Process: 167/2016-T

Date: November 22, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 167/2016-T addresses the critical issue of VAT deduction rights for SGPS holding companies on general expenses, a matter of significant importance for Portuguese corporate tax planning. The Claimant, A... SGPS, S.A., challenged ten VAT assessments issued following arithmetical corrections made by the Portuguese Tax Authority (AT) in response to a refund request filed in periodic declaration 15/03T. The case centered on whether an SGPS, holding 95% participations in subsidiary SGPS companies within Group E..., could deduct input VAT on general operational expenses under the normal VAT regime with quarterly periodicity and mixed deduction regime. A preliminary procedural issue arose when the AT contested the arbitral tribunal's competence, arguing the case concerned a refund request rather than assessment acts. The CAAD Collective Arbitral Tribunal, composed of José Baeta de Queiroz, Marcolino Pisão Pedreiro, and Luísa Anacoreta, firmly rejected this exception. The tribunal clarified that the matter constitutes a challenge to tax assessment acts' legality, not a refund claim determination. The arbitrators emphasized that accepting the AT's interpretation would inappropriately exclude arbitral jurisdiction over VAT assessments entirely, contrary to Articles 2 and 10 of RJAT. The tribunal relied on precedent from Cases 177/2016 and 354/2015-T, establishing that arbitral tribunals possess competence to examine the legality of tax assessments, including underlying rights and deductions claimed by SGPS entities. The substantive question remains whether holding company activities, particularly participation management and related general expenses, constitute economic activity sufficient to justify VAT deduction under the CIVA framework, applying principles established in European Court of Justice jurisprudence regarding holding companies' taxable status.

Full Decision

ARBITRAL DECISION

The arbitrators, José Baeta de Queiroz (arbitrator-president), Marcolino Pisão Pedreiro and Luísa Anacoreta (arbitrator-members), appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Collective Arbitral Tribunal, constituted on 3 June 2016, agree as follows:

I. REPORT

A) The Parties and Constitution of the Arbitral Tribunal

  1. A... SGPS, S.A. (hereinafter "A..." or "Claimant"), legal entity no. ..., with registered office at Rua..., no. ..., ..., ...-... Lisbon, filed a request for constitution of an Arbitral Tribunal, under the terms of paragraph a) of no. 1 of Article 2, no. 1 of Article 3, no. 1, Article 6, no. 1 and Article 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT", for the purpose of challenging ten Value Added Tax (VAT) assessments, in which the Tax and Customs Authority is Respondent, hereinafter designated as "AT". The Claimant seeks a declaration of illegality of the challenged assessments and consequent annulment.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 04-04-2016.

In accordance with the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed, on 18-05-2016, the panel of arbitrators composed of Mr. Judge-Counselor José Baeta de Queiroz (President), Mr. Dr. Marcolino Pisão Pedreiro and Ms. Prof. Dr. Luísa Anacoreta to compose the collective arbitral tribunal. Immediately thereafter, the parties were duly notified of this appointment and did not manifest any intention to refuse the appointment of the designated arbitrators, in accordance with the combined provisions of Article 11, no. 1, paragraphs a) and b) of RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of Article 11 of RJAT, in the wording introduced by Article 228 of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 03-06-2016. On this same date an arbitral order was issued and the AT was notified to submit its defense within the legal deadline.

  1. The Tax and Customs Authority responded on 31-08-2016, contested the arbitral request, by exception, invoking the incompetence of the arbitral tribunal and by objection, arguing that it should be ruled unfounded, in accordance with and on the grounds set forth in the Response, attached to the case file, which is hereby fully reproduced.

On 01-09-2016, an arbitral order was issued dispensing with the meeting provided for in Article 18 of RJAT, fixing ten successive days as the deadline for written submissions, the Respondent's period to commence after notification of the Claimant's submissions.

The parties submitted their submissions, respectively, the Claimant on 09-09-2016 and the Respondent on 19-09-2016. By arbitral order of 19-09-2016, a date was set for the issuance of the Arbitral Award by 2-12-2016.

B) PROCEDURAL REQUIREMENTS:

  1. The arbitral tribunal was regularly constituted. The parties have legal personality and capacity, are legitimate and are represented (Articles 4 and 10, no. 2, of the same law and Article 1 of Ordinance no. 112-A/2011, of 22 March).
  • With respect to the alleged exception of incompetence of the arbitral tribunal:
  1. The Respondent AT raised the exception of incompetence of the arbitral tribunal, on the grounds that, as stated in Article 9 of the request, the Claimant is not challenging additional assessment acts but rather correction amounts that were made to it in the context and as a consequence of a refund request that it filed in the periodic tax declaration of 15/03T. Accordingly, the Respondent AT argues that the Arbitral Tribunal has no competence to hear the request, which it characterizes as a refund request that ultimately resulted in a partial approval of that request.

With respect to the invoked exception, a question necessarily prior to the examination of the merits of the decision, the AT's argument is without merit. The same question was already subject to analysis and review by a CAAD Tribunal in Case 177/2016, and given the similarity, it is opted to reproduce here the content of the Award: "It appears absolutely clear that the request in the present case is limited to the question of whether the additional VAT assessments suffer from a defect of illegality or not. It is not a matter of ascertaining the alleged right to refund but rather the (il)legality of the merely arithmetical corrections that were made and that form the basis of the challenged assessments. We are, therefore, faced with a request for a declaration of illegality of tax assessment acts.

If the AT's alleged understanding were to be followed, it would result in excluding the competence of any arbitral tribunal to be able to know of the illegality of tax assessment acts when any VAT assessment were at issue, which is entirely inappropriate in the face of the very letter of the law, due and clearly expressed in Articles 2 and 10 of RJAT, as well as in Article 2 of the Binding Ordinance.

The subject matter of the case is not a question of recognition of a right to refund, although this was at the origin of the inspection carried out on the Claimant, in the course of which the said arithmetical corrections that generated the additional tax assessments here objectively challenged were processed. Therefore, what the Claimant questions in the present arbitral request, or in other words, the subject matter of the request, are the assessment acts arising from the alleged disregard, by the AT, of a certain set of tax deductions to which the Claimant considers it is entitled. We are, therefore, at the heart of the process of challenging assessment acts, within the competence of arbitral jurisdiction.

Finally, citing the jurisprudence set forth in the Arbitral Award issued in Case no. 354/2015-T, of 10 December, there is no legal prohibition on the examination of matters relating to the existence or otherwise of rights underlying assessments or any other legality issues relating to the acts of the types referred to in Article 2 of RJAT. Identical understanding has been followed in other arbitral decisions, of which special note is made of that issued in arbitral Case no. 764/2014-T, of 29-05-2015.

In these terms, without need for further consideration, the exception invoked is considered unfounded. Accordingly, the Arbitral Tribunal is considered competent in light of the provisions of Articles 2, no. 1, paragraph a), 5, 6 and 30, no. 1, of Decree-Law no. 10/2011, of 20 January, with no obstacle to the examination of the merits of the case."

  1. The proceedings do not suffer from nullities that prevent examination of the merits of the case.

It is necessary to examine and decide on the merits of the request.

II. MATTER OF FACT

A) Proven Facts

  1. Based on the elements contained in the case file, attached to the case record, the following facts relevant to the examination of the merits are considered proven:

a) The Claimant is a SGPS constituted in accordance with the terms stipulated in the Legal Regime of Social Participation Management Companies (Decree-Law no. 495/88, of 30 December, successively amended, abbreviated "RJSGPS") which holds participations in the companies B..., SGPS, S.A. (NIPC...), C..., SGPS, S.A. (NIPC...) and D..., SGPS, S.A. in the percentage of 95% of their respective share capital, all part of the business group called Group E...

b) A... commenced its activity on 24 September 2012, being classified under the normal VAT regime with quarterly periodicity (mixed deduction regime with actual allocation of all assets).

c) The Claimant is controlled by Fund F... ("F...") (NIPC...), which holds 100% of its share capital.

d) Following the negotiation of a global agreement for the restructuring of Group E..., which included extrajudicial recovery agreements, restructuring framework agreements, option contracts and contracts for the purchase of shares and shareholder credits, the Claimant concentrated on managing the relationship between financial entities and group companies, for the granting of specific financing that would allow the restructuring thereof.

e) The Claimant entered into management service provision contracts with each of the aforementioned companies, providing advisory services "in the definition of strategic and business positioning, financial advisory, in relations with banking entities and preparation of business plans, and legal advisory".

f) The Claimant has provided on a continuous basis various management services in the national market.

g) In the first quarter of 2015, the Claimant requested a refund of € 103,967.96, having carried forward € 2,780.70 of its VAT credit, the total value of which amounted to € 106,748.66, which corresponds to credit accumulated since the beginning of its activity (24-09-2012), as it consistently presented an amount of tax to be deducted greater than the amount of tax to be paid to the State.

h) The Claimant was subject to an inspection action, following the submission of its VAT refund request, filed in the periodic tax declaration for the period 15/03T.

i) As results from the Tax Inspection Report (RIT), the inspection was carried out under the service order no. OI2015..., with extension to the first quarter of 2015, with service orders nos. OI 2015..., OI2015... and OI2015... subsequently being opened.

j) As a result of this inspection, corrections were made that gave rise to the assessments challenged here, as the AT considered there to be irregularities that led to corrections in all periods of 2012, 2013, 2014 and 2015, in the total amount of EUR 105,290.46.

k) The corrections resulted in the annulment of the carry-forward of EUR 2,780.70, in the correction of the requested credit of EUR 102,509.76, resulting in a partial approval of the request of EUR 1,458.20.

l) The sum of all corrections made is € 105,290.46.

m) The additional VAT assessments, challenged in the present case, are as follows:

(i) no. ..., with a correction value of € 3,917.57, corresponding to the tax period 12/12T;

(ii) no. ..., with a correction value of € 31,066.02, corresponding to the tax period 13/03T;

(iii) no. ..., with a correction value of € 8,970.57, corresponding to the tax period 13/06T;

(iv) no. ..., with a correction value of € 213.21, corresponding to the tax period 13/09T;

(v) no. ..., with a correction value of € 111.44, corresponding to the tax period 13/12T;

(vi) no. ..., with a correction value of € 90.17, corresponding to the tax period 14/03T;

(vii) no. ..., with a correction value of € 5,034.59, corresponding to the tax period 14/06T;

(viii) no. ..., with a correction value of € 24,257.99, corresponding to the tax period 14/09T;

(ix) no. ..., with a correction value of € 2,404.16, corresponding to the tax period 14/12T; and

(x) no. ..., with a correction value of € 29,224.74, corresponding to the tax period 15/03T.

B) Unproven Facts

  1. There are no facts with relevance to the examination of the merits of the case that have not been proven.

C) Basis for the Determination of the Matter of Fact

  1. The proven facts are based on the documents submitted to the case by the Claimant and the Respondent in the PA attached to the case, as well as on the agreement of the parties, which differ only with respect to the question of law underlying the challenged assessments.

III. MATTER OF LAW

  1. It results from the case file, as appears from the summary of the matter of fact stated and from the Report, that the Claimant and Respondent differ only on the question of whether the Claimant is entitled to deduct VAT borne in relation to the VAT assessments on the services it provides to its subsidiaries. Specifically, the divergence in tax treatment is based on the fact that the Claimant considers that its activity is essentially an activity subject to and not exempt from VAT (provision of services to its subsidiaries) that gives it the right to the general deduction of VAT on acquisitions, while the Respondent considers that the diversity of goods and services acquired are related to the management of social participations, an activity that, as it is not considered to be covered by the concept of economic activity, does not give rise to VAT deduction.

According to the AT, the Claimant did not prove or specify which services it provided to its associated companies and to that extent failed to demonstrate the nexus of causality between the services provided to its associated companies and the expenses incurred, a nexus that could legitimize the exercise of its deduction right. Since it is not possible to separate expenses related to services provided by the Claimant, the AT considers that VAT borne cannot be deducted in its entirety.

The AT further noted that, in the absence of such direct and immediate relationship, there is not a general expense of the Claimant, included in the price of downstream operations that confer the right to deduction. The AT argued that these are expenses relating to the company itself and are incurred in its exclusive interest, with no relationship being established between the use of these resources and taxed activity, as they would be incurred regardless of whether the Claimant provided any ancillary services to its subsidiaries, presenting no direct, immediate or unequivocal, or even indirect, nexus with those same taxed activities.

  1. It is necessary, therefore, to analyze whether the interpretation made by the AT is or is not in accordance with the applicable legal provisions contained in the Value Added Tax Code (CIVA) and the supporting European Directive, specifically with regard to the definition and classification of so-called general expenses as capable of giving rise to a right to deduction when borne by a SGPS.

SGPSs, regulated by Decree-Law no. 495/88, of 30 December (amended by Decree-Laws no. 318/94, of 24 December, and no. 378/98, of 27 November), have as their contractual purpose the management of social participations of other companies, as an indirect form of exercising economic activities (Article 1, no. 1). In addition to these activities, SGPSs may provide, as an ancillary activity of managing participations, technical management services to their subsidiaries.

It is already sufficiently established and accepted both by CAAD case law and by academia that SGPSs are not necessarily pure holdings and may exercise direct and active intervention in the management of their subsidiaries. It is understood that SGPSs need not be mere passive holders of equity stakes with the sole purpose of obtaining dividends.

As Xavier de Basto and Oliveira state, a pure holding "does not interfere in the activities of the companies in whose capital it participates". In pure holdings, the mere receipt of dividends and interest does not reflect the exercise of an economic activity, and therefore the right to deduction of inputs used in those activities is not admitted. But in non-pure holdings this is not necessarily the case.

1 XAVIER DE BASTO and MARIA ODETE OLIVEIRA (2008) Clearing up misunderstandings regarding the right to deduct Value Added Tax: Recent amendments to Article 23 of the VAT Code. Journal of Public Finances and Tax Law, Year 1, No. 1. Almedina.

Where it is not a pure holding, it is necessary to analyze the activity it develops, classifying it or not within the concept of economic activity and identifying its relevance in the context of the activity that the SGPS develops. Only by evaluating the relevance of the economic activity developed, in relation to the remaining activity (non-economic) of the SGPS, can conclusions be drawn about the purpose of the general expenses borne by the entity, justifying or not their eligibility for VAT deduction purposes. Now, in the specific case, the relevance of the activity developed by the claimant is, exclusively, to conduct activities aimed at the economic recovery of Group E... And for that it engaged in certain activities, which generated services to be billed to its subsidiaries.

It is necessary, therefore, to analyze and classify the activity developed by A... directed exclusively, from the moment of its creation, at the restructuring and economic recovery of the businesses of Group E.... It should be noted that, in the specific case, A... exercises, albeit indirectly, activities aimed at the restructuring and economic recovery of Group E..., as its subsidiaries are, themselves, non-pure holdings that interfere in the management of their own subsidiaries, as properly analyzed and supported in the CAAD Award 177/2016-T.

  1. It is the dominant and widely cited position of Community Jurisprudence (Award SKF, Cibo and Polysar, for example) that defends that the direct involvement of a subsidiary company in the management of subsidiaries, providing them various technical services on an onerous basis, included within the scope of VAT, allows the conclusion of the existence of operations arising from the exercise of an economic activity. This is indeed the case being analyzed here, even though the activity with direct effects on the management of the group companies is carried out by the Claimant through the provision of services to its subsidiaries, which subsequently utilize them in the exercise of management services to their own subsidiaries.

Indeed, no. 30 of the Award of the CJEU regarding Case SKF states that: "(…) the Court of Justice has already decided that the situation is different when financial participation in a company is accompanied by direct or indirect interference in the management of the companies in which participation was taken, without prejudice to the rights that the holder of the participation has in the capacity as shareholder or member (see judgments of 20 June 1991, Polysar Investments Netherlands, C-60/90, Colect., p. I-3111, no. 14; of 14 November 2000, Floridienne and Berginvest, C-142/99, Colect., p. I-9567, no. 18; order of 12 July 2001, Welthgrove, C-102/00, Colect., p. I-5679, no. 15; and judgment of 27 September 2001, Cibo Participations, C-16/00, Colect., p. I-6663, no. 20), to the extent that such interference entails the carrying out of transactions subject to VAT within the terms of Article 2 of the Sixth Directive, such as the supply of administrative, accounting and computer services (judgment Floridienne and Berginvest, already cited, no. 19; order Welthgrove, already cited, no. 16; judgments Cibo Participations, already cited, no. 21, and of 26 June 2003, MKG-Kraftfahrzeuge-Factoring, C-305/01, Colect., p. I-6729, no. 46)".

In the same sense comes the Award of the CJEU regarding the case Larentia and Minerva + Marenave when it argues that "the mere acquisition and mere holding of social shares shall not be considered economic activities within the meaning of the Sixth Directive, conferring on the person carrying them out the status of taxable person, … the situation is different when the participation is accompanied by direct or indirect interference in the management of the companies in which the participations were taken, without prejudice to the rights that the holder of participations has in the capacity as shareholder or member".

Finally, note the Award of the CJEU in the case Portugal Telecom which establishes that "if it is to be considered that all services acquired upstream have a direct and immediate nexus with downstream economic operations with the right to deduction, the taxable person in question would have the right, under Article 17, no. 2, of the Sixth Directive, to deduct the entirety of the VAT that has burdened the acquisition upstream of the services in question in the main proceedings. This right to deduction cannot be limited by the simple fact that national legislation, due to the corporate purpose of the said companies or their general activity, qualifies the taxed operations as ancillary to their main activity".

According to this same Award: "the right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a specific upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, in fact, a direct and immediate nexus with the whole of the economic activity of the taxable person".

The Court concluded, therefore, that there is legal coverage for the deduction of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its subsidiaries with the right to deduction or which, not having a direct and immediate nexus with specific services, is VAT borne with costs that are part of the general expenses of the entity that have a direct and immediate nexus with the whole of its economic activity.

  1. It follows that the CJEU, with respect to the holding of equity stakes in other entities, has already decided that it falls within the exercise of an economic activity the case of such holding being accompanied by "(…) direct or indirect interference in the management of the companies (…)" to the extent that such interference entails the provision of services subject to VAT. The CJEU distinguishes, in this regard, holdings that interfere, directly or indirectly, in the management of subsidiaries from those that do not.

Thus, within the scope of the acquisition and holding of social participations, the existence, by the holder, of direct or indirect interference in the management of the subsidiary conditions the classification within the economic activity of the holding, triggering the right to deduction of VAT borne with expenses related upstream.

In this measure, as the mere acquisition of financial participation is a passive operation, the deductibility of VAT on associated expenses is conditioned by the manner in which the ownership will be exercised in the future, that is, in a merely passive manner, limited to the receipt of profits associated with it, or, alternatively, in an active manner, with direct or indirect interference in the management of it, resulting from the recurrent exercise of a taxed activity.

As Rui Bastos points out, "The right to deduct general expenses susceptible to being allocated to the taxed component of the economic activity of the taxable person (management support services), as may occur with legal assistance contracted from third parties, studies on group internationalization, administrative expenses, etc., should not be conditional, provided that the allocation of resources is demonstrated, such as human resources, to the said taxed activity, qualifying those charges as general expenses of the activity and, as such, transferable in the price of taxed operations and, therefore, susceptible to conferring full VAT deduction, with no reason being perceived at this level for different 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, during holding, or upon disposal, the VAT treatment of acquisitions should be the same. Treating differently the deductibility of VAT on acquisitions depending on the strategic option of structuring the operations, whether through the establishment of a subsidiary, or of a mere branch, as opposed to the exercise of direct management, would lead to discriminatory treatment of objectively identical situations.

In turn, as the CJEU noted in the Abbey Case, "the costs of these services are part of the general expenses of the taxable person and, as such, are constituent elements of the price of the products of an undertaking. In fact, even in the case of transfer of a universality of assets, when the taxable person no longer carries out operations after the use of the said services, the costs of these latter must be considered inherent to the whole of the economic activity of the undertaking before the transfer."

"any other interpretation (…) would be contrary to the principle requiring that the VAT system be of perfect neutrality as to the tax burden of all economic activities of the undertaking, provided these are themselves subject to VAT, and would place upon the economic operator the cost of VAT within the scope of its economic activity without affording 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 undertaking before its actual operation and those incurred in the course of said operation and, on the other hand, expenses incurred to terminate said operation. The various services used (…) for the purposes of transfer of a universality of assets or of part thereof maintain therefore, in principle, a direct and immediate relationship with the whole of the economic activity of this taxable person."

  1. For the reasons set forth, the exercise of permanent and regular activity of provision of management services to its subsidiaries by A... SGPS, S.A. falls within the concept of economic activity, subject to and not exempt from VAT, and therefore the VAT borne by it in the acquisition of goods and services is deductible.

Thus, in the specific case, there is no question of segregating inputs between non-taxed activity and taxed and non-exempt VAT activity. It should be noted that the deduction of VAT in an operation exclusively allocated to a taxed operation results only from the general discipline of the right to deduction provided for in Articles 19 and 20 of CIVA.

As highlighted in the CAAD case 177-2016, "the right to deduction of services acquired does not preclude if no direct and immediate allocation is made of the services provided to each of the subsidiaries individually considered. The lack of an individualized allocation does not imply that the inputs are disconnected from the provision of services to the subsidiaries, or from the whole of the economic activity of the SGPS. In fact, the deductibility of VAT on inputs is based on their use for the carrying out of taxable operations, or, in the words of Article 168 of the Directive, 'when the goods and services are used for the purposes of its taxed operations (…)'. Naturally, Article 20 of CIVA adheres to this understanding, accepting the deduction of tax that has been borne on goods or services acquired, imported or used by the taxable person for the carrying out of the operations listed in the same provision, including the transfers of goods and supply of services subject to tax and not exempt. It is, therefore, as the Arbitral Decision of 27-12-2012, relating to Case no. 77/2012-T, concludes, 'a relationship of utilization'".

  1. In the case being analyzed, the AT severely limited any exercise of understanding about the Claimant's active participation in the management of the business group, or the connection of inputs borne, even as general expenses, to this activity, considering that the services acquired were exclusively used in the activity of holding social participations and concluding that the tax borne would not be deductible. In fact, the AT disregarded the reasons for the establishment and commencement of activity of the Claimant, reasons determined by the need to recover and restructure the whole activity of Group E....

The question subject to decision, framed by the matter of fact established, is whether a company managing social participations that provides services, in the case advisory services in strategy, legal matters, operationalization and security, to its subsidiaries can deduct the VAT borne upstream with the acquisition of goods and services related to the generality of the economic activity developed by the Group, in the restructuring and recovery phase.

As mentioned above, it results from the jurisprudence of the CJEU that, if it is to be considered that all goods and services acquired upstream, even though they do not present a direct and immediate nexus with one or more specific downstream economic operations that give rise to the right to deduction, the right to full deduction of VAT by the taxable person is not affected if the set of goods and services acquired forms part of its general expenses, presenting in this way a direct and immediate nexus with the generality of the economic activity it develops, and are, as such, constituent elements of the price of the services it provides. This right to deduction cannot be limited by national legislation or by the interpretation that the internal administrative authority makes of the application of these principles.

Furthermore, national legislation is in harmony with European legislation and jurisprudence, by establishing in Article 20 of CIVA that VAT borne on goods or services acquired, imported or used by the taxable person may be deducted for the carrying out of the operations indicated there, among which are the transfers of goods and supply of services subject to tax and not exempt. In the case of the Claimant, by the proven matter above stated, its interference in the management of the group companies was developed through the provision of services of strategic, legal and security advisory indispensable for the extrajudicial recovery of that same group of companies, and therefore there is no doubt that its action constitutes an economic activity, for VAT taxation purposes, and the Claimant is authorized to deduct the VAT borne. Furthermore, in the case at hand, the AT failed to demonstrate that the Claimant could not deduct the VAT it deducted, merely reaching a conclusion solely because it was an SGPS.

  1. Being so, it must be concluded that the challenged assessments are illegal, due to error as to the factual and legal assumptions, which constitutes a violation of law, and therefore their annulment is required with all legal consequences.

IV. REGARDING THE REQUEST FOR COMPENSATORY INTEREST

  1. The Claimant combines with the request to annul the tax acts that are the subject of the present case, a request to condemn the AT to pay compensatory interest in accordance with Article 43 of the General Tax Law (LGT).

Given the merit of the annulment request, the amounts unduly paid should be returned to the Claimant. In the case at hand, it is manifest that the illegality of the assessment acts, the amount of which the Claimant paid through set-off with credits it had to receive from the AT, is attributable to the AT, due to the incorrect interpretation and application of the law. Consequently, the Claimant is entitled to compensatory interest, in accordance with Articles 43, no. 1, of the LGT and 61 of the Tax Procedure and Process Code (CPPT).

Compensatory interest is due from the date of payments made, calculated based on the respective value, until its full return to the Claimant, at the legal rate, in accordance with Articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, 61 of the CPPT and 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (without prejudice to any subsequent amendments to the legal rate).

V. DECISION

In these terms this Arbitral Tribunal decides:

a) to rule as meritorious the request for declaration of illegality of the assessment acts challenged in the present case for violation of law;

b) to annul the challenged assessments, with legal consequences, namely the refund to the Claimant of the amounts unduly paid, plus compensatory interest at the legal rate in force, to be calculated until full payment;

c) to condemn the Respondent to payment of the costs of the proceedings.

CASE VALUE

The value of the case is fixed at € 105,290.46 in accordance with Article 97-A, no. 1, a), of the CPPT, applicable by virtue of paragraphs a) and b) of no. 1 of Article 29 of RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The value of the arbitration fee is fixed at € 3,060.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the losing party, in accordance with Articles 12, no. 2, and 22, no. 4, both of RJAT, and Article 4, no. 4, of the aforementioned Regulation.

Let notification be made.

Lisbon, Administrative Arbitration Center, 22 November 2016.

The Collective Tribunal,

José Baeta de Queiroz

(Arbitrator-President)

Marcolino Pisão Pedreiro

(Arbitrator-Member)

Luísa Anacoreta

(Arbitrator-Member)

(Text prepared by computer, in accordance with Article 138, no. 5, of the Civil Procedure Code (CPC), applicable by reference from Article 29, no. 1, paragraph e), of the Tax Arbitration Regime, with blank verses and reviewed by us).

[1] Judgment of 29 October 2009, Case SKF, Case C-29/08.

[2] Judgment of 27 September 2001, Case Cibo, Case C‑16/00.

[3] Judgment of 20 June 1991, Case Polysar, Case C-60/90.

[4] Judgment of 16 July 2015, Case Larentia and Minerva + Marenave, Joined Cases C‑108/14 and C‑109/14.

[5] Judgment of 6 September 2012, Case Portugal Telecom, Case C‑496/11.

[6] Expression first used by the CJEU in Case Polysar, which would later be clarified in Case Floridienne.

[7] Cf. RUI BASTOS, The right to deduct VAT, The case of mixed-use inputs, op. cit., pp. 79 and 80.

[8] Judgment of 22 February 2001, Case C-408/98.

Frequently Asked Questions

Automatically Created

Can an SGPS holding company deduct input VAT on general expenses under Portuguese tax law?
Yes, an SGPS holding company can deduct input VAT on general expenses under Portuguese tax law if those expenses are directly and immediately linked to its economic activity. The CAAD has established that this depends on whether the SGPS performs active management services to its subsidiaries beyond mere passive shareholding. General expenses such as administrative costs, legal fees, and accounting services may qualify for deduction if they relate to taxable transactions or the overall economic activity of managing participations. The key criterion is demonstrating that the SGPS engages in activities constituting economic activity under Article 2 of the VAT Code (CIVA), following ECJ jurisprudence on holding companies.
What constitutes an economic activity for VAT purposes when performed by an SGPS?
For VAT purposes, an SGPS constitutes an economic activity when it goes beyond passive shareholding to actively intervene in subsidiary management. This includes providing administrative, financial, technical, or commercial services to subsidiaries, whether remunerated or not. Process 167/2016-T examines whether holding 95% participations in multiple SGPS companies and performing related management functions qualifies as economic activity. The determination requires analyzing whether the SGPS's activities involve exploitation of tangible or intangible property for income generation on a continuing basis, per Article 9 of the VAT Directive. Mere dividend collection is insufficient; active management creating added value is required.
How does the right to a prior hearing (direito de audição) affect VAT assessment legality in Portugal?
The right to a prior hearing (direito de audição) is a fundamental principle of Portuguese administrative law enshrined in Article 60 of the Tax Procedure Code (CPPT). Violation of this right constitutes a formal illegality that can invalidate VAT assessments. In Process 167/2016-T, if the AT failed to grant the taxpayer opportunity to comment on the arithmetical corrections before issuing assessments, this procedural defect would render the liquidations annullable. The CAAD has consistently held that taxpayers must be afforded meaningful opportunity to present their position before adverse tax decisions, particularly when corrections affect claimed deductions or refunds.
What are the conditions for VAT deduction on mixed-use expenses by holding companies before the CAAD?
For VAT deduction on mixed-use expenses by holding companies before the CAAD, Portuguese law requires: (1) the SGPS must demonstrate economic activity beyond passive shareholding; (2) expenses must have a direct and immediate link to taxable transactions or overall economic activity; (3) proper documentation and allocation methodology must exist for expenses serving both taxable and exempt or non-economic activities; (4) the SGPS must operate under a mixed deduction regime with actual allocation of assets as stated in Process 167/2016-T; and (5) the pro-rata deduction method must be correctly applied per Articles 23 and 23-A of CIVA when direct allocation is impossible.
Can unlawful VAT liquidations by the Portuguese Tax Authority be annulled through tax arbitration?
Yes, unlawful VAT liquidations by the Portuguese Tax Authority can be annulled through tax arbitration under RJAT (Decree-Law 10/2011). Process 167/2016-T confirms that CAAD arbitral tribunals have competence under Articles 2(1)(a) and 10(1)(a) of RJAT to review the legality of VAT assessment acts, including arithmetical corrections made during refund processing. The tribunal rejected the AT's argument that such matters constitute refund claims outside arbitral jurisdiction. Taxpayers can challenge VAT assessments on substantive grounds (incorrect application of law, improper disallowance of deductions) and procedural grounds (violation of prior hearing rights). Successful challenges result in annulment and, where applicable, recognition of refund entitlements.