VAT Exemption Waiver for Health Establishments: CAAD Arbitration on Additional Assessments

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (arbitrator-president), Dr. José Nunes Barata and Dr. Paulo Lourenço, designated by the Ethical Council of the Administrative Arbitration Centre to constitute the Arbitral Tribunal, constituted on 25-05-2016, agree as follows:

1. Report

A…, LDA, TAX ID…, with registered office at …, …, Floor…, …-… Porto, (hereinafter referred to as "A…" or "APPLICANT"), came, pursuant to sub-section a) of no. 1 of article 2 and articles 10 and following of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), to request the constitution of a Collective Arbitral Tribunal with a view to declaring the illegality and annulment of the additional VAT assessments and compensatory interest in the global amount of € 143,928.94 detailed below:

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 24-03-2016.

Pursuant to the provisions of sub-section a) of no. 2 of article 6 and sub-section b) of no. 1 of article 11 of the RJAT, the Ethical Council designated as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.

On 10-05-2016, the parties were notified of this appointment and manifested no intention to challenge the designation of the arbitrators, in accordance with the combined provisions of article 11 no. 1 sub-sections a) and b) of the RJAT and articles 6 and 7 of the Ethical Code.

Thus, in conformity with the provisions of sub-section c) of no. 1 of article 11 of the RJAT, the collective arbitral tribunal was constituted on 25-05-2016.

The Tax and Customs Authority raised the plea of lack of material jurisdiction on the grounds that the recognition of a right in tax law matters was at issue and argued that the application for arbitral ruling should be rejected.

The Applicant submitted written observations on the plea, arguing that it was unfounded.

By procedural order of 26-09-2016, the meeting provided for in article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with submissions.

The parties submitted their written arguments.

The arbitral tribunal was duly constituted.

The parties have legal personality and capacity, are entitled to bring proceedings (articles 4 and 10 no. 2 of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings are free from any procedural defects.

It is necessary to address as a priority the plea regarding lack of jurisdiction.

2. Issue of lack of material jurisdiction of this Arbitral Tribunal arising from the question of recognition of a right in tax law matters

The Tax and Customs Authority contends that this Arbitral Tribunal lacks material jurisdiction to consider the application for arbitral ruling because, in summary, in order to assess the legality of the assessments, it would be necessary to previously decide on the legality of the prerequisites of the right to waive the VAT exemption which the Applicant exercised, pursuant to the provisions of sub-section b) of no. 1 of article 12 of the VAT Code, and therefore "the acts of additional VAT assessment should be qualified as consequential acts."

The Tax and Customs Authority states that "acts should be qualified as consequential which were produced, or endowed with certain content, by reason of the existence of previous allegedly valid acts which serve them as cause, basis or prerequisite" and understands that "the acts of additional VAT assessment pending consideration in this arbitral instance are in a relationship of dependence on the recognition or not of the right of the Applicant to waive the VAT exemption, in accordance with article 12 no. 1 sub-section b) of the VAT Code."

For this reason, the Tax and Customs Authority contends that "this arbitral instance lacks material jurisdiction to hear the present case, specifically to assess whether the Applicant does or does not have the right to waive the exemption provided for in article 9 of the VAT Code."

The jurisdiction of arbitral tribunals functioning in the CAAD is defined, in the first instance, by article 2 no. 1 of the RJAT, which establishes the following:

1 - The jurisdiction of arbitral tribunals comprises the consideration of the following claims:

a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts fixing the taxable matter when it does not give rise to the assessment of any tax, of acts determining the taxable matter and of acts fixing patrimonial values;

In the second instance, the jurisdiction of arbitral tribunals functioning in the CAAD is limited by the commitment of the Tax and Customs Authority which, pursuant to article 4 no. 1 of the RJAT, came to be defined by Ordinance no. 112-A/2011, of 12 March, which establishes the following, to the extent relevant here:

The bodies and agencies referred to in the previous article undertake to submit to the jurisdiction of arbitral tribunals functioning in the CAAD having as their object the consideration of claims relating to taxes the administration of which is entrusted to them referred to in no. 1 of article 2 of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to the administrative procedure in accordance with articles 131 to 133 of the Tax and Procedural Code;

b) Claims relating to acts determining the taxable matter and acts determining the taxable matter, both by indirect methods, including the decision of the review procedure;

c) Claims relating to customs duties on importation and other indirect taxes levied on goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or proceedings to be carried out by another Member State under administrative cooperation in customs matters.

Ordinance no. 112-A/2011, regarding acts that can be framed in the indications of article 2, only removed from the scope of the commitment of the Tax Administration, in non-customs matters, claims relating to acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to the administrative procedure and claims relating to acts determining the taxable matter and acts determining the taxable matter, both by indirect methods, including the decision of the review procedure.

It is manifest that we are not dealing with any of the situations in which Ordinance no. 112-A/2011 removes the jurisdiction of arbitral tribunals functioning in the CAAD, and therefore jurisdiction must be assessed solely on the basis of the RJAT.

As can be seen from article 2 of the RJAT, the jurisdiction of arbitral tribunals functioning in the CAAD was defined by the RJAT solely taking into account the type of acts that are the subject matter of the claims of taxpayers and not as a function of the type of questions that need to be considered in order to decide whether the acts are legal or illegal.

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

Thus, in arbitral proceedings, as occurs in judicial challenge proceedings, any illegality may, as a rule, be imputed to assessment acts, as follows from article 99 of the Tax and Procedural Code, which applies subsidiarily.

This will not be the case only in situations where the law provides for autonomous challengeability of administrative acts that are prerequisites of assessment acts, and only to that extent that the consideration of the legality of the assessment acts in all respects is excluded. However, for there to be such autonomous challengeability, it is necessary that there be some administrative act in tax matters, since challengeability 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, as mentioned by the Tax and Customs Authority, are consequential to other previous tax or administrative acts and, in the case at hand, there is no evidence that any administrative act was performed 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 challengeability of the assessment acts being challenged, some administrative act would have to have been previously performed that was a prerequisite of these assessment acts, which did not occur in the case at hand.

For this reason, since the assessment acts are harmful to the interests of the Applicant and are the only acts performed by the tax administration regarding the situation assessed therein, their contentious challengeability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection enshrined in articles 20 no. 1 and 268 no. 4 of the Portuguese Constitution.

On the other hand, when there is no previously autonomous challengeable act prior to an assessment act concerning its prerequisites, "any illegality previously committed may be invoked in the challenge to the final decision" (final part of article 54 of the Tax and Procedural Code), and therefore all questions relating to the legality of assessment acts may be considered in tax courts in judicial challenge proceedings, as follows from sub-section a) of no. 1 of article 97 and article 99 of the same Code.

In fact, in tax courts, even when, having performed assessment acts, one is faced with a situation in which it might be more useful for the taxpayer to use an action for recognition of a right or legitimate interest (by allowing, in addition to the consideration of the legality of acts, the definition for the future of the taxpayer's rights), the use of an action instead of judicial challenge is a mere option, as follows from the very text of article 145 no. 3 of the Tax and Procedural Code, stating that "actions may only be brought whenever this procedural method is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest." That is, what is provided for in this rule is a limitation on the use of the action and not a limitation on the use of the judicial challenge procedure.

In fact, it is manifest that the judicial challenge procedure includes the possibility of recognition of rights in tax law matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnifying interest and the right to compensation for undue guarantee, and therefore the fact that recognition of rights is at issue is not an obstacle to the use of the judicial challenge procedure.

Thus, given that tax arbitral proceedings were created as an alternative to judicial challenge proceedings, it must be concluded that there is no obstacle to the legality of the assessment acts in this proceeding being considered by this Arbitral Tribunal, since in tax courts that legality could be considered in judicial challenge proceedings.

For this reason, the plea of lack of material jurisdiction raised by the Tax and Customs Authority is unfounded.

3. Matter of Fact

3.1. Proven Facts

The following facts are considered proven:

a) The Applicant was constituted on 1 March 2002 in the form of a private company limited by shares, under the corporate name B…, Lda;

b) In 2006, the Applicant began to be designated C…, Lda and, in 2013, began to use the business name A…, Lda.;

c) The Applicant commenced activity on 06-01-1978, being registered for the exercise of "Clinical Analysis Laboratories" (Economic Activity Code…);

d) The Applicant is engaged in imaging activities, through various facilities to which its clients travel and where it carries out image collection and processing, with no hospitalization or admission;

e) On 17-03-2008, the Applicant waived the VAT exemption, beginning to charge it to its clients and to deduct it, until 01-01-2014, the date on which it opted for the exemption regime;

f) The Tax and Customs Authority carried out an inspection of the Applicant, determined by Service Order no. OI2014…, in which the Report forming part of the administrative file was prepared, the contents of which are given as reproduced, which states, among other things, the following:

3.1. Tax Classification

The taxable person is registered for the exercise of the activity of "Clinical Medical Practice Specialized, Outpatient" (Economic Activity Code…), having commenced activity on 01/03/2002.

For VAT purposes, the taxable person, at the date of commencement of activity, was classified under the exemption regime provided for in article 3 of the VAT Code (VACC), having, on 17/03/2008, opted for the normal taxation regime, in accordance with sub-section b) of no. 1 of article 12 of the same Code, through submission of a declaration of changes to commencement of activity, provided for in article 32 of the VACC.

The taxpayer was covered by the normal quarterly periodicity regime, until 01/01/2014, the date on which it was again classified under the exemption regime provided for in article 9 of the VACC, through submission of a declaration of changes to commencement of activity.

(...)

3.2. Actual Activity and VAT Classification

In the course of the inspection procedure, it was concluded that the activity of the taxable person consisted of the provision of health services in the imaging field, specifically magnetic resonance imaging (MRI), CT scans, ultrasounds, Doppler ultrasounds, X-rays and densitometry.

The provision of imaging health services benefits from the VAT exemption provided for in article 9 of the VAT Code.

3.3. Waiver of VAT Exemption

On 01/03/2002, the taxable person was classified under the exemption regime provided for in article 9 of the VAT Code (VACC), having on 17/03/2008 opted for the normal taxation regime, in accordance with sub-section b) of no. 1 of article 12 of the same Code, through submission of a declaration of changes to commencement of activity, provided for in article 32 of the VACC. Consequently, and from then on, the taxable person began to subject to VAT the imaging services.

In fact, in the period under review, the taxable person subjected to VAT the operations carried out within the scope of the activities developed and described in the preceding section and deducted all of the tax borne on the acquisition of goods and services.

As will be demonstrated in Chapter III of this report, the said waiver of VAT exemption could not have been implemented due to lack of legal basis, and the taxable person in the period under review should have been classified under the exemption regime provided for in article 9 of the VACC.

(...)

III - DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS TO THE TAXABLE MATTER AND TAX PAYABLE

Value Added Tax

1. Legislative Framework for Imaging Activity in Health

The following exposition is intended to provide a framework for imaging activity in health, under Value Added Tax (VAT).

1.1. Article 9, No. 1, of the VACC

Pursuant to no. 1 of article 9 of the VACC are exempt from tax "Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions."

However, given that the VACC does not contain any definition with respect to 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 instruments that contain the requirements to be observed for the exercise of the respective activities.

It should be noted that the list attached to Decree-Law no. 261/93, of 24 July, provides in its item 1, the activity of Radiology. According to the description presented there, this activity translates to the "carrying out of all examinations in the field of medical diagnostic radiology; programming, execution and evaluation of all radiological techniques involved in the prevention and promotion of health;...".

The different examinations are performed by doctors or other health technicians/professionals regulated by Decree-Law no. 261/93.

Finally, it should be noted that the exemption provided for in the aforementioned no. 1 of article 9 of the VACC operates regardless of the legal nature of the service provider and, in particular, whether it is a natural or legal person.

1.2. Article 9, No. 2, of the VACC

Pursuant to article 9 no. 2 of the VACC, are exempt "Medical and health services and operations closely connected therewith provided by hospital facilities, clinics, dispensaries and similar establishments."

No. 2 of article 9 of the VACC transposes into internal law sub-section b) of no. 1 of article 132 of Directive 2006/112/EC, of 28 November, providing that the following activities are exempt from tax: "Hospitalization and medical care, as well as operations closely related thereto, provided by public bodies or, under conditions analogous to those applying to the latter, by hospital facilities, medical care and diagnostic centers and other establishments of the same nature duly recognized."

Therefore, it can be concluded that 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, carried out by the establishments expressed in the aforementioned rule or by similar establishments (hospitalization/admission).

On the other hand, similar establishments, for purposes of the aforementioned exemption, are understood to be establishments, public or private, that diagnose and treat diseases or any other health anomaly, that is, establishments that actually carry out operations of the nature of health services.

1.3. Court of Justice Judgment - Scope of Nos. 1 and 2 of Article 9 of the VACC

The Court of Justice of the European Communities, in the Judgment of 10 September 2002, delivered in Case C-141/00, concerning the Kügler case (no. 36), clarified that sub-sections b) and c) of no. 1 of article 132 of the VAT Directive, although intended to regulate the exemptions applicable to medical assistance services, have distinct scopes.

While sub-section b) - which corresponds to no. 2 of article 9 of the VACC - exempts the provision of assistance services in the hospital setting, including closely connected operations, sub-section c) – which corresponds to no. 1 of article 9 of the VACC – is intended to exempt the provision of medical and paramedical services outside such locations, whether at the service provider's private home, at the patient's home, or anywhere else.

1. Situation of the Taxpayer

2.1. Activity Actually Engaged In

The taxable person commenced the provision of health services in the imaging field, specifically magnetic resonance imaging (MRI), CT scans, ultrasounds, Doppler ultrasounds, X-rays and densitometry, on 01/03/2002.

The activity actually engaged in by the taxable person which benefits from VAT exemption, under article 9 of the VAT Code, and for which it waived the exemption, in accordance with sub-section b) of no. 1 of article 12 of the VAT Code, consists essentially of the provision of health services in the imaging field (examinations). The various medical examinations are performed at the facilities of the taxable person, located at …, since their execution involves the use of various equipment, some of which of large dimensions. Subsequently, the various images collected are analyzed and the corresponding examination reports are issued.

It is emphasized that, 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 provided in a hospital setting.

The different examinations are performed by doctors or health technicians/professionals whose activity is regulated by Decree-Law no. 261/93 (Paramedical Activities).

2.2. VAT Classification

As follows from the exposition in section 1 of this chapter of the report, the taxable person could not be considered exempt from tax by classification under no. 2 of article 9 of the VACC, but only by invocation of the provisions of no. 1 of the same article.

Thus, being classified under no. 1 of article 9 of the VACC, the taxable person could not have waived the exemption, due to the absence of a legal rule permitting it to do so, since the waiver of exemption provided for in sub-section b) of no. 1 of article 12 of the VACC only applies to the exemption of no. 2 of article 9 of the VACC.

2.3. Tax Consequences

The taxable person, being unable to have effected the waiver of exemption, should have remained classified under the exemption regime provided for in article 9 of the VACC, which implies the non-acceptance of all VAT deducted, as provided for in no. 1 of article 20 of the VACC.

The following table transcribes the values recorded in the periodic VAT declarations (PD) submitted by the taxable person, specifically the values in the deductible VAT fields (values in euros):

Note that, for the determination of the amount improperly deducted, the VAT regularized in favor of the taxable person is not relevant (field 40 of the PDs of VAT), given that it essentially concerns corrections to tax previously assessed. However, the value of € 8,840.58, recognized in account 243413 - VAT adjustments -, through entry no. … of the journal of miscellaneous operations of August 2011, and which contributed to the value recorded in field 40 of the PD of the 3rd quarter of 2011 (201109T), is relevant for the amount of VAT improperly deducted as it concerns the deduction of VAT borne on the acquisition of services.

Similarly, for passive operations, for determination of the value of VAT that is globally in default, the amounts of VAT regularizations in favor of the State (field 41 of the PD) must be corrected when the acquisitions of goods or services that gave rise to them were accounted for and the respective VAT deducted.

Consequently, the values of improperly deducted VAT, in accordance with the periodic VAT declarations (PD) submitted by the taxable person, in the years 2011 and 2012, amount to €197,726.92 and € 129,042.46, respectively, distributed among the different tax periods, as shown in the following table (values in euros):

It is important to note that the amounts considered in the preceding tables of VAT deducted and adjustments in favor of the State correspond to those recorded in the periodic VAT declarations submitted by the taxable person with reference to those periods, after the substitutions resulting from the voluntary adjustments described in Chapter VI.

g) Following the inspection, the following VAT assessments were made:

h) Following the inspection, the following compensatory interest assessments were made:

i) On 16-03-2016, the Applicant submitted the application for arbitral ruling which gave rise to the present proceedings.

3.2. Unproven Facts

It was not proven that the Applicant had provided any security to suspend any enforcement proceedings for coercive collection of the assessed amounts.

3.3. Reasoning for the Determination of Factual Matters

The facts were determined as proven on the basis of the documents accompanying the application for arbitral ruling and the administrative file.

4. Matter of Law

4.1. Scope of the Contentious Jurisdiction of Arbitral Tribunals Functioning in the CAAD and the Issue that is the Subject of the Proceedings

The contentious regime provided for in the RJAT is one of mere legality, aiming solely at the declaration of illegality of acts of the types provided for in sub-sections a) and b) of no. 1 of its article 2.

For this reason, the legality of the challenged acts must be assessed as they were performed, with the reasoning used in them, with other possible reasoning that could serve as support for other acts, of a decision content totally or partially coincident with the act performed, being irrelevant. Thus, reasoning invoked a posteriori, after the end of the tax procedure in which the act whose declaration of illegality is requested was performed, is irrelevant, including that put forward in the jurisdictional proceeding.

Thus, the Tribunal cannot, faced with the finding of the invocation of an illegal ground as support for the administrative decision, assess whether its action could be based on other grounds and fail to declare the illegality of the concrete act performed because, eventually, there exists the abstract possibility of a hypothetical act with decision content totally or partially identical, with another reasoning, which would be legal, but was not performed. [1]

For this reason, it is beyond the cognizance of this Arbitral Tribunal to assess whether the challenged acts could be based on other legal grounds, in addition to those invoked in their reasoning, which is contained in the Tax Inspection Report.

The Applicant provides imaging services that do not involve hospitalization of those to whom the services are provided.

The Tax and Customs Authority, in the Tax Inspection Report underlying the challenged assessments, understood, in summary, that:

– "The Court of Justice of the European Communities, in the Judgment of 10 September 2002, delivered in Case C-141/00, concerning the Kügler case (no. 36), clarified that sub-sections b) and c) of no. 1 of article 132 of the VAT Directive, although intended to regulate the exemptions applicable to medical assistance services, have distinct scopes";

– "While sub-section b) - which corresponds to no. 2 of article 9 of the VACC - exempts the provision of assistance services in the hospital setting, including closely connected operations, sub-section c) – which corresponds to no. 1 of article 9 of the VACC – is intended to exempt the provision of medical and paramedical services outside such locations, whether at the service provider's private home, at the patient's home, or anywhere else";

– "The taxable person could not be considered exempt from tax by classification under no. 2 of article 9 of the VACC, but only by invocation of the provisions of no. 1 of the same article" and that, because its situation has this classification, "could not have waived the exemption, due to the absence of a legal rule permitting it to do so, since the waiver of exemption provided for in sub-section b) of no. 1 of article 12 of the VACC only applies to the exemption of no. 2 of article 9 of the VACC."

In these terms, the issue to be addressed consists, in the first instance, in determining whether the position taken by the Tax and Customs Authority is correct in considering that only the activity carried out in a hospital setting is classified under no. 2 of article 9 and that the activity of the Applicant is not carried out in such a setting, since it is developed in its own facilities, without the services provided involving the hospitalization or admission of patients.

That is, for the assessment of the legality of the corrections made, it is not relevant what the Tax and Customs Authority states in its Response and in the submissions presented in the present proceedings regarding, in the event that it were to be understood that the situation of the Applicant is classified under no. 2 of article 9, the necessity to assess whether the waiver of exemption is possible in light of the principle of neutrality, "a situation which was not assessed by the AT since it was prejudiced by the classification of the Applicant's activity" (article 61 and following of the Response). In fact, the grounds that the Tax and Customs Authority did not assess when performing the act are not grounds of the act performed, and their invocation constitutes a posteriori reasoning.

For this reason, only the contemporary reasoning of the act being relevant, if it were concluded that the situation of the Applicant is classified under article 9 no. 2 of the VACC, it would be necessary to conclude that the act is illegal due to error regarding the legal prerequisites.

4.2. Applicable Legal Regime

Articles 9 and 12 of the VACC establish the following, to the extent relevant here, in the versions prior to Law no. 7-A/2016, of 30 March, in force during the periods in which the tax facts occurred:

Article 9

Exemptions in Domestic Operations

Are exempt from tax:

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

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

(...)

Article 12

Waiver of Exemption

1 - May waive the exemption, opting for the application of tax to their operations:

(...)

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

(...)

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

3 - Having exercised the right of option in accordance with the preceding numbers, the taxable person is obliged to remain in the regime chosen for a period of at least five years, and, upon expiration of such period, in the event of wishing to return to the exemption regime:

a) Submit, during the month of January of one of the years following the year in which the period of the chosen regime has been completed, the declaration referred to in article 32, which takes effect as of 1 January of the year of its submission;

b) Subject to taxation the remaining inventories and proceed, in accordance with no. 5 of article 24, to the adjustment of the deduction with respect to fixed assets.

These exemptions are connected with article 132 of Directive no. 2006/112/EC, of 28-11-2006, which establishes the following, to the extent relevant here:

1. The Member States exempt the following operations:

(...)

b) Hospitalization and medical care, as well as operations closely related thereto, provided by public bodies or, under conditions analogous to those applying to the latter, by hospital facilities, medical care and diagnostic centers 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 concerned;

4.3. Possibility of Waiving the Exemption

The aforementioned sub-section b) of no. 1 of article 12 of the VACC, in the version prior to Law no. 7-A/2016, of 30 March, allows the waiver of VAT exemption to "hospital facilities, clinics, dispensaries and similar establishments, not belonging to public legal entities or private institutions integrated in the national health system, which provide medical and health services and operations closely connected therewith."

Article 9 no. 2) of the VACC provides for the exemption of "medical and health services and operations closely connected therewith provided by hospital facilities, clinics, dispensaries and similar establishments," and therefore, in view of the textual correspondence, it must be concluded that only these entities classified under this no. 2) can waive the exemption and not also those that benefit from the exemption under no. 1).

The Tax and Customs Authority understood that the fields of application of sub-sections b) and c) of article 132 of Directive no. 2006/112/EC correspond to the fields of application of nos. 2) and 1), respectively, of article 9 of the VACC.

With this premise, following the case law of the CJEU on the field of application of the rule of sub-sections b) and c) of article 13-A no. 1 of the Sixth Directive [literally corresponding to sub-sections b) and c) of article 132 of Directive no. 2006/112/EC] [2], it understood that sub-section c) and, consequently, no. 1 of article 9 of the VACC, encompasses health services provided by legal entities and that sub-section b) – which corresponds to no. 2 of article 9 of the VAT Code – exempts the provision of assistance services in the hospital setting, including closely connected operations, sub-section c) – which corresponds to no. 1 of article 9 of the VAT Code – is intended to exempt the provision of medical and paramedical services outside such locations, whether at the service provider's private home, at the patient's home, or anywhere else.

However, the CJEU, in the judgment L.u.P. [3], subsequent to the Kügler judgment, clarified that

"Article 13-A no. 1 sub-section b) of the Sixth Council Directive 77/388/CEE, of 17 May 1977, (...) should be interpreted to the effect that clinical analyses having as their object the observation and examination of patients for preventive purposes, which are carried out, as those at issue in the main proceedings, by a private law laboratory external to a medical assistance facility under the prescription of general practitioners, are capable of being covered by the exemption provided for by that provision while medical care provided by another."

In this L.u.P. judgment, the CJEU understood that "since clinical analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in article 13-A no. 1 sub-section b) of the Sixth Directive, a laboratory as that at issue in the main proceedings should be considered an establishment 'of the same nature' as the 'hospital facilities' and 'medical care and diagnostic centers' within the meaning of that provision" (point 35).

In a recent judgment, the CJEU reaffirmed "that a private law laboratory carrying out clinical analyses should be considered an establishment 'of the same nature' as the 'hospital facilities' and 'medical care and diagnostic centers' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in the aforementioned provision (point 35 of the De Fruytier judgment, of 02-07-2015, delivered in case n.º C-334/14, which cites the L.u.P. judgments, C-106/05, points 18 and 35 and CopyGene, C-262/08, point 60).

The type of diagnostic examinations that the Applicant carries out is essentially identical to clinical analyses, for this purpose, since, having regard to their therapeutic purpose, they are encompassed by the concept of 'medical care' provided for in the aforementioned provision.

For this reason, the facilities of the Applicant should be considered as being 'of the same nature' as the 'hospital facilities' and 'medical care and diagnostic centers' for purposes in the meaning of that provision.

Thus, it must be concluded that, in light of the case law of the CJEU, the exemption provided for in sub-section b) of article 132 encompasses the services provided by entities of the types that the Applicant provides, even if the provision does not occur in a hospital setting, an interpretation which is in manifest harmony with the text of this rule, by making reference to the exemption of operations closely related to hospitalization and medical care assured to "medical care and diagnostic centers."

As regards article 9 of the VACC, the text of its no. 2) does not also provide explicit support for the thesis defended by the Tax and Customs Authority that only the activity carried out in a hospital setting is classified thereunder and, in particular, that the provision of clinical analysis and diagnostic services related to hospital activities is outside its scope.

In fact, in this no. 2) reference is made, in addition to hospital facilities, also to "clinics, dispensaries and similar establishments."

The reference to "dispensaries" unequivocally encompasses the provision of health services outside such hospital setting, 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" [4], or "an establishment to provide, free of charge, care and medicines to poor patients who can be treated at home" [5].

On the other hand, the reference to "similar establishments," interpreted in harmony with the parallel rule of sub-section c) of article 132 of Directive n.º 2006/112/EC, which makes reference to "medical care and diagnostic centers and other establishments of the same nature," allows for the conclusion that entities of the type of the Applicant, which provides diagnostic health services, will also fall within that concept.

Thus, there is no textual support for the thesis defended by the Tax and Customs Authority that the exemption applicable to establishments of the type of the Applicant is not provided for in no. 2 of article 9 of the VACC.

For the foregoing reasons, the Applicant had the right to the exemption under this rule and, consequently, had the right to waive it, in accordance with article 12 no. 1 sub-section b) of the VACC.

The compensatory interest assessments have as their prerequisite the VAT assessments, in which they are integrated (article 35 no. 8 of the General Tax Law), and therefore suffer from the same defect.

For the foregoing reasons, it is concluded that the challenged assessments suffer from the defect of violation of law, due to error regarding the legal prerequisites, which justifies their annulment.

4.4. Compensation for Undue Security

The Applicant makes reference to a request for compensation for undue security, should it have provided it.

It was not proven that the Applicant had provided any security connected with the challenged assessments, and therefore this request is unfounded.

As a result of the foregoing, which establishes the declaration of illegality of the assessments that are the subject of the present proceedings, due to a defect that prevents the renewal of the acts, the consideration of the remaining defects attributed to them by the Applicant is rendered moot, specifically the impossibility of disregarding the waiver of exemption with retroactive effects and the consequent recharacterization of the taxable person with retroactive effects.

In fact, article 124 of the Tax and Procedural Code, which applies subsidiarily by virtue of the provision in article 29 no. 1 of the RJAT, by establishing an order of consideration of defects, presupposes that, where a defect is judged well-founded that ensures effective protection of the rights of those challenging, it is not necessary to consider the remaining ones, since, if it were always necessary to consider all defects attributed to the challenged act, it would be immaterial to establish an order of consideration.

For the foregoing reasons, the remaining defects attributed by the Applicant to the challenged assessments are not considered.

5. Decision

In these terms, the arbitrators agree in this Arbitral Tribunal as follows:

a) To judge unfounded the plea of lack of jurisdiction of the Arbitral Tribunal raised by the Tax and Customs Authority;

b) To judge well-founded the main application for arbitral ruling and to annul the following VAT assessments and compensatory interest assessments:

c) To judge unfounded the request for compensation for undue security.

6. Value of the Proceedings

In accordance with the provisions of article 306 no. 2 of the Civil Procedure Code, article 97-A no. 1 sub-section a) of the Tax and Procedural Code and article 3 no. 2 of the Regulation on Costs in Tax Arbitration Proceedings, the value of the proceedings is set at € 143,928.94.

7. Costs

Pursuant to article 22 no. 4 of the RJAT, the amount of costs is set at € 3,060.00, in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, 31-10-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(José Nunes Barata)

(Paulo Lourenço)

[1] Essentially in this sense, reference may be made to the following judgments of the Supreme Administrative Court, regarding a parallel situation that arises in contentious appeal proceedings:

• of 10-11-98, of the Plenary, delivered in appeal no. 32702, published in Appendix to the Official Journal of 12-4-2001, page 1207;
• of 19/06/2002, case no. 47787, published in Appendix to the Official Journal of 10-2-2004, page 4289;
• of 09/10/2002, case no. 600/02;
• of 12/03/2003, case no. 1661/02.

In the same sense, reference may be made to:

– MARCELLO CAETANO, Manual of Administrative Law, volume I, 10th edition, page 479 in which he states that it is "irrelevant that the Administration, during the course of contentious proceedings, invokes as determining reasons other reasons not stated in the act," and volume II, 9th edition, page 1329, in which he writes that "the respondent authority cannot (...), in its response to the appeal, justify the performance of the challenged act on the basis of reasons different from those stated in its express reasoning";

– MÁRIO ESTEVES DE OLIVEIRA, Administrative Law, Volume I, page 472, where he writes that "reasons objectively existing but not expressly adduced as grounds of the act cannot be taken into account in the assessment of its legality."

[2] Point 36 of the Kügler judgment, of 10-09-2002, delivered in case n.º C-141/00.

[3] Of 08-06-2006, delivered in case n.º C-106/05

[4] Dictionary of the Portuguese Language, Porto Editora, 5th edition, page 483, also available at http://www.infopedia.pt/dicionarios/lingua-portuguesa/dispensários.

[5] Priberam Dictionary, available at http://www.priberam.pt/dlpo/dispensário and Michaelis Dictionary, available at http://michaelis.uol.com.br/moderno/portugues/definicao/dispensario _947235.html.