours and, above all, goods and services acquired from third parties).

c) In addition to certain income expenses – those that can be directly allocated to a certain activity – the Claimant regularly bears general expenses, whose application cannot be directly imputed to a determined operation or to a certain type of operations, but rather to the entirety of the company's activity.

d) These general expenses naturally form part of the constituent elements of the prices practiced in the context of all operations carried out by the Claimant, including the provision of services to its investee companies.

e) In the course of 2012, the Claimant did not carry out relevant operations for restructuring its portfolio of shareholdings.

f) In that same year, the income related to the management of shareholdings of the Claimant reached the global amount of € 51,516,636.00.

g) When the Claimant carries out operations for the management of shareholdings, the main expenses it bears are (i) the costs of acquisition of shareholdings; and (ii) the interest associated with the financing of these operations.

h) In the course of 2012, the Claimant continued to finance its investee companies sporadically, on normal terms, having received interest on loans in the amount of € 10,538,665 and other interest in the amount of € 1,567,492.00.

i) When the Claimant carries out financing operations to its investee companies, the main expenses it bears are the interest on its own financing.

j) The Claimant continuously has complete and up-to-date information on the situation of its investee companies, not needing to resort to the services of third parties to evaluate the financing conditions to apply in operations in which it grants credit to them.

k) The Claimant obtained income subject to VAT in the amount of € 5,918,142.64, corresponding to the sum of the amount recorded in account 72 (provision of administration services to investee companies) with the amount recorded in sub-account 781 (supplementary income).

l) If the Claimant were to cease managing shareholdings and financing its investee companies, its structure would not need to be modified, as these activities consume insignificant resources.

m) With reference to the 2012 tax periods, the Claimant deducted the entirety of VAT supported in its passive operations, in the global amount of € 1,155,924.88.

n) On 14 December 2014, the Claimant was notified of the Tax Inspection Report prepared as a result of the inspection action carried out in compliance with Service Order no. OI2014…, of 31 March 2014, and relating to the 2012 tax periods.

o) In this document, the tax authority concluded that there was VAT improperly deducted in the global amount of € 562,160.26.

p) This amount corresponds to the result of the sum of three distinct corrections:

(i) First, the tax authority disregarded, pursuant to the provisions of no. 1 of article 20 of the VAT Code, the deductions of VAT supported by the Claimant with audit and statutory certification of accounts, in the global amount of € 112,359.60. According to the understanding expressed in the Tax Inspection Report, such charges "constitute (…) charges inherent to the company, associated with its legal structure and necessary to its proper and correct functioning, being supported exclusively in its interest, presenting no relationship of direct benefit, nor even reflex benefit with any one of its investee companies, nor with the activity developed by the SGPS";

(ii) The tax authority also disregarded, pursuant to the provisions of no. 1 of article 20 of the VAT Code, the deductions of VAT supported by the Claimant with the acquisition of legal services related to the evaluation of assets of related entities, in the global amount of € 35,748.31 on the grounds that the services in question "do not belong to the sphere of A…" but rather to its related entities and, consequently, "are not covered by the VAT deduction regime, so that any and all deduction of tax associated with these operations is unwarranted".

(iii) Finally, the tax authority corrected, pursuant to the provisions of paragraph a) of no. 1 of article 23 of the VAT Code, part of the deductions referring to the other expenses of the Claimant, in the global amount of € 414,052.36. This amount corresponds to the fraction of VAT relating to general expenses (used both in the performance of taxable operations and in non-taxed operations) which, according to the understanding of the tax authority, is not deductible. To reach this conclusion, the tax authority used a cost allocation key used by the Claimant in the formation of prices for services to its investee companies and which is substantially influenced (approximately two-thirds) by expenses not subject to VAT, such as expenses with…

q) In January 2015, the Claimant was notified of acts of additional assessment of VAT that implement the corrections described in the preceding point and total the amount of € 562,160.26.

r) On the same date, the Claimant was also notified of the acts of assessment of compensatory interest identified below, whose total value amounts to € 48,406.99.

s) Also in January 2015, the Claimant was notified of the account reconciliation statements no. 2014 … to no. 2014 …, relating to the VAT and compensatory interest of all 2012 tax periods.

t) Contrary to what their designation suggests, these account reconciliation statements do not constitute compensation acts between credits arising from payment of previous assessments and the tax determined in the aforementioned self-assessment notices, but rather merely reproduce the amount determined in each of those assessments and indicate the voluntary payment deadline for those amounts.

u) On 19 March 2015, the Claimant was summoned to the tax execution proceeding no. …2015… and attached matters, initiated by the Finance Service of Lisbon –… for compulsory collection of the VAT debt and compensatory interest assessed in the aforementioned tax acts (€ 610,567.25), and increase, in the amount of € 3,962.00 (three thousand, nine hundred and sixty-two euros).

v) On 17 April 2015, the Claimant requested, pursuant to the provisions of article 169, no. 2, of the Code of Tax Procedure and Process, the suspension of the aforementioned tax execution proceeding.

w) For this purpose, the Claimant informed the tax execution body that it intended to contest the underlying assessment acts of that proceeding and presented adequate guarantee, in accordance with the provisions of article 199 of the same Code of Tax Procedure and Process [a personal bond of the investee company B…, S.A., legal entity no. …, in the amount of € 778,547.97].

x) On 19 June 2015, the Claimant was notified, through Official Letter no. …, dated the 17th of the same month, of the Order rendered by the Director-General of the Large Taxpayers Unit, pursuant to which the guarantee offered by the Claimant in the context of the aforementioned tax execution proceeding no. …2015… and attached matters was accepted.

y) The Claimant contends that: (i) the corrections effected pursuant to the provisions of no. 1 of article 20 and paragraph a) of no. 1 of article 23 of the VAT Code; (ii) the acts of additional tax assessment resulting from them; and (iii) the acts of assessment of compensatory interest identified above are illegal and should, therefore, be annulled.

z) To that end, on 23 June 2015, the Claimant filed a Gracious Complaint against the acts of VAT assessment and compensatory interest identified above, which was registered with number …2015… .

aa) On 5 October 2015, the Claimant was notified, through Official Letter no. …, from the Division of Management and Tax Assistance of the Large Taxpayers Unit, to, within fifteen days, express itself on the draft dismissal of Gracious Complaint no. …2015… .

bb) However, on 19 October 2015 - still before the end of the aforementioned fifteen-day period for exercise of the right to prior hearing – the Claimant was notified of the decision to dismiss Gracious Complaint no. …2015… .

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

Pursuant to the terms and for the purposes of the provisions of paragraph a), of no. 2 of article 6 of the RJAT [Legal Regime of Arbitration in Tax Matters], by decision of the President of the Ethics Council, duly communicated to the parties, within the legally foreseen periods, the signatories were designated arbitrators, having communicated to the Ethics Council and to the Administrative Arbitration Center their acceptance of the charge within the time period established in article 4 of the Code of Ethics of the Administrative Arbitration Center.

The Tribunal was constituted on 29 March 2016, in accordance with the provision of paragraph c), of no. 1 of article 11 of the RJAT.

The TA presented a response to the request for arbitral pronouncement, presenting in essence and in summary:

a) The Claimant is a commercial company with registered office in national territory, whose corporate object is based on "Activity of Management of Social Participation" (CAE…).

b) In addition to the exercise of such activity (non-economic and not subject to VAT), the Claimant additionally practices, in an ancillary manner, the activity of provision of technical services of administration and management to the companies in which it participates, finding itself, to that extent, subject to the legal regime foreseen for this type of company, contained in Decree-Law no. 495/88, of 30 December.

c) For VAT purposes, it is a taxable person as provided for in paragraph a) of no. 1 of article 2 of the VAT Code.

d) There was verified the improper deduction of VAT in the amount of € 562,160.26 relating to the part of the tax supported with the acquisition of specialized services, which was concluded not to have been used in the activity of provision of technical services of administration and management, subject to VAT and not exempt from it.

e) The Claimant received on 1 October 2015 the notification (Official Letter no. … of 30 September 2015) to, should it wish to, exercise its right to participation, in the prior hearing mode, within a fifteen-day period regarding the draft dismissal decision relating to Gracious Complaint no. …2015… .

f) According to the provisions of no. 3 of article 1 of Decree-Law no. 121/76, of 11 February, as a rule, the notifications and notices effected pursuant to nos. 1 and 2 of that article, are presumed made on the third day following the date of registration or on the first working day following that, when applicable, producing no effects prior to that.

g) However, there is no such presumption of notification in the case at hand, as the registration of the notification was made on 30 September 2015 and the actual delivery of the notification to the representatives of the now Claimant was made on 1 October 2015.

h) On 1 October 2015, the notification was received at the professional domicile of the Claimant's representatives, so that the fifteen-day period given by the Tax Authority for it to express itself would end on 16 October 2015.

i) The Claimant "incurred charges with asset evaluation, for purposes of a swap operation, whose direct beneficiaries are entities with which it is in a situation of related-party relationships." - see page 44 of the TIR [Tax Inspection Report].

j) Furthermore, these expenses are related to the evaluation and swap of assets, which do not belong to the sphere of A… SGPS, constituting charges supported on behalf and for account of third parties, on which VAT totaling € 35,748.21 was deducted.

k) As it is VAT relating to other taxable persons, this should be re-invoiced, pursuant to article 16 of the VAT Code.

l) The VAT relating to charges not intended for the performance of taxable operations in the sphere of the Claimant should not have any interference in the determination of the VAT relating to it. Rather, they should have a neutral effect, with the deduction being offset by a VAT assessment of, at least, equal amount.

m) With respect to the correction relating to VAT relating to expenses allegedly supported exclusively for the development of non-taxed activity, in the amount of € 112,359.60, what is at issue are the so-called "shareholder costs" and others that do not present a direct and immediate nexus with downstream taxable operations (such as, for example, the statutory auditor's fees).

n) Indeed, it is manifest that services are involved that are related to the activity of acquisition, holding and management of shareholdings developed by the Claimant, in a business management perspective and expansion of activity, relating to A… itself, as shareholder, having been contracted by the Claimant in its exclusive interest and not for the benefit of any one of its investee companies, and that, by definition, cannot be entirely imputed to them.

o) As no direct and immediate relationship with the taxed activity is apparent, nor does it appear that one can understand that one is faced with a general expense as defined by Community case law, namely, in the Cibo, SKF or Portugal Telecom judgments.

p) Indeed, according to Community case law, in the absence of a "direct link" between the inputs and the taxed outputs (as the VAT supported does not directly burden the price of downstream operations conferring deduction rights) there may be deduction of VAT supported with goods and services acquired, if the respective expenses qualify as general business expenses and form part of the constituent elements of the price of operations carried out by taxable persons conferring deduction rights.

q) But the Claimant did not demonstrate that the expenses related to the acquisition of these services form part of the cost of the various constituent elements of the price of the downstream operation.

r) With respect to the correction relating to VAT on expenses admittedly used in the pursuit of the various activities of the now Claimant, in the amount of € 414,052.36, it happened that, in the inspection procedure, given the finding of the impossibility of entirely allocating certain goods and services acquired to one of the company's activities, the aim was to determine what part of the tax supported in their acquisition is allocated to the provision of services activity and with respect to which the deduction right is verified.

s) To the main activity (acquisition, holding, disposal, management of shareholdings, resulting from which it obtains dividends, capital gains, etc.) a substantial number of resources are allocated, as the development of this activity implies, among others, the provision of advisory and/or audit services related to potential acquisition of strategic participation; assessment of investment opportunities; actions aimed at evaluating projects for development and internationalization of the group, etc.

t) Thus, it can never be considered a taxable person with the right to full deduction, that is, with the right to deduction of 100% of the VAT supported upstream with the acquisition of goods and services, with its deduction right being necessarily limited.

u) There are several judgments of the CJEU according to which a holding company, such as the now Claimant, which, accessorily to its main activity of management of shareholdings of companies of which it holds all or part of the share capital, acquires goods and services which it subsequently invoices to the said companies, is authorized to deduct the value added tax paid upstream, on condition that the services acquired upstream present a direct and immediate nexus with downstream economic operations conferring deduction rights.

v) When the aforementioned services are used by the holding company to simultaneously perform economic operations with deduction rights and economic operations without deduction rights, deduction is only permitted for the part of the VAT that is proportional to the amount relating to the first operations and the national Tax Administration is authorized to foresee one of the methods for determining the deduction right, enumerated in article 173, no. 1 of the VAT Directive.

w) In the case at hand, the Claimant having indicated to the Tax and Customs Authority, through the transfer pricing file, that part of the operational costs incurred by the holding relate to costs supported in the exercise of a single activity subject to VAT and not exempt, embodied in the provision of support services, it was decided to consider that proportion in an allocation key that reflects the costs whose VAT supported may be deductible.

x) These are charges with acquisition of advisory services of an administrative, technical and computer nature, which are necessarily common to the various activities.

y) By applying the calculated ratio of 35.20% to the total VAT identified, through sampling carried out, as allocated to common costs, a deductible VAT amount of € 224,917.33 was calculated, pursuant to articles 19 and 20 of the VCITA [VAT Code], which is considered as relating to goods or services acquired by the Claimant, for the performance of the provision of services subject to tax and not exempt from it.

z) The difference between those amounts, in the amount of € 414,052.36, constitutes the part of VAT not deductible pursuant to no. 1 of article 20 of the VCITA, by application of paragraph a) of no. 1 of article 23 of the same normative provision.

Both parties presented arguments, concluding, in essence, in the same manner as they did in their respective pleadings.

II – CASE MANAGEMENT

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

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

The proceeding is not affected by any nullities.

III - REASONING

A. FINDINGS OF FACT

The relevant facts proven are as follows:

The Claimant is a Management Company holding shares of companies ("SGPS"), established pursuant to Decree-Law no. 495/88, of 30 December;
The Claimant engages in three types of activities: it manages shareholdings, makes interest-bearing loans to its investee companies and provides technical services of administration and management to these latter.
The number of hours of work spent by the Claimant's employees with the activity of management of shareholdings is irrelevant.
In 2012, the Claimant did not carry out relevant operations for restructuring its portfolio of shareholdings.
In 2012, the Claimant financed its investee companies sporadically.
In addition to certain expenses that can be directly allocated to a certain activity, the Claimant regularly bears expenses that cannot be directly imputed to a determined operation or to a certain type of operations, but rather to the entirety of the company's activity;
The expenses that cannot be imputed to a determined activity are considered in the formation of prices practiced in the context of the operations that the Claimant performs that are taxed in VAT;
The Claimant deducted the entirety of VAT supported in its passive operations, in the global amount of € 1,155,924.66.
On 14 December 2014, the Claimant was notified of the Tax Inspection Report prepared as a result of the inspection action carried out in compliance with Service Order no. OI2014…, of 31 March 2014, relating to the 2014 tax periods.
That Report states the existence of VAT improperly deducted in the global amount of € 562,160.26.
This amount results from the following actions of the TA:

Disregard of the deduction of VAT supported with expenses for audit and statutory certification of accounts, in the amount of € 112,359.69;
Disregard of the deduction of VAT supported on the acquisition of legal services related to the evaluation of assets held by related entities, in the amount of € 35,748.31;
Correction of part of the VAT supported with other expenses of the Claimant, that part totaling € 414,052.36;

For purposes of calculating the correction referred to at the end of the preceding point, the TA used a cost allocation key based on the Claimant's transfer pricing file, having also used in the calculations without explicit identification or justification, the amount of € 2,554,695.65.
In January 2015, the Claimant was notified of acts of additional VAT assessment that implement the non-considerations and correction described, as well as acts of assessment of compensatory interest, these in the amount of € 48,406.99;
On 23 June 2015, the Claimant filed a Gracious Complaint against the acts of additional VAT assessment and respective compensatory interest;
On 30 September 2015, the TA issued Official Letter … from the Division of Management and Tax Assistance of the Large Taxpayers Unit heading the draft dismissal of said complaint.
The Claimant received the Official Letter … on 1 October 2015.
On 19 October 2015, the Claimant was notified by the Head of the Division of Management and Tax Assistance of the Large Taxpayers Unit of the decision to dismiss the Gracious Complaint, rendered on 15 October 2015.

There are no other facts to be considered, which the parties have alleged, proven or not proven.

Regarding the facts proven, the conviction of the Arbitral Tribunal was based on the body of documents submitted, including the administrative instructional proceeding file which includes the final report of the tax inspection referred to, as well as on the hearing of the recording of the testimony of a witness heard in proceeding CAAD 316/2015-T – made pursuant to court order of 16 June 2016 -, which presents relevant facts identical to what is now being analyzed and which, as expressly described in the judgment, appeared to testify with impartiality and with knowledge of the facts he referred to.

B. THE LAW

With the findings of fact established as proven, it is next important to determine the applicable law to the underlying facts, in accordance with the questions raised above.

It is thus relevant to decide on:

I – Determining the illegality of the decision to dismiss Gracious Complaint no. …2015…, due to pretermission of an essential legal formality, violating the provisions of paragraph b) of no. 1 and no. 6 of article 60 of the General Tax Law, of no. 1 of article 45 of the Code of Tax Procedure and Process and of no. 1 of article 122 of the Code of Administrative Procedure:

II - Determining whether the corrections made which resulted in the additional assessments are in compliance with the rules governing this tax at the European and internal level, and whether the exercise of the deduction right of tax supported relating to the expenses in question should be accepted, the core issue in these proceedings.

1. On the Exercise of the Right to Prior Hearing

The Claimant was notified of the intention of the TA to dismiss the gracious complaint by registered letter sent on 30 September 2015.

Such letter is presumed to have been received on 5 October 2015, since 3 and 4 were Saturday and Sunday, respectively, and on those days there is no mail distribution – article 39, no. 1 of the Code of Tax Procedure and Process (CTPP).

The Claimant had the right to express itself on the draft dismissal, a right that is granted to it by articles 267, no. 5 of the Constitution of the Portuguese Republic (CRP), 60, no. 1 paragraph b) and of the General Tax Law (GTL) and 60 of the Regime of Tax and Customs Inspection Procedure (RTCIP).

Having fifteen days to be heard in prior hearing, as established in that letter, the Claimant could do so until 20 October 2015.

However, on 15 of that month, without awaiting the Claimant's expression, the TA rendered an order dismissing said gracious complaint, when the period for that expression was still running, and notified that decision.

In so doing, the TA committed a pretermission of legal formality, because it did not give the Claimant an opportunity to express itself on the draft decision that was unfavorable to it, before the final decision.

The verified pretermission constitutes a formal defect in the proceeding, invalidating, and sufficient for the final decision of the TA to be annulled, and of everything causally following it in the proceeding, namely, the assessment acts now under attack.

It is true that article 39, no. 1 of the CTPP contains only a presumption, which certainly can be rebutted by the taxable person, when it intends to demonstrate that the letter only reached it after three days following dispatch.

The TA does not have that same faculty, which is well understood, as it would never have any interest in rebutting the presumption, proving that the registered letter was only delivered beyond those three days. In the same way that the taxable person will not be able to rebut the presumption, for lack of legitimate interest, if by chance he wishes to convince that he received the correspondence before three days.

In any case, it seems evident that the TA may already have an interest in rebutting the presumption, proving that the letter was delivered to the taxpayer before three days had elapsed, in which case the notification would have to be deemed made on a prior date – that of actual receipt. Just as is the case in the present matter.

The possibility of the TA rebutting the presumption is not expressly foreseen in the law.

However, establishing no. 1 of article 39 of the CTPP a presumption, that is, using a presumed fact in substitution of a fact that is not known (the actual date of receipt), it could always be understood that nothing prevents the TA from being convinced that receipt occurred at an earlier time. And thus, once known the fact, the presumption would cease to function.

Unless one is faced with an irrebuttable presumption, juris et de jure, which does not appear to be the case, as no. 2 of article 39 of the CTPP is clear in the sense that the presumption is juris tantum, by permitting its rebuttal by the person notified.

And it is not easy to consider that a presumption can be simultaneously juris et de jure for the one who benefits from it, and juris tantum for the one who is burdened by it.

Nevertheless, some legal scholarship – see, notably, Jorge de Sousa, in the location and work pointed out by the Claimant in its arguments – considers that, in the absence of a rule allowing it, the rebuttal of the presumption is not within the reach of the TA nor, indeed, of the court, but only of the person notified, ex vi no. 2 of the cited article 39.

This understanding was expressly adopted and seconded by the Supreme Administrative Court, at least in proceeding 1340/2015, in a judgment dated 31 March 2016.

It is this understanding that is also adopted here, in obedience, moreover, to article 8, no. 2 of the Civil Code.

Consequently, the proof made by the TA is not considered, regarding the date of notification made via the letter sent on 30 September 2015, considering such notification as realized on 5 October following, from which results the occurrence of the pretermission of the formality consisting of the lack of prior hearing of the Claimant.

Notwithstanding the verification of this formal defect, it is important to ensure that the annulment of the act is its fatal consequence. It may not be, namely, if it is concluded that the TA could not, even if it had respected the pretermitted formality, render a different decision from the one it rendered. If the defect now verified in the proceeding did not prevent it from achieving its useful and legal result, that is, if, notwithstanding, the legality of the substantive decision was assured, then the act deserves to be saved, as has long been the understanding of case law.

This is what will be seen hereinafter.

2. On the Nature and Scope of the Exercise of the Deduction Right

Regarding the exercise of the deduction right in VAT, it is appropriate to make some preliminary considerations, both on its nature and regarding its scope of application and exercise by taxable persons, whereby we shall reproduce here the general considerations already previously made by this same Tribunal in its Arbitral Decision relating to Proceedings no. 148/2012 - T/CAAD, no. 18/2013 – T/CAAD and no. 15/2015 – T/CAAD.

As is known, VAT is an indirect tax of Community origin, multiphase, which tendentially reaches all act of consumption[1]. The right to deduction is an essential element of the functioning of the tax, and should ensure its main characteristic – neutrality.

In reality, the right to deduction is embodied as the essential element of the functioning of the tax, the "mainstay of the value added tax system"[2], based on the so-called method of deduction of tax, method of tax credit, indirect subtractive method or even method of invoices. According to this method, and in compliance with the provisions of article 19 of the VCITA, through an arithmetic operation of subtraction, from the tax determined on sales and provision of services (outputs) and identifiable on the respective invoices, the tax supported on purchases and other expenses (inputs) is deducted.

As determined by the 2nd paragraph, of no. 2, of article 1 of the VAT Directive (hereinafter DVAT)[3], "At each transaction, the VAT, calculated on the price of goods or services, is due, with prior deduction of the amount of the tax that has directly affected the cost of the various constituent elements of the price." The mechanism of exercise of the deduction right allows the taxable person to eliminate from its burden the VAT supported upstream, not thus reflecting it as an operational cost of its activity, thereby removing the cumulative or cascade effect, enabling the economic neutrality of the tax.

According to what is foreseen in the DVAT, the VAT Code determines, as a general rule, the deductibility of the tax due or paid by the taxable person in the acquisitions of goods and services made to other taxable persons.

The expressly stated situations of exclusion of the deduction right are exceptional and relate to specific cases enumerated by the national legislator in exhaustive terms, in accordance with what is provided in the DVAT, depending on the type of expenses involved[4].

The rules for the exercise of the deduction right of the tax contemplate objective requirements, more linked to the type of expenses, subjective ones, relating to the taxable person, and temporal ones, relating to the period in which it is possible to exercise the deduction right of VAT, which must be met simultaneously to exercise the deduction right[5].

As objective requirements for the exercise of the deduction right of the tax we have, namely, the fact that the tax supported must be contained in an invoice issued in legal form (that is, it must comply, in its requirements, with the terms generally foreseen in article 36, no. 5 of the VCITA), that it be Portuguese VAT, and that the expense, by itself, confers the right to deduction of VAT (that is, it should not be an expense excluded from the deduction right, pursuant to the provisions of article 21 of the VCITA).

As subjective requirements for the exercise of the deduction right of the tax, it is determined, namely, that the goods and services should be directly related with the exercise of the activity in question. In compliance with the provisions of article 168 of the DVAT, transposed, in part, by article 20, no. 1, paragraph a), of the VCITA, the taxable person may deduct the VAT supported in the Member State in which it is established in the transfers of goods and provision of services, as well as in operations assimilated in intra-community acquisitions of goods and in imports located there, "When the goods and services are used for the purposes of its taxed operations (…) ".

This normative provision, in compliance with the rules of European Union Law, thus requires that there be a nexus of causality between the good or service acquired (input) and the taxed output, for the VAT to be susceptible to being deductible.

That is, the VAT supported upstream in a determined operation is only deductible insofar as it may be related downstream with an operation effectively taxed, and the relationship must be assessed based on the allocation and inclusion of the cost supported in the price of the taxed operation.

In this context, the CJEU, in Case BLP[6], concluded that the goods or services upstream must present a direct and immediate relationship with one or more taxed operations downstream, with the VAT deduction right presupposing that the expenses in question must form an integral part of the constituent elements of the price of the taxed operations.

Inevitably, the analysis of the scope of that expression " (…) direct and immediate relationship (…)", must be carried out on a case-by-case basis, with it being incumbent on the national judicial bodies to apply the criterion to the facts of each proceeding before them and to take into consideration all the circumstances in which the operations in question occur[7].

Nevertheless, as concluded by the Advocate General in Case Midland Bank, the use of the two adjectives "direct" and "immediate" cannot help but mean a particularly close relationship between the taxable operations carried out by a taxable person and the goods or services supplied by another taxable person[8].

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

Thus, according to the case law of the CJEU, whenever a taxable person exercises economic activities intended to perform exclusively taxable operations, it is not necessary, for the entirety of the tax to be deductible, to establish, with regard to each upstream operation, the existence of a direct and immediate relationship with the specific taxable operation[9].

What the legislator only requires is that the goods and services be used or susceptible to being "for the purposes of the taxable operations themselves". There is no need for the existence of a relationship with a specific taxable operation, being sufficient that there be a relationship with the company's activity.

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

Thus, in a first phase, it should be verified whether the upstream operation subject to VAT presents a direct and immediate relationship with one or more operations that confer deduction rights, presupposing the allocation of its cost in the price of the operations.

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

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

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

In compliance with the provisions of no. 1 of article 20 of the VCITA, the deduction of VAT is conferred, namely, by the transfers of goods and provision of services subject to tax and not exempt from it and the transfers of goods and provision of services that consist of operations performed abroad that would be taxable if performed in Portugal.

It is recognized unanimously by the case law of the CJEU that the mechanism of the deduction right is an essential element of the functioning of VAT as it was designed in the VAT Directives, assuming a fundamental role of ensuring the neutrality of the tax and equality of tax treatment[10]. Thus, it is constant case law of the CJEU that, as the deduction right is a fundamental element of the VAT regime, it is only possible to limit this right in the cases expressly foreseen by the DVAT and, even so, with respect for the principles of proportionality and equality, the common VAT system not being able to be emptied of its content.

As is noted in the BP Soupergaz judgment, the so-called indirect subtractive method, of invoices, tax credit, or fractional payments system, is the essential mechanism for the functioning of this type of tax. As is stated in the conclusions of this judgment, "In this regard, the right to deduction provided for in articles 17 and following of the Sixth Directive, which forms an integral part of the mechanism of value added tax, cannot, in principle, be limited and is exercised immediately with regard to the entirety of the taxes that affected the operations performed upstream, impacts the level of tax burden and should be applied similarly in all Member States, so that only derogations expressly provided for by the directive are permitted" [11].

And in the Commission v France judgment, the CJEU adds that, "The characteristics of value added tax (…) make it possible to infer that the regime of deductions is intended to free the businessman entirely from the burden of VAT, due or paid, in the context of all his economic activities. The common system of value added tax thus ensures perfect neutrality as to the tax burden of all economic activities, whatever the purposes or results of those activities, provided that those activities are themselves subject to VAT" [12].

It should also be noted that, as is stated in the Metropol judgment, "59. The provisions that provide for derogations to the principle of the right to deduction of VAT, which ensures the neutrality of this tax, are to be interpreted restrictively" [13].

The scope of the VAT deduction right is so broad that it is established law in the case law of the CJEU that it should even be granted with respect to so-called preparatory activities, with it not being required that the activity has already started for the VAT to be deductible, being able to be deducted with respect to this type of activities[14].

It should be noted in this regard that, according to the CJEU's understanding, a position that has already been subscribed to by the Tax Administration[15], the deduction right, once acquired, subsists even if the projected economic activity does not give rise to taxable operations or the taxable person, for reasons beyond its control, has not been able to use the goods or services that gave rise to the deduction in the context of taxable operations[16].

As the CJEU emphasizes, it is the acquisition of the good by the taxable person, acting in that capacity, that determines the application of the VAT system and, therefore, of the deduction mechanism[17]. The taxable person acts in that capacity when it acts for the purposes of its economic activity, in the sense of article 9, no. 1, second paragraph, of the DVAT[18]. Furthermore, as concluded in Case Intiem, the mechanism of VAT deduction regulated by the Sixth Directive "must be applied in such a way that its scope of application corresponds, as far as possible, to the scope of the professional activities of the taxable person"[19].

That is, as the CJEU notes, the principle of neutrality of VAT, regarding the tax burden of the enterprise, requires that investment expenses incurred for the needs and objectives of an enterprise be considered economic activities conferring an immediate VAT deduction right[20].

It is also important to note that, in accordance with the case law of the CJEU, the principle of neutrality of VAT requires that the deduction of the tax paid upstream be granted if the substantial requirements have been met, even if the taxable persons have neglected certain formal requirements. In this context, according to the CJEU, provided that the Tax Administration has the necessary data to determine that the taxable person, as the recipient of the operations, is a debtor of VAT, it cannot impose, regarding its deduction right, additional conditions that may have the effect of making the exercise of that right absolutely unfeasible[21].

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

3. On the Concept of Economic Activity and Its Relationship with the Deduction Right Relating to the Acquisition of Shareholdings

3.1 Case Law of the CJEU

The CJEU has been classifying the operations developed by a VAT taxable person in non-economic activities, which should remain outside the scope of the DVAT, not conferring deduction rights, and in economic activities. Only economic activities are covered within the scope of the Directive, being distinguished into activities not subject, subject and exempt and into activities subject and not exempt (that is, effectively taxed).

As noted by Advocate General Mengozzi in Case VNLTO[22], given the principle of neutrality that informs the common VAT system, a person should only bear VAT if it has affected goods and services that it used for private consumption and not for its taxable professional activities.

That is, it is not possible to deduct VAT supported upstream if it relates to the activity of the taxable person that does not have the nature of an economic activity in the sense of the DVAT.

As we have noted above regarding the scope of the "direct and immediate relationship" between the inputs containing VAT subject to deduction and the taxed operations of the taxable person, the CJEU has been adopting an increasingly broad interpretation, namely, for the matters now of interest to us regarding the management of shareholdings, being that the establishment of a causal nexus between the deductible VAT and a determined, individualized and concretized operation cannot be accepted[23].

As we have seen, according to the case law of the CJEU, "it is also admitted that there is a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a determined upstream operation and one or more downstream operations conferring deduction rights, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, indeed, a direct and immediate nexus with the entirety of the economic activity of the taxable person"[24]. However, it is imperative that there be a relationship with the economic activity of the taxable person, with the necessity of its unequivocal demonstration subsisting.

As was noted in Case Cibo[25], "1) The intervention of a holding in the management of companies in which it made participations constitutes an economic activity in the sense of article 4, no. 2, of the Sixth Directive 77/388/EEC of the Council, of 17 May 1977, relating to the harmonization of the legislation of the Member States concerning taxes on turnover - Common system of value added tax: uniform basis of assessment, insofar as it entails the performance of transactions subject to value added tax pursuant to article 2 of that directive, such as the supply, by the holding to its subsidiaries, of administrative, financial, commercial and technical services.

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

As is emphasized by the CJEU in Case I/S Fini y Skatteministeriet[26], the concept of taxable person is always linked to that of economic activity, being precisely this economic activity that justifies the qualification of the taxable person with the right to deduct. Now, if the exercise, in an independent manner, of an economic activity is, by itself, a condition of subjective incidence of this tax, thus of the possibility of conferring the right to deduction and if the deduction right is, as we have seen, the guarantor of the neutrality of the tax, the delimitation of that concept should necessarily be as broad as possible.

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

Now, it is at the level of the management of shareholdings that the determination of the scope of this concept has been much discussed, being especially relevant in this context the conclusions of Case EDM [27].

As is noted by Advocate General Philippe Léger in his conclusions in this Case[28], "(…) it is constant case law that the mere exercise of the right of property by its holder cannot, by itself, be considered an economic activity".

Earlier, in Case Polystar[29], relating to a pure holding, the CJEU had concluded that the mere acquisition and holding of shareholdings, without intervention in the management of other companies, should not be considered an economic activity, in the sense of the Sixth Directive, not conferring on its author the quality of taxable person.

In the conclusions of Case EDM[30], the CJEU further refers that the simple sale of shares and other negotiable securities, such as participations in investment funds, as well as the income inherent to these funds, do not constitute an "economic activity" in the sense of the Sixth Directive, whereby they are not covered within the scope of its application.

In compliance with this judgment, the mere taking of a financial participation in another company does not constitute exploitation of a good for the purpose of obtaining income of a permanent nature, insofar as the possible dividend, fruit of such participation, results from the mere ownership of the good and not the counterpart of any economic activity[31]. Already with respect to the interest received by a holding regarding loans granted to its subsidiary companies, these cannot, according to the conclusions of that judgment, be excluded from the scope of application of VAT.

In the same logic, the assignment of said participations does not equally meet the concept of economic activity, as is referred to in Case Satam/Sofitam[32]. As it is not the counterpart of an economic activity, in the sense of the Sixth Directive, the perception of dividends does not enter the field of application of VAT, nor can be qualified as a counterpart of possible services provided by the SGPS to its subsidiary, which are consumed in an intervention in its management (e.g. technical management support services).

It is of particular interest to note that in Case Floridienne and Berginvest[33], which underlies a holding company, the CJEU refers that the intervention in the management of subsidiaries should be considered as economic activity, insofar as it entails transactions subject to VAT, such as the provision of administrative, accounting and computer services.

That is, it is of particular interest to underscore that the CJEU, regarding the acquisition of financial participations, has already decided that the situation is different, falling within the scope of the exercise of an economic activity, in the case the acquisition of a financial participation in a company being accompanied by "(…) direct or indirect intervention in the management of the companies (…)"[34] in which the participation was taken, without prejudice to the rights that the holder of the participation has in its capacity as shareholder or member[35], insofar as such intervention entails the performance of transactions subject to VAT in terms of the DVAT, such as the provision of administrative, accounting and computer services.

The CJEU distinguishes, to this extent, holdings that intervene, directly or indirectly, in the management of their subsidiaries, from those that do not[36].

As to the treatment to be given to the management (acquisition, holding and disposal) of shareholdings beyond the case of holdings, in the context of the participations of a parent company in subsidiaries or associates, it results from the case law of the CJEU that operations relating to shares or participations in companies are covered by the scope of application of VAT when carried out within the framework of a commercial activity of trading in securities or when they constitute the direct, permanent and necessary extension of taxable activity[37].

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

As refers Rui Bastos[38], "Thus, the acquisition of participations in a pure investment perspective, having in view the obtaining of income such as dividends, directs its holding outside the concept of economic activity, being that the acquisition in a context of commercialization of securities would direct it to the exercise of an activity subject, although exempt.

The same should not occur in a context of acquisition of a participation that represents the natural and necessary extension of the commercial or industrial activity of the acquiring company, in a context of business restructuring or in a process of expansion, by choosing the acquisition of a subsidiary, to the detriment of the establishment of a permanent establishment, the same not occurring in a context of intervention in the management of the subsidiaries and, concomitantly, in activities taxed by them performed."

In Case SKF, the CJEU, invoking the principle of equality of treatment and fiscal neutrality, concludes the economic nature of takings of participations accompanied by intervention by the parent company in the management of the subsidiaries should be extended to situations of transmission of participations that put an end to that intervention.

Within the framework of the transmission of shares, the CJEU considers in Case SKF that the right to deduction of VAT paid upstream on services intended to perform a transmission of shares[39] is conferred, by virtue of article 168 of the DVAT, if there is a direct and immediate relationship between the expenses relating to the upstream services and the entirety of the economic activities (taxed) of the taxable person, the so-called "general expenses".

In that proceeding, the transmission of shares in question[40], performed with a view to the restructuring of a group of companies by the parent company, was considered an operation for obtaining income of a permanent nature of activities that exceed the framework of mere sale of shares. This operation presented a direct nexus with the organization of the industrial activity exercised by the group and thus constitutes the direct, permanent and necessary extension of the taxable activity of the taxable person, whereby that operation of sale of shares would be covered within the scope of application of VAT, susceptible to conferring the right to deduction of VAT of the respective inputs.

The CJEU considers that these services have a direct and immediate relationship with the entirety of the economic activity of the taxable person, enabling the right to deduction of the entirety of the VAT of said services.

It was debated whether the inputs associated with the disposal of shareholdings could be susceptible to permitting the deduction of VAT, through their qualification as general business expenses, in the case such disposal is not subject to VAT, a situation more frequent, as we have seen, in holdings, or alternatively, is subject but exempt, as happens with the parent company that manages a group of companies.

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

On the contrary, in the case that the disposal of shareholdings is qualified as exempt from VAT, such as happened in Case SKF, the Advocate General, relying on the conclusions of Case BLP Group, considered that the VAT paid upstream of the acquisitions of services possessed a direct and immediate relationship with the exempt operation, thus interrupting the VAT chain.

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

In this sense, the Tribunal considered that refusing the right to deduction of VAT paid upstream for consulting expenses linked to an exempt transmission of shares on account of involvement in the management of the company whose shares are transferred and admitting this right to deduction for such expenses linked to a transmission that is outside the scope of application of VAT on account of them constituting general expenses of the taxable person would lead to different tax treatment of objectively similar operations, in violation of the principle of fiscal neutrality[41].

As far as the deduction of VAT is concerned, the CJEU already concluded in Case Kretztechnik [42] that in an issuance of shares (despite being, by itself, an operation that is not covered within the scope of application of VAT, given that it does not qualify as transfer of goods or provision of services) effected in a context of capital reinforcement for the benefit of the overall economic activity of a company, it is considered that the costs of services acquired[43] by a company form part of its general expenses and are, as such, constituent elements of the price of its products.

As decided by the CJEU in this Case, "The right to deduction of VAT that affected the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition formed part of the constituent elements of the price of the taxed operations downstream conferring deduction rights (…).

However, it is also admitted that there is a right to deduction in favor of the taxable person, even in the absence of a direct and immediate relationship between a determined upstream operation and one or more downstream operations conferring deduction rights, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, indeed, a direct and immediate relationship with the entirety of the economic activity of the taxable person." (cfr. §§ 57 and 58)

"Finally, it is important to recall that the right to deduction is conferred with respect to VAT paid upstream for services performed within the framework of financial operations if the capital acquired with these latter operations has been allocated to the economic activities of the interested party. On the other hand, the expenses related to upstream services have a direct and immediate link with the economic activities of the taxable person in cases where they are exclusively imputable to economic activities performed downstream and, therefore, are only part of the constituent elements of the price of operations covered by said activities (see judgment Securenta, already mentioned, nos. 28 and 29).

It follows from the foregoing that the answer to the third question should be that the right to deduction of VAT paid upstream on services intended to perform a transmission of shares is conferred, by virtue of article 17, nos. 1 and 2, of the Sixth Directive, in the version resulting from its article 28 F, no. 1, and of article 168 of Directive 2006/112, if there is a direct and immediate relationship between the expenses relating to the upstream services and the entirety of the economic activities of the taxable person." (cfr. §§ 71 to 73)

Also with respect to the acquisition and holding of shares, the expenses incurred will be deductible as general expenses, insofar as they have "a direct and immediate nexus with the entirety of the economic activity [of the holding]", as could be the case of support services for the management of its subsidiaries[44].

As we have seen, within the framework of the acquisition and holding of shareholdings, the existence, by the participant, of direct or indirect intervention in the management of the subsidiary conditions its classification within the scope of the economic activity of holdings, raising the right to deduction of VAT supported with expenses related upstream.

To this extent, being the acquisition an operation, by nature, passive, the deductibility of VAT of expenses associated, in whole or in part, with the same, would be, strictly speaking, conditioned by the way in which the ownership thereof will be exercised in the future, that is, in a merely passive manner, limiting itself to the receipt of profits associated with it or, alternatively, in an active manner, with direct or indirect intervention in the management of the same, from which results an extension of a taxed activity.

As is noted by Rui Bastos[45], "The deduction right of general expenses susceptible to being allocated to the taxed component of the economic activity of the taxable person (management support services) should not be seen as conditioned, such as could happen with legal assistance contracted to third parties, studies on group internationalization, administrative expenses, etc., provided that the allocation of resources, such as human resources, is demonstrated with respect to that taxed activity, qualifying those charges as general business expenses and, as such, referable in the price of taxed operations and, therefore, susceptible to conferring full deduction of VAT, seeing that no reason is apparent, at this level, for differential treatment of a mixed holding from an operational company".

As the author notes, whether in a mixed holding, or a parent company, whether at the level of acquisition or holding, or at the level of its disposal, the treatment for VAT purposes of the deductibility of inputs should be the same. Treating differently the deductibility of VAT of inputs depending on the strategic option of enterprise organization or a business plan for expansion of an economic activity, whether by the establishment of a subsidiary or the creation of a mere branch, directly managing a taxed activity or, indirectly, through the intermediation of a participation, would lead to discriminatory treatment of objectively identical situations.

For its part, as the CJEU noted in Case Abbey[46], "form part of the general expenses of the taxable person and, as such, are constituent elements of the price of a company's products. Indeed, even in the case of transfer of a body of goods, when the taxable person no longer performs operations after the use of said services, the costs of the latter must be considered inherent to the entirety of the economic activity of the enterprise before the transfer." (cfr. § 35)

(…)

"any other interpretation (…) would be contrary to the principle that requires that the VAT system ensure perfect neutrality as to the tax burden of all economic activities of the enterprise, provided that these are themselves subject to VAT, and would put on the operator the cost of VAT within its economic activity without giving it the possibility of deducting it (see in this sense, judgment Gabalfrisa (…)). Thus, an arbitrary distinction would be made between, on the one hand expenses incurred for the purposes of an enterprise before the actual exploitation of it and those incurred during that exploitation and, on the other hand, expenses incurred to put an end to that exploitation. The various services used (…) for the purposes of the transfer of a body of goods or part thereof thus maintain, in principle, a direct and immediate relationship with the entirety of the economic activity of this taxable person." (cfr. §§ 35 and 36)

3.2 Case Law of CAAD

In Proceeding no. 77/2012-T, of 27 December 2012, the question was whether a management company holding shares of companies that provides services to its subsidiaries and whose employees are principally and almost exclusively allocated to that provision of services can deduct all VAT supported upstream with the acquisition of goods and services, and inclusively that connected with activities such as the holding of shareholdings, the receipt of dividends and interest derived from loans to its subsidiaries and certain services and payments.

The Tribunal began by referring to the Conclusions of Case … of the CJEU, in the context of which the "conceptual obstacle raised by the Tax and Customs Authority of the inadmissibility of full deduction of VAT supported by a SGPS, given its nature, when it is a company of this type that provides services to its subsidiaries" should be dismissed[47].

In this context, the Tribunal concludes that the Claimant is correct in arguing, in the first place, that the deduction right arises from a relationship of usage: if the resources were used by the Claimant in activities conferring deduction rights, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity in the confrontation with the entirety of revenues.

On the other hand, citing case law of the CJEU, it is noted that «it is also admitted that there is a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a determined upstream operation and one or more downstream operations conferring deduction rights, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, indeed, a direct and immediate nexus with the entirety of the economic activity of the taxable person».

In this context, the Tribunal concludes that the deduction by the Claimant of all VAT supported with services and goods acquired that have a direct and immediate nexus with the services provided to its subsidiaries conferring deduction rights or that, not having direct and immediate nexus with certain services, is VAT supported with costs that form part of the general expenses of the Claimant that have a direct and immediate nexus with the entirety of its economic activity, is legally supported.

Equally in a proceeding similar to the one contested (Proceeding no. 128/2012-T), this Tribunal already had occasion to pronounce itself, on 23 April 2013, on the deductibility of expenses supported by an operational company, "which has as its main activities the manufacture of … and products intended for its production and acquires participations in other companies and intervenes in their management with the objective of enhancing its main activity, namely by expanding internationally its area of sales to new markets and ensuring conditions for the commercialization of its products".

The question that arose was whether the Claimant could deduct VAT supported with the acquisition of goods and services necessary for the acquisition of those shareholdings and intervention in other companies.

In this Case, one also invoked the Judgment of the CJEU of 6 September 2012 rendered in Case Portugal Telecom.

As is noted, the intervention of the Claimant «in the management of companies in which it made participations constitutes an economic activity», for VAT taxation purposes, with the Claimant being authorized to deduct VAT paid upstream, provided that the services acquired upstream present a direct and immediate nexus with downstream economic operations conferring deduction rights.

Furthermore, as is stated in the same Judgment, «it is also admitted that there is a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a determined upstream operation and one or more downstream operations conferring deduction rights, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, indeed, a direct and immediate nexus with the entirety of the economic activity of the taxable person».

In these terms, this Tribunal concludes that "Thus, the deduction by the Claimant of all VAT supported with services and goods acquired that have direct and immediate nexus with the services provided to its subsidiaries conferring deduction rights or that, not having direct and immediate nexus with certain services, is VAT supported with costs that form part of the general expenses of the Claimant that have direct and immediate nexus with the entirety of its economic activity, is legally supported.

In the case at hand, the acquisition of participations was proven and the studies related to them, as well as the intervention of the Claimant's employees in subsidiary companies, supervising the activity developed and the training of human resources thereof, are inserted in its global commercialization strategy of its products (… and …), aiming at obtaining new markets with connection with local companies (Lebanon and various African countries) and ensuring the transport of these products (port terminal of …) in internal commercialization (case of the acquisition of J... –, S.A.)

Thus, although there was not proven a direct and immediate nexus between the consulting expenses that were object of the corrections made by the Tax and Customs Authority and one or more downstream operations conferring deduction rights, it was proven that the existence of a direct and immediate nexus between those expenses and the entirety of the economic activity of the Claimant, whereby the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides, being thus costs with «a direct and immediate nexus with the entirety of the economic activity of the taxable person», which, in the perspective of the referred case law of the Court of Justice of the European Union suffices to confer the deduction right."

Finally, in Proceeding no. 316/2015-T, of 5 January 2016, the question was also whether, in a SGPS that practices the same three types of activity, management of shareholdings, granting of loans and provision of services of administration and management and that «should cease managing shareholdings, its structure would not need to be modified, as the activity of management involves few resources» the so-called "shareholder costs", namely the costs with «the services of the Company Secretary, certification of accounts, GMTN program, provision of services of the Fiscal Council, maintenance of shares in the stock exchange, General Assembly» and others, such as costs with fees of statutory auditors company, advertising, and image for investors, employee training and transport of office material» give rise to deductible VAT.

In this case the Tribunal concluded that "in view of the case law of the European Union, if a holding company develops an economic activity, such as the active management of shareholdings embodied in the provision of services of administration and management to its subsidiaries, it is a VAT taxable person, with there being no limitation on the exercise of the deduction right with respect to all VAT that has burdened the acquisition of goods and services connected with the exercise of that activity. Thus, the deduction right arises from a relationship of usage: if the resources were used by the Claimant in activities conferring deduction rights, the VAT will be deductible, regardless of the legal nature of holding company that the Claimant has and the relative weight in terms of value generated by that activity in the confrontation with the entirety of revenues".

The Tribunal further states: "thus, in view of the referred case law of the CJEU, it is incorrect the understanding of the Tax and Customs Authority in considering as necessarily not connected with the provision of services to its subsidiaries the costs relating to the operation of the Claimant that «would always be incurred even if the taxable person did not provide any ancillary service», as, to consider such connection demonstrated, it is sufficient that those costs are necessary to ensure the operation of the Claimant, as the provision of services, which was the main activity of the Claimant, could not be carried out without the company bearing those costs necessary to ensure its overall operation.

In the same proceeding was also discussed the right to deduction of VAT relating to expenses connected with goods and services of mixed use, as occurs in the present proceeding, having been concluded that "the result at which the Tax and Customs Authority arrived demonstrates, from the start, the inadequacy of the method used, as it manifestly results from the proof produced that the allocation of resources to the mere holding and enjoyment of shareholdings was insignificant and the use of nearly all goods and services acquired should be imputed to the activity of provision of services of administration and management by the Claimant to its subsidiaries".

In the case being analyzed, the TA had also used the allocation key provided by the Claimant from the transfer pricing file. The tribunal considered that, "in view of the proof produced, it is manifest that the key applied by the Tax and Customs Authority to determine the allocation of the amounts of value added tax paid upstream between economic and non-economic activities has no relationship with reality, as it was proven that, in 2011, the main activity of the Claimant was the provision of services of administration and management to its subsidiaries, being insignificant the quantity of resources burdened with VAT that are connected with the mere holding and enjoyment of shareholdings (namely, only the partial sale of capital of two group companies occurred), whereby it will also have to be very reduced the degree of allocation to these activities of general expenses subject to VAT."

4. Application to the Present Case

Considering the findings of fact as proven and the substantive law enunciated above, it is important to assess the legitimacy of the Claimant's claim to deduct VAT supported in the services in question.

As we have seen, the deduction right forms an integral part of the VAT mechanism and is the guarantor of a correct application of the basic principle of tax neutrality and cannot, in principle, be limited, from which it follows that any limitation thereon must be interpreted restrictively.

As a general rule, for goods or services acquired upstream to be susceptible to deduction, they must present a direct and immediate relationship with downstream operations conferring deduction rights, with it being immaterial the ultimate objective pursued by the taxable person.

According to the CJEU, the mere acquisition and simple holding of shareholdings should not be considered economic activities.

However, the intervention of a company in the management of affiliated companies is considered an economic activity insofar as it entails the performance of transactions subject to VAT such as the provision of administrative, financial, commercial and technical services.

As we have seen, within the framework of the acquisition and holding of shareholdings, the existence, by the participant, of direct or indirect intervention in the management of the subsidiary conditions its classification within the scope of the economic activity of holdings, conferring the right to deduction of VAT supported with expenses related upstream.

The Claimant argues that, by developing an economic activity subject to VAT and not exempt, the VAT supported with general expenses is deductible and that because, owing to the majority allocation of general expenses to that activity, considered thus principal, the VAT supported with those general costs is deductible in its entirety.

The proof produced confirms that the principal activity developed by the Claimant in 2012 was that of provision of services of administration and management to its subsidiaries, as it did not carry out relevant operations for restructuring its portfolio of shareholdings.

It further results from the proof produced that, if the Claimant were to cease managing shareholdings, its structure would not need to be modified, as the activity of management of shareholdings involves residual resources.

As is duly explained in the case law already cited, a management company holding shares of companies which, in addition to the management of shareholdings, acquires services that it subsequently invoices to the companies it controls, is authorized to deduct the value added tax paid upstream, provided that the services acquired upstream present a direct and immediate nexus with downstream economic operations conferring deduction rights. Thus, in cases in which all services acquired present direct and immediate nexus with downstream economic operations conferring deduction rights, the taxable person is granted the right to deduct the entirety of the VAT that has burdened the upstream acquisition of services.

The deduction right arises from a relationship of usage: if the resources were used by the Claimant in activities conferring deduction rights, the VAT will be deductible, regardless of the legal nature of the Claimant and the relative weight of revenues generated by each type of activity.

On the other hand, it is also admitted that the right to deduction of VAT supported be granted, even should there be no direct and immediate nexus between the acquisition of upstream services and downstream taxed operations, when the costs of the services in question form part of the general expenses of the taxable person and are presented as constituent elements of the taxed services it provides, as these costs have, indeed, a direct and immediate nexus with the entirety of the economic activity of the taxable person.

Thus, in view of this case law of the CJEU, the deduction by the Claimant of all VAT supported with services and goods acquired that have direct and immediate nexus with the services provided to its subsidiaries conferring deduction rights or that, not having direct and immediate nexus with certain services, is VAT supported with costs that form part of the general expenses of the Claimant that have direct and immediate nexus with the entirety of its economic activity of provision of services, is legally supported.

Thus, to conclude for the non-deductibility of the VAT supported it is necessary [document appears to be truncated]

Frequently Asked Questions

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Can a Portuguese SGPS holding company deduct input VAT on general expenses related to subsidiary management services?

Yes, a Portuguese SGPS can deduct input VAT on general expenses related to subsidiary management services, but only proportionally. Under Article 23 of the VAT Code, when an SGPS performs both taxable activities (like providing administration and technical services to investees) and exempt activities (shareholding management and financing), general overhead expenses must be allocated using an appropriate pro-rata method. The deductible portion corresponds to the ratio of taxable turnover to total turnover. However, the expense must genuinely relate to the SGPS's economic activity—not constitute pure shareholder costs. In Process 16/2016-T, the claimant argued that service provision consumed the majority of its resources, supporting full deduction of general expenses, while the Tax Authority insisted on applying a restrictive allocation key influenced by exempt financing activities. The key determinant is whether the general expense has a direct and immediate link to taxable output transactions or forms part of the overall cost components of the business's mixed activities.

What qualifies as an economic activity for VAT purposes when performed by an SGPS under Decree-Law 495/88?

For VAT purposes under Decree-Law 495/88, an SGPS performs economic activity when it provides services to subsidiaries for remuneration, such as technical administration, management consulting, or other professional services that constitute taxable supplies. Merely holding shares (shareholding management) or providing interest-bearing loans are generally considered exempt financial activities under Article 9 of the VAT Code, not economic activities generating deduction rights. The critical distinction lies in whether the SGPS actively supplies services in a sustained manner with the intention of generating revenue. In Process 16/2016-T, the claimant emphasized that service provision was materially its most important activity, consuming the majority of working hours and third-party acquisitions, generating €5,918,142.64 in taxable income during 2012. This contrasts with passive portfolio management, which the company argued consumed insignificant resources. The CAAD must assess whether the SGPS structure and input expenses genuinely support taxable service delivery or primarily facilitate exempt shareholding functions, applying EU VAT Directive principles on direct attribution and business purpose.

How does the CAAD distinguish between shareholder costs and deductible general expenses for VAT recovery?

The CAAD distinguishes shareholder costs from deductible general expenses by examining whether expenditures serve the SGPS's own corporate obligations or directly support its economic activities generating taxable supplies. Shareholder costs—such as statutory audit fees, mandatory legal compliance, and corporate governance expenses required by company law—are incurred exclusively in the SGPS's interest as a legal entity, not for the benefit of investee companies or service recipients. These lack the direct and immediate link to taxable output required under Article 20 of the VAT Code. In Process 16/2016-T, the Tax Authority classified €112,359.60 in audit and statutory certification VAT as non-deductible shareholder costs, arguing they relate to the SGPS's legal structure rather than service provision. Conversely, deductible general expenses include overhead costs (office rent, utilities, administrative staff) that form part of the price structure for taxable services rendered to subsidiaries. The tribunal applies a functional test: does the expense contribute to the cost components of taxable outputs, or does it merely satisfy the SGPS's own regulatory obligations? Asset valuation services for related entities (€35,748.31 disallowed) exemplify costs benefiting third parties rather than supporting the SGPS's own taxable activities.

What is the right of hearing (direito de audição) procedure in Portuguese VAT additional assessment disputes?

The right of hearing (direito de audição) in Portuguese VAT additional assessment disputes is a fundamental procedural guarantee enshrined in Article 60 of the General Tax Law (Lei Geral Tributária) and the Tax Procedure Code, requiring the Tax Authority to notify taxpayers of proposed corrections before finalizing additional assessments, allowing them to present observations, evidence, and arguments. This right ensures taxpayers can contest factual findings and legal interpretations in the inspection report before assessments become definitive. The procedure typically involves: (1) taxpayer notification of the draft inspection report with proposed corrections; (2) a statutory period (usually 15 days, extendable) for the taxpayer to submit written comments; (3) Tax Authority consideration of those submissions before issuing final assessment acts. Violation of the right of hearing constitutes a formal irregularity that can invalidate subsequent assessment acts. In Process 16/2016-T, while the excerpt doesn't detail whether the claimant raised procedural violations, the case involves gracious complaint (reclamação graciosa) against 2014 additional VAT assessments totaling €562,160.26 plus compensatory interest, suggesting standard procedural steps were followed. The CAAD reviews both substantive tax treatment and procedural regularity, with hearing rights violations providing independent grounds for annulment regardless of substantive merit.

How are VAT deduction rights allocated when an SGPS performs both exempt and taxable activities for its subsidiaries?

When an SGPS performs both exempt and taxable activities, VAT deduction rights are allocated using the pro-rata method prescribed in Article 23 of the VAT Code. Input VAT on expenses exclusively attributable to taxable activities (like costs of delivering specific services to subsidiaries) is fully deductible under Article 20. Input VAT exclusively related to exempt activities (shareholding management, financing) is non-deductible. For mixed general expenses serving both activity types, the deductible percentage equals the ratio of annual taxable turnover to total turnover from both taxable and exempt activities. However, Article 23(2) allows alternative allocation methods if they more accurately reflect actual use. In Process 16/2016-T, the controversy centered on whether the claimant's cost allocation key—substantially influenced by exempt financing expenses representing two-thirds of the calculation—properly reflected resource consumption. The SGPS argued that service provision dominated actual resource use (staff time, third-party acquisitions), justifying higher deductions, while the Tax Authority applied the standard turnover-based pro-rata, disallowing €414,052.36. The allocation method must objectively represent the genuine relationship between input costs and output activities, considering both financial flows and real economic consumption of business resources. Taxpayers bear the burden of demonstrating that alternative methods more accurately reflect actual attribution than the statutory turnover ratio.

VAT Deduction Rights for SGPS Holding Companies: CAAD Case 16/2016-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. STATEMENT OF FACTS

II – CASE MANAGEMENT

III - REASONING

A. FINDINGS OF FACT

B. THE LAW

1. On the Exercise of the Right to Prior Hearing

2. On the Nature and Scope of the Exercise of the Deduction Right

3. On the Concept of Economic Activity and Its Relationship with the Deduction Right Relating to the Acquisition of Shareholdings

3.1 Case Law of the CJEU

3.2 Case Law of CAAD

4. Application to the Present Case

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

VAT Deduction Rights for SGPS Holding Companies: CAAD Case 16/2016-T

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. STATEMENT OF FACTS

II – CASE MANAGEMENT

III - REASONING

A. FINDINGS OF FACT

B. THE LAW

1. On the Exercise of the Right to Prior Hearing

2. On the Nature and Scope of the Exercise of the Deduction Right

3. On the Concept of Economic Activity and Its Relationship with the Deduction Right Relating to the Acquisition of Shareholdings

3.1 Case Law of the CJEU

3.2 Case Law of CAAD

4. Application to the Present Case

Frequently Asked Questions

Tags

FRESH Legal Group

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Table of Contents