VAT Exemption for Radiology Services Under Article 9 CIVA and Waiver Under Article 12 – CAAD Ruling 160/2016-T

ARBITRATION DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Paulino Brilhante Santos and Filipa Barros, designated by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal:

I – REPORT

On 16 March 2016, the company A…, LDA, registered under NIPC …, with headquarters in …, …, …, …-… Porto, filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly referred to as LRAT), seeking the declaration of illegality of the following additional VAT assessments and compensatory interest, for the years 2011 to 2013, in the respective amounts of €133,752.23 and €21,633.33, totalling €155,385.56:

To substantiate its request for declaration of illegality and consequent annulment of the VAT assessments and respective compensatory interest, the Applicant alleges, in summary, that:

i. Paragraph b) of Article 12, paragraph 1 of the VAT Code is fully applicable to the case of the present applicant, so it effectively had the right to waive the exemption;

ii. Consequently, it was entitled to deduct the tax borne in its passive operations, whose acceptance is being illegally refused by the Tax Authority;

iii. The applicant carries out operations framed in Article 9, paragraph 2 of the VAT Code and may therefore, as to those, waive the aforementioned exemption — the Tax Authority's reasoning therefore suffers from manifest lack of adherence to the reality of the facts and, likewise, does not make a correct interpretation of the applicable legal provisions.

iv. The argument is based on a deliberately biased reading of the applicable norms and, concomitantly, of the case law sources cited in alleged support of its thesis — such as the Kügler Judgment;

v. It is in open opposition to the case law established in CAAD.

On 17 March 2016, the request for constitution of the Arbitral Tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not proceed with the appointment of an arbitrator, so, under the provisions of paragraph a) of Article 6, paragraph 2 and paragraph a) of Article 11, paragraph 1 of the LRAT, the President of the Ethics Council of CAAD designated the undersigned as arbitrators of the Collective Arbitral Tribunal, who communicated acceptance of the charge within the applicable deadline.

On 10 May 2016, the parties were notified of these designations and did not express any intention to refuse any of them.

In accordance with the provisions of paragraph c) of Article 11, paragraph 1 of the LRAT, the Collective Arbitral Tribunal was constituted on 25 May 2016.

On 24 June 2016, the Respondent, duly notified for this purpose, submitted its response, defending itself by exception and challenge.

By order of 26 October 2016, the hearing provided for in Article 18 of the LRAT was dispensed with.

Having been granted a deadline for submission of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A deadline of 30 days was set for rendering of final decision, after submissions by the Tax Authority.

The Arbitral Tribunal is materially competent and is regularly constituted, under Articles 2, paragraph 1, letter a), 5 and 6, paragraph 1, of the LRAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under Articles 4 and 10 of the LRAT and Article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceedings are not affected by nullities.

Having considered everything, it is appropriate to render judgment

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

The Applicant was, and was at the date of the tax facts, framed in the general regime for determining taxable profit in the context of Corporate Income Tax.

With regard to VAT, the Applicant was originally framed in the exemption regime contained in Article 9 of the VAT Code.

In 2008, the Applicant filed a notice of changes in VAT, whereby it waived the exemption and opted for framing in the normal taxation regime.

The Applicant is a commercial company that engages, and engaged at the date of the tax facts, in the provision of services in the field of imaging (namely with respect to magnetic resonance imaging (MRI), CT scan, ultrasounds, Doppler ultrasound, X-ray and densitometry), having for this purpose several establishments (clinics), with its main activity being the provision of imaging services in health — analysis of the images obtained and preparation of the respective medical reports.

The collection and processing of images are, and were at the date of the tax facts, carried out at the centres of the present Applicant, to which its clients travel for this purpose.

The assessments which are the subject of the present arbitral action resulted from the conclusions reached within the scope of the tax inspection procedure carried out by the Finance Directorate of Porto, initiated and concluded in 2015, under Service Order No. OI2014….

The Tax Inspection Report contains, among other things, the following:

Services are exempt from tax "…the services provided in the exercise of the professions of physician, dentist, midwife, nurse and other paramedical professions";

"However, given that the VAT Code does not contain any definition regarding paramedical activities, it is necessary to resort to Decree-Law No. 261/93, of 24 July, as well as to Decree-Law No. 320/99, of 11 August, since these are the decrees that contain the requirements to be observed for the exercise of the respective activities".

The list appended to Decree-Law No. 261/93, of 24 July provides "in its item 1, the activity of CLINICAL AND PUBLIC HEALTH ANALYSES", and which, in accordance with the description presented therein, "…this activity translates into the development of activities at the level of clinical pathology, immunology, clinical haematology, genetics and public health, through the study, application and evaluation of analytical techniques and methods, for purposes of diagnosis and screening".

"The exemption provided for in the said Article 9, paragraph 1 of the VAT Code operates independently of the legal nature of the service provider and, namely, of the fact that it is a natural or legal person and, likewise, that exemption is based on paragraph c) of Article 132 of Directive 2006/112/EC, of the Council, of 28 November [the 'Sixth Directive']".

Services are exempt "the medical and health services and operations closely connected therewith provided by hospital establishments, clinics, dispensaries and similar establishments";

Article 9/2 of the VAT Code "transposes into the internal legal order paragraph b) of Article 132, paragraph 1 of Directive 2006/112/EC, of the Council, of 28 November, providing that the following activities are exempt from tax: Hospitalization and medical assistance, as well as operations closely related thereto, provided by public bodies or, in conditions analogous to those applicable to the latter, by hospital establishments, medical and diagnostic care centres and other establishments of the same nature duly recognized".

"This exemption covers the provision of medical and health services (health acts) consisting of providing assistance to persons, diagnosing and treating diseases or any health anomalies and operations connected therewith, provided by the establishments referred to in the aforementioned norm or by similar establishments (hospitalization/admission)".

"Establishments similar, for purposes of the exemption referred to, are considered to be public or private establishments that diagnose and treat diseases or any other health anomaly, that is, establishments that effectively carry out operations that have the nature of health services".

"The Court of Justice of the European Communities, in its judgment of 10 September 2002, delivered in Case C-141/00, concerning the Kügler case (paragraph 36), demonstrated that paragraphs b) and c) of Article 132, paragraph 1 of the VAT Directive, although aimed at regulating the exemptions applicable to medical assistance services, have distinct scopes";

"Whereas paragraph b) [of Article 132, paragraph 1 of the VAT Directive] – which corresponds to Article 9, paragraph 2 of the VAT Code – exempts the provision of medical assistance services provided in the hospital environment, including closely connected operations, paragraph c) [of Article 132, paragraph 1 of the VAT Directive] – is intended to exempt the provision of medical and paramedical services provided outside these places, whether in the private residence of the service provider, in the patient's residence, or in any other place";

"The various medical examinations are carried out in the facilities of the taxpayer, located in the Atlantic Health Space, as their execution involves the use of various equipment, some of which are of large dimensions. Subsequently, the various images collected are analyzed and the relevant examination reports are issued".

"In no case did the services provided involve the hospitalization or admission of patients, and, as stated in the preceding paragraph, it is verified that they are not carried out in a hospital environment";

"The taxpayer cannot consider the activities exercised as exempt from tax by being framed in Article 9, paragraph 2 of the VAT Code, but only by invoking what is provided in Article 9, paragraph 1 of the same code. Consequently, being framed in Article 9, paragraph 1 of the VAT Code, the taxpayer could not waive the exemption, due to the non-existence of a legal norm that permitted it to do so, since the waiver of the exemption provided for in paragraph b) of Article 12, paragraph 1 of the VAT Code only applies to the exemption in Article 9, paragraph 2 of the VAT Code";

A.2. Facts established as not proven

None.

A.3. Substantiation of the factual matters proven and not proven

With regard to factual matters, the Tribunal does not have to pronounce itself on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between proven and unproven matters (see Article 123, paragraph 2, of the Tax Procedure Code and Article 607, paragraph 3 of the Civil Procedure Code, applicable pursuant to Article 29, paragraph 1, letters a) and e), of the LRAT).

Thus, the facts pertinent to the judgment of the case are chosen and selected according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (see former Article 511, paragraph 1, of the Civil Procedure Code, corresponding to the current Article 596, applicable pursuant to Article 29, paragraph 1, letter e), of the LRAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110, paragraph 7 of the Tax Procedure Code, the documentary evidence and the procedural file joined to the case, the above-listed facts were considered proven, with relevance for the decision.

B. ON THE LAW

i. On the matter of exception.

The Respondent begins by questioning the material competence of the Arbitral Tribunal to appreciate the claim that was submitted to it, since, in its view, "the first issue to be decided relates to whether or not the right of waiver of exemption by the Applicant is recognized", so "the acts of additional VAT assessment effected should be qualified as consequential acts".

This same issue was raised in case 168/2015-T of CAAD[1], where dealing with a matter entirely identical to that of the present case, it was written what now, with due respect, is transcribed:

"Administrative Order No. 112-A/2011, with respect to the acts that may be categorized within those indicated in Article 2, only removed from the scope of the Tax Authority's binding effect, in non-customs matters, claims relating to self-assessment acts, withholding at source and payments on account that were not preceded by recourse to the administrative remedy and claims relating to acts determining taxable matter and acts determining the taxable basis, both by indirect methods, including the decision of the review procedure.

It is clear that we are not dealing with any of the situations in which Administrative Order No. 112-A/2011 removes the competence of the arbitral tribunals that function in CAAD, so competence must be assessed solely in light of the LRAT.

As can be seen from Article 2 of the LRAT, the competence of the arbitral tribunals that function in CAAD was defined by the LRAT only taking into account the type of acts that are the subject of the claims of taxpayers and not based on the type of questions that must be appreciated to decide whether the acts are legal or illegal.

There is, in particular, no prohibition on the appreciation of matters relating to the verification of the requirements of the right to waive the VAT exemption or any other questions of legality relating to the acts of the types referred to in Article 2 of the LRAT. A tax assessment that departs from the disregard of an exemption or a waiver of exemption does not cease to be a tax assessment act. And the claim for appreciation of the legality or illegality of that underlying disregard in a tax assessment act does not, therefore, cease to be the appreciation of a claim relating to the declaration of illegality of tax assessment acts, in which that disregard is materialized.

Thus, in arbitral proceedings, similarly to what occurs in judicial review proceedings, any illegality may, as a rule, be imputed to assessment acts, as follows from Article 99 of the Tax Procedure Code, subsidiarily applicable.

This will not be the case only where the law provides for autonomous contestability of administrative acts that are the prerequisite of assessment acts, only to that extent being excluded the appreciation of the legality of assessment acts in all respects. However, for such autonomous contestability to exist, there must be some administrative act in tax matters, since contestability relates to acts and not to legal positions assumed explicitly or implicitly as prerequisites of assessment acts, but not materialized in autonomous tax acts.

The consequential acts, of which the Tax Authority speaks, are consequential to other tax or administrative acts and, in the case at hand, there is no notice that any administrative act was carried out assessing whether the Applicant has or does not have the right to waive the VAT exemption.

That is, for there to be a limitation on the contestability of the disputed assessment acts, there would have to have been carried out, previously, some administrative act that was a prerequisite of these assessment acts, which did not occur in the case at hand.

For this reason, being the assessment acts injurious to the interests of the Applicant and being the sole acts carried out by the tax administration with respect to the situation assessed in them, their contentious contestability must be ensured on the ground of any illegality, as follows from the principle of effective judicial protection, enshrined in Articles 20, paragraph 1, and 268, paragraph 4, of the Constitution of the Portuguese Republic.

On the other hand, when there is no autonomous contestable act prior to a tax assessment relating to its prerequisites, "any illegality previously committed may be invoked in the challenge to the final decision" (last part of Article 54 of the Tax Procedure Code), so all questions relating to the legality of assessment acts may be appreciated in tax courts in judicial review proceedings, as follows from paragraph a) of Article 97, paragraph 1 and Article 99 of the same Code.

In fact, in tax courts, even when, having been carried out assessment acts, there is a situation in which it could be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (by enabling, in addition to the appreciation of the legality of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial review is a mere faculty, as follows from the text of Article 145, paragraph 3, of the Tax Procedure Code itself, by stating that "actions may only be proposed whenever this procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest". That is, what is provided in this norm is a limitation on the use of action and not a limitation on the use of judicial review proceedings.

Indeed, it is clear that judicial review proceedings include the possibility of recognition of rights in tax matters, such as the right to the annulment or declaration of nullity of assessments, the right to compensatory interest and the right to compensation for undue guarantee, so the fact that recognition of rights is at stake is not an obstacle to the use of judicial review proceedings.

Thus, as the Tax Authority states, having the tax arbitral proceedings been created as an alternative to judicial review proceedings, it must be concluded that there is no obstacle to the legality of the assessment acts in question in these proceedings being appreciated by this Arbitral Tribunal, since in tax courts that legality could be appreciated in judicial review proceedings.

Therefore, as regards the request for annulment of the assessment acts, the exception to material incompetence raised by the Tax Authority on the ground that recognition of a right in tax matters is at stake is without merit."

Not seeing reason to diverge from what was skillfully expounded in the aforementioned judgment, indeed fully subscripting to what was expounded therein, the exception to material incompetence raised by the Respondent is judged to be without merit.

ii. on the merits of the case

It falls to this Tribunal, competent for such, to verify the legality of the VAT assessments disputed, identified above.

First, it is necessary to conclude on the legality of the ground of the decision of the Tax Authority, which frames the activity of the Applicant, because developed outside the hospital environment, as not susceptible to waiver.

It is important to note, for what is at issue here, Articles 9 and 12 of the VAT Code:

Article 9

Exemptions in domestic operations

The following are exempt from tax:

1. Services provided in the exercise of the professions of physician, dentist, midwife, nurse and other paramedical professions;

2. Medical and health services and operations closely connected therewith provided by hospital establishments, clinics, dispensaries and similar establishments;

(...)

Article 12

Waiver of exemption

1 - The following may waive the exemption, opting for the application of tax to their operations:

(...)

b) Hospital establishments, clinics, dispensaries and similar establishments, not belonging to public legal entities or private institutions integrated in the national health system, that provide medical and health services and operations closely connected therewith;

(...)

2 - The right of option is exercised by submitting, at any tax office or other legally authorized location, a declaration of commencement or changes, as the case may be, taking effect from the date of its submission.

3 - Having exercised the right of option in accordance with the above paragraphs, the taxpayer is obliged to remain in the regime for which it has opted for a period of at least five years, and upon the expiry of such period, in case it wishes to return to the exemption regime:

a) Submit, during the month of January of one of the years following the one in which the deadline for the optional regime was completed, the declaration referred to in Article 32, which takes effect from 1 January of the year of its submission;

b) Subject taxation to remaining inventory and proceed, in accordance with paragraph 5 of Article 24, to the adjustment of the deduction for fixed assets.

These exemptions are related to Article 132 of Directive No. 2006/112/EC, of 28-11-2006, namely:

1. Member States exempt the following operations:

(...)

b) Hospitalization and medical assistance, as well as operations closely connected therewith, provided by public bodies or, in conditions analogous to those applicable to the latter, by hospital establishments, medical and diagnostic care centres and other establishments of the same nature duly recognized;

c) Services provided in the exercise of medical and paramedical professions, as defined by the Member State in question; (…)

Thus, paragraph b) of Article 12, paragraph 1 of the VAT Code permits only the waiver of the exemption of entities exempt under Article 9, paragraph 2 of that same code.

In the position of the Tax Authority, referring to the Kügler case (judgment of the CJEU of 10 September 2002, delivered in Case C-141/00), it is argued that "the exemption provided for in Article 9, paragraph 1 of the VAT Code, operates independently of the legal nature of the service provider and, namely, of the fact that it is a natural or legal person and, likewise, that exemption is based on paragraph c) of Article 132, paragraph 1 of Directive 2006/112/EC, of the Council, of 28 November.(…)" and that it is intended to exempt the provision of medical and paramedical services provided outside these places, whether in the private residence of the service provider, in the patient's residence, or in any other place. And, on the other hand, that Article 9, paragraph 2 of the VAT Code, which exempts the provision of medical assistance services carried out in a hospital environment, including closely connected operations, "transposes into the internal legal order paragraph b) of Article 132, paragraph 1 of the aforementioned Directive 2006/112/EC (…)".

Considering that the activity of the Applicant is carried out outside the hospital environment, the Tax Authority argues that the exemption that applies to it does so under Article 9, paragraph 1 of the VAT Code.

However, it is not derived from the aforementioned judgment that, as the Tax Authority asserts, only hospitals are within the scope of paragraph b) of the Article 132 cited above.

The CJEU, in the judgment L.u.P. (of 8 June 2006, delivered in Case C-106/05), subsequent to the Kügler judgment, clarified that "Article 13 A, paragraph 1, letter b), of the Sixth Directive 77/388/CEE of the Council, of 17 May 1977, (...) must be interpreted as meaning that clinical analyses whose purpose is the observation and examination of patients as a preventive measure, which are carried out, as in the case of the proceedings before it, by a private laboratory external to a medical care establishment under the prescription of general practitioners, are capable of being covered by the exemption provided for by that provision as medical care provided by another".

In this judgment L.u.P., the CJEU understood that "since clinical analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical assistance' provided for in Article 13 A, paragraph 1, letter b), of the Sixth Directive, a laboratory such as that in question in the proceedings before it must be considered an establishment of the 'same nature' as the 'hospital establishments' and the 'medical and diagnostic care centres' within the meaning of that provision" (paragraph 35).

In support, what is derived from paragraph 35 of the CJEU judgment De Fruytier, of 02-07-2015, delivered in Case C-334/14, in which the judgments L.u.P., C‑106/05, paragraphs 18 and 35 and CopyGene, C‑262/08, paragraph 60, are cited, "that a private laboratory that carries out clinical analyses must be considered an establishment 'of the same nature' as the 'hospital establishments' and the 'medical and diagnostic care centres' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical assistance'.

Thus, the case law of the European Court is sufficiently clear on this matter, to the effect that, as was written in the decision of arbitral case 168/2015-T, already cited, "the exemption provided for in paragraph b) of Article 132 covers the services provided by entities of the types that the Applicant provides services, independently of whether the provision occurs or not in a hospital environment, an interpretation that is in manifest harmony with the text of this norm, by making reference to the exemption of operations closely related to hospitalization and medical assistance provided by 'medical and diagnostic care centres'".

In this way, the Applicant has subjective conditions that are fundamental to the exemption of paragraph b) of Article 132, paragraph 1 of the Directive. It being that, as is argued by the Applicant, it is not a body that carries out its activity in conditions analogous to those applicable to public bodies.

As for its framing in national law, the Tax Authority incorrectly interprets the reference to "dispensaries and similar establishments" in the exemption provided for in Article 9, paragraph 2 of the VAT Code. For it is in this reference "dispensaries and similar establishments" that other establishments are included in which "medical and diagnostic care centres and other establishments of the same nature", also in accordance with paragraph b) of Article 132, paragraph 1 of Directive 2006/112/EC.

Referring again to the Judgment delivered in arbitral case No. 168/2015-T:

"The reference to 'dispensaries' unequivocally covers provision of health services outside that hospital environment, since the meaning of 'dispensary' is that of 'a charitable establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines' (...), or 'an establishment for providing, free of charge, care and medicines to poor patients who can be treated at home' (...).

On the other hand, the reference to 'similar establishments', interpreted in accordance with the parallel norm of paragraph c) of Article 132 of Directive 2006/112/EC, which makes reference to 'medical and diagnostic care centres and other establishments of the same nature', allows us to conclude that entities of the type of the Applicant, which provides health services in clinical analyses and diagnosis in connection with hospital establishments, would also fall within that concept.

Thus, there is no textual support for the thesis defended by the Tax Authority that the exemption applicable to establishments of the type of the Applicant is not provided for in Article 9, paragraph 2 of the VAT Code.".

By identity of reasoning, the same is to be understood with respect to the imaging activity to which the Applicant is engaged.

Being thus the applicable norm Article 9, paragraph 2 of the VAT Code, and because it here permits framing in a subject regime, the possibility of waiver of the exemption provided for in paragraph b) of Article 12, paragraph 1 of the VAT Code cannot be excluded.

Thus, the assessments carried out by the Tax Authority are affected by a defect of error in the application of law.

This conclusion is not opposed by the argument of the Respondent at arbitration (see paragraphs 61 et seq. of the Response), relating to a possible violation of the principle of neutrality resulting from the option for the exemption regime enshrined in Article 12, paragraph 1, letter b) of the VAT Code, inasmuch as such does not form part of the factual and legal grounds of the tax acts whose legality it is now necessary to examine, given that such acts were based on the non-applicability of that norm, by considering the factual requirements of Article 9, paragraph 1 of the VAT Code to be met, and not of Article 9, paragraph 2 of that same article.

The Applicant combines with the request for annulment of the tax acts which are the subject of the present case, the request for compensation provided for in Articles 171 of the Tax Procedure Code and 53 of the General Tax Law, in case it should be judged that the guarantee that the Applicant provided with a view to the suspension of the tax enforcement proceeding launched in the meantime is undue.

Nothing having been proven in this respect, this part of the arbitral request must be rejected.

C. DECISION

We hereby decide in this Arbitral Tribunal to judge the arbitral request filed as founded and, in consequence:

a) Annul the assessments which are the subject of the present tax arbitral action;

b) Condemn the Respondent in the costs of the proceedings, in the amount of €3,672.00.

D. Value of the case

The value of the case is set at €155,385.56, under Article 97-A, paragraph 1, a), of the Tax Procedure and Process Code, applicable by virtue of paragraphs a) and b) of Article 29, paragraph 1 of the LRAT and paragraph 2 of Article 3 of the Regulations for Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is set at €3,672.00, under Table I of the Regulations for Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, since the request was entirely founded, under Articles 12, paragraph 2, and 22, paragraph 4, both of the LRAT, and Article 4, paragraph 4, of the aforementioned Regulation.

Let notification be made.

Lisbon

23 November 2016

The Presiding Arbitrator

(José Pedro Carvalho - Rapporteur)

The Arbitrator Member

(Paulino Brilhante Santos)

The Arbitrator Member

(Filipa Barros)

[1] Available for consultation at www.caad.org.pt.