VAT Exemption for Medical Services: Tribunal Competence...

Process: 168/2015-T

Date: September 18, 2015

Tax Type: IVA

Summary

Process 168/2015-T addresses critical jurisdictional questions in Portuguese tax arbitration concerning VAT exemptions for medical service providers. A healthcare company challenged additional VAT assessments totaling €2,704,462.12 for periods 2010-2011, claiming entitlement to VAT exemption for medical services under Portuguese law. The Tax Authority raised preliminary exceptions arguing the CAAD arbitral tribunal lacked material jurisdiction because the case involved recognizing a right in tax matters rather than merely reviewing administrative acts. Under Article 2 of Decree-Law 10/2011 (RJAT), tax arbitration tribunals can only review the legality of administrative acts, not recognize new tax rights. The distinction is crucial: if the taxpayer seeks confirmation of an existing exemption improperly denied, the tribunal has jurisdiction; if seeking initial recognition of exempt status, it does not. Portuguese VAT law exempts medical services under specific conditions, typically requiring providers to be qualified healthcare professionals or authorized medical entities. The case raised fundamental questions about the scope of tax arbitration jurisdiction when VAT exemption status is disputed. The tribunal must determine whether classifying a taxpayer under the VAT exemption regime constitutes recognizing a new right (outside its jurisdiction) or reviewing whether the Tax Authority correctly applied existing law to established facts (within its jurisdiction). This distinction impacts thousands of healthcare providers and determines whether VAT exemption disputes must proceed through administrative courts rather than the faster arbitration system. The decision affects procedural strategy for taxpayers challenging VAT treatment of medical services and defines the boundaries of CAAD competence in healthcare taxation matters.

Full Decision

TRANSLATION

Case No. 168/2015-T

The arbitrators Dr. Jorge Manuel Lopes de Sousa (president-arbitrator), Dr. Diogo Feio and Prof. Dr. António Martins, appointed by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 22-05-2015, agree as follows:

1. Report

A…, S.A., Tax Identification Number …, with registered office at Rua …, no. …, ….º, in … (hereinafter referred to as "Claimant"), filed a request for constitution of a collective arbitral tribunal, in accordance with the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT"), with the aim, as its main claim, of annulling the additional VAT assessments and compensatory interest:

– no. …, in the amount of € 63,387.18, corresponding to VAT, and no. …, in the amount of € 11,989.73, corresponding to compensatory interest, both relating to period 2010.01;

– no. …, in the amount of € 72,296.21, corresponding to VAT, and no. …, in the amount of € 13,429.27, corresponding to compensatory interest, both relating to period 2010.02;

– no. …, in the amount of € 130,255.60, corresponding to VAT, and no. …, in the amount of € 23,795.74, corresponding to compensatory interest, both relating to period 2010.03;

– no. …, in the amount of € 67,739.57, corresponding to VAT, and no. …, in the amount of € 12,137.45, corresponding to compensatory interest, both relating to period 2010.04;

– no. …, in the amount of € 119,755.85, corresponding to VAT, and no. …, in the amount of € 21,050.78, corresponding to compensatory interest, both relating to period 2010.05;

– no. …, in the amount of € 96,608.32, corresponding to VAT, and no. …, in the amount of € 16,674.86, corresponding to compensatory interest, both relating to period 2010.06;

– no. …, in the amount of € 81,251.39, corresponding to VAT, and no. …, in the amount of € 13,748.18, corresponding to compensatory interest, both relating to period 2010.07;

– no. …, in the amount of € 117,850.62, corresponding to VAT, and no. …, in the amount of € 19,540.60, corresponding to compensatory interest, both relating to period 2010.08;

– no. …, in the amount of € 135,604.49, corresponding to VAT, and no. …, in the amount of € 22,038.52, corresponding to compensatory interest, both relating to period 2010.09;

– no. …, in the amount of € 97,504.46, corresponding to VAT, and no. …, in the amount of € 15,525.92, corresponding to compensatory interest, both relating to period 2010.10;

– no. …, in the amount of € 76,516.52, corresponding to VAT, and no. …, in the amount of € 11,924.00, corresponding to compensatory interest, both relating to period 2010.11;

– no. …, in the amount of € 204,289.52, corresponding to VAT, and no. …, in the amount of € 31,141.56, corresponding to compensatory interest, both relating to period 2010.12;

– no. …, in the amount of € 100,535.63, corresponding to VAT, and no. …, in the amount of € 15,016.99, corresponding to compensatory interest, both relating to period 2011.01;

– no. …, in the amount of € 69,653.91, corresponding to VAT, and no. …, in the amount of € 10,159.93, corresponding to compensatory interest, both relating to period 2011.02;

– no. …, in the amount of € 146,068.77, corresponding to VAT, and no. …, in the amount of € 20,841.81, corresponding to compensatory interest, both relating to period 2011.03;

– no. …, in the amount of € 101,356.33, corresponding to VAT, and no. …, in the amount of € 14,084.36, corresponding to compensatory interest, both relating to period 2011.04;

– no. …, in the amount of € 95,288.09, corresponding to VAT, and no. …, in the amount of € 12,948.74, corresponding to compensatory interest, both relating to period 2011.05;

– no. …, in the amount of € 108,885.80, corresponding to VAT, and no. …, in the amount of € 14,438.56, corresponding to compensatory interest, both relating to period 2011.06;

– no. …, in the amount of € 139,058.74, corresponding to VAT, and no. …, in the amount of € 17,936.67, corresponding to compensatory interest, both relating to period 2011.07;

– no. …, in the amount of € 93,163.35, corresponding to VAT, and no. …, in the amount of € 11,730.92, corresponding to compensatory interest, both relating to period 2011.08;

– no. …, in the amount of € 128,115.45, corresponding to VAT, and no. …, in the amount of € 15,969.78, corresponding to compensatory interest, both relating to period 2011.09;

– no. …, in the amount of € 101,361.52, corresponding to VAT, and no. …, in the amount of € 12,063.41, corresponding to compensatory interest, both relating to period 2011.10, in the total amount of € 2,704,462.12;

– statement of assessment no. …, concerning the correction of VAT to be carried forward in period 2011.11, in the amount of € 72,500.08.

As a subsidiary claim, should it be determined that the Claimant should be classified under the VAT exemption regime from 03-01-2005, the Claimant seeks reimbursement from the Tax Authority of the VAT which it contends was unduly assessed and paid to the State, in the amount of € 1,905,481.09.

Also as a subsidiary claim, and assuming that the Claimant will be served in the course of the enforced collection proceedings for payment of the aforementioned VAT assessments and compensatory interest and that, as a consequence, it will be obliged to incur costs resulting from the provision of a bank guarantee by a financial institution, the Claimant requests that compensation for the undue guarantee be fixed, in accordance with Article 53 of the General Tax Code and Article 171 of the Code of Tax Procedure and Process.

Also as a subsidiary claim, the Claimant requests a preliminary ruling referral to the CJEU.

The request for constitution of the arbitral tribunal was accepted by the President of the Administrative Arbitration Centre and notified to the TAX AUTHORITY AND CUSTOMS SERVICE on 13-03-2015.

In accordance with the provisions of Article 6(2)(a) and Article 11(1)(b) of the RJAT, the Deontological Council appointed as arbitrators the undersigned, who communicated their acceptance of the appointment within the applicable period.

On 06-05-2015, the parties were notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of Article 11(1)(a) and (b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Accordingly, in compliance with the provision of Article 11(1)(c) of the RJAT, the collective arbitral tribunal was constituted on 22-05-2015.

The Tax Authority and Customs Service raised the exceptions of "lack of material jurisdiction because a right in tax matters is at issue" and "lack of material jurisdiction regarding the request for reimbursement of assessed VAT" and contested the merits of the claims.

By order of 22-06-2015, the hearing provided for in Article 18 of the RJAT was dispensed with and it was decided that the case would proceed with written submissions.

The parties submitted their written submissions.

The arbitral tribunal was regularly constituted.

The parties possess legal personality and capacity, are legitimate (Articles 4 and 10(2) of the same instrument and Article 1 of Ordinance No. 112-A/2011, of 22 March) and are properly represented.

The case is not vitiated by any nullities.

The exceptions of jurisdiction, which constitute possible obstacles to the examination of the merits of the case, must be considered first.

2. Issue of Lack of Material Jurisdiction of this Arbitral Tribunal Due to a Right in Tax Matters Being at Issue

The Tax Authority and Customs Service contends that this Arbitral Tribunal is materially incompetent to examine the request for arbitral pronouncement because the central question to be examined, according to the Claimant's own thesis, should be that of its classification "under the normal VAT regime with the right to deduct this tax in the taxation periods from 2010.01 to 2011.11".

The Tax Authority and Customs Service states, in summary, the following:

– prior to examining the legality or illegality of the disputed assessments, there is another question to be decided, a question which runs throughout the pleadings: the Claimant contends that the tribunal should examine the legality of the prerequisites for the right to waive the exemption which it exercised, in accordance with the provision of Article 12(1)(b) of the VAT Code;

– the acts of additional VAT assessment carried out should be qualified as consequential acts;

– in the present case, the acts of additional VAT assessment, pending examination in this arbitral instance, are in a relationship of dependence on the recognition or otherwise of the right of the Claimant to waive the VAT exemption, in accordance with Article 12(1)(b) of the VAT Code, and this dependence is of a substantive nature and not merely formal;

– the recognition of whether or not the Claimant has the right to waive the exemption in the terms referred to will determine, or will not determine, the annulment of the additional tax assessments, since it depends directly and exclusively on that;

– this arbitral instance is materially incompetent to examine the present proceedings, in particular, to determine whether or not the Claimant has the right to waive the exemption provided for in Article 9(2) of the VAT Code, since, as it itself states, this is the fundamental question to be resolved in the present proceedings;

– the scope of jurisdiction of the arbitral tribunals constituted in accordance with the provision of Decree-Law No. 10/2011, of 20 January (RJAT), does not contemplate the possibility of examining requests aimed at the recognition of rights in tax matters;

– a circumstance which follows from the wording of Article 2(1) of the RJAT which, as is well known, defines the types of claims that may be examined by arbitral tribunals in tax matters;

– the same follows, equally, from a comparison between the enabling legislation under which arbitration in tax matters was established – namely, when it stated that "The tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters" (cf. nos. 2 and 4, subparagraph b) of Article 124 of Law No. 3-B/2010, of 28 April) – and what, in fact, came to be established in the RJAT;

– it follows unequivocally that the legislator chose not to provide for (in the RJAT) the possibility of examining requests aimed at the recognition of rights in tax matters;

– the appropriate means to examine the Claimant's claim would be an action for recognition of a right in tax matters, provided for in Article 145 of the Code of Tax Procedure and Process, particularly since the situation involves successive similar relationships with the tax administration.

The jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre is defined, in the first place, by Article 2(1) of the RJAT, which establishes the following:

1 - The jurisdiction of the arbitral tribunals comprises the examination 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, acts determining the taxable base and acts fixing patrimonial values;

In the second place, the jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre is limited by the submission of the Tax Authority and Customs Service which, in accordance with Article 4(1) of the RJAT, came to be defined by Ordinance No. 112-A/2011, of 12 March, which establishes the following, insofar as relevant here:

The services and bodies referred to in the previous article submit themselves to the jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre which have as their object the examination of claims relating to taxes whose administration is entrusted to them referred to in Article 2(1) 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 131-133 of the Code of Tax Procedure and Process;

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

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

d) Claims relating to the tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or procedures to be carried out by another member state within the framework of administrative cooperation in customs matters.

Ordinance No. 112-A/2011, concerning acts that may be classified as indicated in Article 2, only excluded from the scope of the submission 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 base and acts determining taxable matter, both by indirect methods, including the decision of the revision procedure.

It is clear that we are not dealing with any of the situations in which Ordinance No. 112-A/2011 excludes the jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre, and therefore jurisdiction must be assessed only in light of the RJAT.

As can be seen from Article 2 of the RJAT, the jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre was defined by the RJAT only taking into account the type of acts that are the object of the claims of taxpayers and not as a function of the type of issues that must be examined to decide whether the acts are legal or illegal.

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

Accordingly, in arbitral proceedings, as in judicial challenge proceedings, any illegality may, as a rule, be imputed to assessment acts, as follows from Article 99 of the Code of Tax Procedure and Process, subsidiarily applicable.

This will not be the case only when the law provides for the independent contestability of administrative acts which are prerequisites of assessment acts, and only to that extent is the examination of the legality of assessment acts excluded in all respects. But, for there to be such independent contestability, 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.

Consequential acts, of which the Tax Authority and Customs Service speaks, are consequential to other prior tax or administrative acts and, in the case at hand, there is no record that any administrative act was carried out assessing whether or not the Claimant has the right to waive the VAT exemption.

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

Therefore, since the assessment acts are injurious to the interests of the Claimant and are the only acts carried out by the tax administration with regard to the situation examined in them, their contestability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in Articles 20(1) and 268(4) of the Portuguese Constitution.

On the other hand, when there is no independently contestable 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 Code of Tax Procedure and Process), and therefore all questions relating to the legality of the assessment acts may be examined in the tax tribunals in judicial challenge proceedings, as follows from Article 97(1)(a) and Article 99 of the same Code.

In truth, in the tax tribunals, even when assessment acts have been carried out, if one is faced with a situation in which it might be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (as it would enable, in addition to the examination of the legality of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere option, as follows from the very text of Article 145(3) of the Code of Tax Procedure and Process, which states that "actions may only be brought whenever this procedural means is the most appropriate to ensure full, effective and efficacious protection of the right or legally protected interest". That is, what this rule provides is a limitation on the use of the action and not a limitation on the use of the judicial challenge process.

Indeed, it is clear that the judicial challenge process includes the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnificatory 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 process.

Accordingly, as the Tax Authority and Customs Service states, since the tax arbitral process was created as an alternative to the judicial challenge process, it must be concluded that there is no obstacle to the legality of the assessment acts in question in this process being examined by this Arbitral Tribunal, since in the tax tribunals that legality could be examined in judicial challenge proceedings.

Therefore, with respect to the claim for annulment of the assessment acts, the exception of lack of material jurisdiction raised by the Tax Authority and Customs Service on the ground that a right in tax matters is at issue does not succeed.

3. Issue of Lack of Material Jurisdiction of this Arbitral Tribunal Regarding the Claim for Reimbursement of Assessed VAT

With regard to the subsidiary claim made by the Claimant that "should it be determined that the Claimant should be classified under the VAT exemption regime from 03.01.2005, reimbursement by the Tax Authority to the Claimant of the VAT unduly assessed and paid", this is a claim which is not based on the illegality of the assessment acts, which are not even identified by the Claimant, and therefore it is clear that this is a matter not included in the jurisdiction of the arbitral tribunals functioning at the Administrative Arbitration Centre.

Accordingly, the exception of lack of material jurisdiction of this Arbitral Tribunal regarding this subsidiary claim succeeds.

4. Facts

4.1. Established Facts

The following facts are considered established:

A) The Claimant is a private capital joint-stock company, with profit-making objectives, which exercises, as its main activity, the provision of medical services in the field of imaging, namely with regard to computed tomography, diagnostic methods using computerized systems, as well as clinical analyses and examinations in the field of nuclear medicine;

B) In the years 2010 and 2011, the Claimant carried out its activity in its own units (…, …, …, …, … and …), as well as in partnership (…, …, and Local Health Unit of …), and was also responsible for operating the imaging service of Hospital … in Porto;

C) The Claimant also develops teleradiology services called MedWeb, which consists of data processing and making available the results of examinations on an online platform;

D) The Local Health Unit of …, E.P.E., constitutes a public business entity integrated into the National Health Service, with the objective of ensuring access to the provision of quality healthcare, with efficiency and effectiveness assured to the entire population. It aggregates two hospital units (Hospital of … in … do Castelo and … in …), one "Health Centre" for each Municipality - with the exception of … do Castelo with 3 "Health Centres" and 2 Convalescence Units. In operation are also 9 Family Health Units, included in the "Health Centres" of … (USF … and USF …), … (USF Vale do …), … (USF …), … (USF …, USF …, USF More Health, USF …) and … (USF …) (information contained on the Ministry of Health website at: «http://www….)»;

E) On the website of Hospital … in Porto it is stated that it "offers a wide range of healthcare for the whole family, in 35 specialties. It also includes specialized centres, from the … Centre" and "it also stands out for its Maternity Unit, which includes a Neonatal Intensive Care Unit unique in the context of Private Healthcare in the North and Permanent Care for Children and Adults and for Oncology, in which, in conjunction with the … Institute Porto, it offers a complete range: diagnosis, PET, treatment, nuclear medicine, palliative care and multidisciplinary approach" (https://www....);

F) On 03-01-2005, the Claimant submitted a declaration of change of activities in which it declared its option to waive the exemption, in accordance with Article 12(1)(b) of the VAT Code;

G) For VAT purposes, the Claimant was classified under the normal monthly taxation regime during the period between 03-01-2005 and 31-12-2011;

H) During the period referred to in the preceding subparagraph, the Claimant calculated its VAT, assessing VAT on the services provided to end consumers, who paid the respective tax in the invoice, and exercising the right to deduct the VAT borne on inputs necessary for its activity;

I) During the period referred to, the Claimant was, almost systematically, in a tax credit situation, with the exception of the months of January and December 2010;

J) In the years 2010 and 2011, the Claimant deducted, respectively, the amounts of € 1,283,902.91 and € 1,403,164.01, relating to VAT associated with acquisitions of fixed assets, inventories and others, as follows (document no. 5 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[Table content redacted in original]

K) In the years 2010 and 2011, the Claimant made the following VAT adjustments in its favour and in favour of the State (document no. 5 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[Table content redacted in original]

L) As a result of the exercise of its activity, the Claimant had accumulated, in December 2011 a tax credit in the amount of € 411,850.67, as follows (document no. 5 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[Table content redacted in original]

M) On 09-01-2012, the Claimant submitted a declaration of change of activities, to be classified as a provider of exempt services without the right to deduction, effective from 01-01-2012;

N) On 16-05-2012, it submitted a new declaration of changes by which it was classified under the mixed regime with actual allocation;

O) Between 16-06-2014 and 12-11-2014, the Claimant was subject to a general scope tax inspection procedure, covering the periods 2010 and 2011;

P) In the course of the inspection procedure, the Tax Inspection Services understood that the Claimant, through the submission of a declaration of change on 03-01-2005, unduly waived the VAT exemption, in accordance with Article 12(1)(b) of the VAT Code, having regard to the activities actually carried out;

Q) Following the inspection referred to, the Tax Authority and Customs Service drew up the Tax Inspection Report which appears in part 5 of the administrative file, the contents of which are hereby reproduced, in which it refers, among other things, to the following:

In accordance with Article 9(1) of the VAT Code, the following are exempt from tax: "Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions".

Since the VAT Code does not provide any definition with respect to paramedical activities, recourse must be had to Decree-Law 261/93, of 24 July, as well as to Decree-Law 320/99, of 11 August (both from the Ministry of Health), 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 261/93, of 24 July provides, in items 1, 9 and 14, the activities of Clinical Analyses, Nuclear Medicine and Radiology.

According to the description presented in item 1, the activity of clinical analyses is translated as "development of activities in the field of clinical pathology, immunology, clinical hematology, genetics and public health, through the study, application and evaluation of analytical techniques and methods, for the purposes of diagnosis and screening".

The description presented in item 9 refers to the activity of nuclear medicine as "Development of activities in the areas of clinical laboratory, nuclear medicine and photographic technique with handling of radioactive equipment and products, as well as execution of morphological examinations associated with the use of radioactive agents and dynamic and kinetic studies with the same agents and with testing of radioactive products, using techniques and standards of radiological protection and safety in the handling of ionizing radiation".

Finally, the description presented in item 14 refers to the activity of radiology as "Execution of all medical diagnostic radiology examinations; programming, execution and evaluation of all radiological techniques that intervene in the prevention and promotion of health; use of techniques and standards of radiological protection and safety in handling ionizing radiation".

The exemption provided for in Article 9(1) of the VAT Code operates independently of the legal nature of the service provider and, in particular, of whether it is a natural or legal person.

This internal provision is based on Article 132(1)(c) of Council Directive 2006/112/EC, of 28 November (which reformulated Council Directive 77/388/EEC, of 17 May, commonly known as the Sixth Directive).

In accordance with Article 9(2) of the VAT Code, the following are exempt: "Medical and health services and operations closely connected with them carried out by hospital establishments, clinics, dispensaries and similar".

Article 9(2) of the VAT Code transposes into the internal legal order Article 132(1)(b) of Council Directive 2006/112/EC, of 28 November, providing that the following activities are exempt from tax: "Hospitalization and medical assistance, and likewise operations closely related to them, ensured by public law bodies or, under conditions comparable to those applicable to these latter, by hospital establishments, medical and diagnostic assistance centres and other establishments of the same nature duly recognized".

This exemption thus covers the provision of medical and health services (health acts), which consist of providing assistance to persons, diagnosing and treating diseases or any anomalies of health and operations connected with them carried out by the establishments expressed in the said rule or by similar establishments (hospitalization/admission).

Similar establishments, for the purposes of the said exemption, are considered to be public or private establishments which diagnose and treat diseases or any other health anomaly, that is, establishments which actually 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, in Case C-141/00, concerning the Kugler case (no. 36), highlighted that subparagraphs (b) and (c) of Article 132(1) of the VAT Directive, although aimed at regulating the exemptions applicable to medical assistance services, have distinct scopes.

Thus, while subparagraph (b) - which corresponds to Article 9(2) of the VAT Code - exempts the provision of assistance services carried out in the hospital setting, including closely connected operations, subparagraph (c) - which corresponds to Article 9(1) of the VAT Code - is intended to exempt the provision of services of a medical and paramedical character supplied outside such premises, whether at the private address of the provider, at the patient's address, or in any other place.

1.2 - Concrete situation of the taxable person 1.2.1 - Activity actually carried out

The company A…, S.A. commenced its activity on 16/08/1988, with the main objective being "the provision of medical services in the field of computed tomography, as well as all diagnostic methods using computerized systems".

The company operates in three areas of business: imaging, nuclear medicine and clinical analyses. The company's activities also include the teleradiology service, called MedWeb. The company carries out its activities in its own or partnership facilities, consisting of conducting examinations in the specialties mentioned above.

It should be emphasized that in no case did the services provided involve the hospitalization or admission of patients.

1.2.2 - Classification for VAT purposes

As follows from the foregoing at point 1.1. Legislative Framework for the Activities Carried Out, the taxable person cannot consider the activities carried out as exempt from tax by classification under Article 9(2) of the VAT Code, but only by invocation of the provision of Article 9(1) of the same.

Consequently, as the taxpayer is classified under Article 9(1) of the VAT Code, it could not waive the exemption, due to the lack of a legal rule permitting it to do so, since the waiver of the exemption provided for in Article 12(1)(b) of the VAT Code only applies to the exemption of Article 9(2) of the VAT Code.

It should also be emphasized that at the beginning of 2012 the taxpayer again requested classification under the exemption regime of Article 9, having in May of that year moved to the mixed regime with actual allocation, a classification that remains in place to the present date, that is, it reclassified the activity it had been treating as taxed as exempt from VAT.

1.3 - Tax consequences

As the waiver of the exemption is prohibited, the taxpayer would have remained classified under the exemption regime provided for in Article 9 of the VAT Code, which implies non-acceptance of all VAT deducted, as provided for in Article 20(1) of the VAT Code.

Thus, the amounts of VAT deducted, in the financial years 2010 and 2011, according to the Periodic VAT Declarations filed, are unduly deducted in the amounts shown below, distributed by the various tax periods, as shown in the following table:

[Table content redacted in original]

Note that the VAT adjusted in the taxpayer's favour (field 40 of the declarations), given that it relates to corrections to tax previously assessed by it, is not relevant for determining the amount unduly deducted.

Likewise, in passive operations and for determining the value that globally is shown as unduly deducted, the corrections to tax inherent to acquisitions of goods or services which had been subject to deduction in the financial years 2010 and 2011 should be purged (VAT adjustments in favour of the State, field 41).

[Table content redacted in original]

R) The Claimant was notified to exercise the right to be heard on the draft Tax Inspection Report, which it did not exercise;

S) Following the inspection, the Tax Authority and Customs Service made the following VAT assessments and compensatory interest assessments (document no. 8 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[Table content redacted in original]

T) The Tax Authority and Customs Service also drew up the assessment statement no. …, relating to period 2011.11, in which it made a correction in the amount of € 72,500.08, to the tax credit that the Claimant had accumulated in that period, and which it intended to carry forward (document no. 8 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[Table content redacted in original]

U) On 12-03-2015, the Claimant submitted the request for arbitral pronouncement that gave rise to the present case.

4.2. Unproven Facts

It was not proven that the Tax Authority and Customs Service carried out, prior to the inspection action referred to in the file, any act assessing the option to waive the exemption made by the Claimant in the declaration of change of activity submitted by the Claimant on 03-01-2015.

4.3. Grounds for the Establishment of the Facts

The facts were established based on the documents attached with the request for arbitral pronouncement and on the Tax Inspection Report.

5. Law

5.1. Powers of Cognition of the Tribunal in Annulment Proceedings

The Claimant, on 03-01-2005, submitted to the Tax Authority and Customs Service a declaration of change of activity in which it opted to waive the VAT exemption, following which it began to assess VAT on the services it provides to end consumers and to deduct the VAT borne on inputs necessary for conducting its activity.

The Tax Authority and Customs Service took no position on the said waiver of exemption until the inspection conducted in which it concluded, in summary, that the activities of the Claimant cannot be considered exempt under Article 9(2) of the VAT Code, but only by invocation of the provision of Article 9(1) of the same article, and therefore the Claimant could not have waived the exemption "due to the absence of a legal rule permitting it to do so, since the waiver of the exemption provided for in Article 12(1) of the VAT Code only applies to the exemption of Article 9(2) of the VAT Code" (page 7 of the Tax Inspection Report).

In order to conclude that the situation falls under Article 9(1) and not Article 9(2) of the VAT Code, the Tax Authority and Customs Service considered that Article 9(2) covers only activities carried out in hospital settings, which it understood was not the case with the Claimant, because it "carries out its activity in its own facilities or in partnership, consisting of the performance of examinations in the specialties mentioned above" and "in no case did the services provided involve the hospitalization or admission of patients" (Tax Inspection Report).

Based on this understanding, the Tax Authority and Customs Service understood that the Claimant could not waive the VAT exemption, as it was not permitted by Article 12(1) of the VAT Code with respect to exemptions classifiable under Article 9(1) of the same Code.

Consequently, the Tax Authority and Customs Service understood that all VAT that the Claimant deducted in the years 2010 and 2011 was unduly deducted, and therefore proceeded with the corresponding corrections.

The contentious regime provided for in the RJAT is one of mere legality, aimed only at the declaration of illegality of acts of the types provided for in subparagraphs (a) and (b) of Article 2(1) thereof.

Therefore, the legality of the acts challenged must be assessed as they were carried out, with the justification used in them, and alternative justifications that could serve as support for other acts, of decisional content totally or partially coincident with the act carried out, are not relevant. Post hoc justifications advanced after the end of the tax procedure in which the act whose declaration of illegality is requested was carried out are thus irrelevant, including those raised in the court proceedings.

Therefore, when confronted with the invocation of an illegal ground as support for the administrative decision, the Tribunal cannot examine whether its action could be based on other grounds and refrain from declaring the illegality of the concrete act carried out because, eventually, there might be the abstract possibility of a hypothetical act with decisional content totally or partially identical, with different justification, which would be legal, but was not carried out. ([1])

In these terms, the question to be examined consists, in the first place, of determining whether the position taken by the Tax Authority and Customs Service is correct in considering that only the activity carried out in hospital settings falls under Article 9(2) and that the activity of the Claimant is not carried out in that setting, because it is developed in its own facilities or in partnership, without the services provided involving the hospitalization or admission of patients.

That is, what is stated by the Tax Authority and Customs Service in its Response and in the submissions presented in the present case regarding, should it be understood that the situation of the Claimant falls under Article 9(2), the necessity of assessing whether the waiver of the exemption is possible in light of the principle of neutrality, "a situation that was not examined by the Tax Authority since it was prejudiced by the classification of the Claimant's activity" (Article 82 et seq. of the Response), is not relevant for assessing the legality of the corrections carried out. In truth, the grounds that the Tax Authority and Customs Service did not examine when carrying out the act are not grounds of the act carried out, and their invocation constitutes post hoc justification.

Therefore, with only contemporaneous justification of the act being relevant, if it is concluded that the situation of the Claimant falls under Article 9(2) of the VAT Code, it will be necessary to conclude that the act is illegal due to error as to the legal prerequisites.

5.2. Applicable Legal Regime

Articles 9 and 12 of the VAT Code establish the following, insofar as relevant here:

Article 9

Exemptions in Internal Operations

The following are exempt from tax:

Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions;
Medical and health services and operations closely connected with them carried out by hospital establishments, clinics, dispensaries and similar;

(...)

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, not belonging to public legal entities or private institutions integrated into the national health system, which carry out medical and health services and operations closely connected with them;

(...)

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

3 - Having exercised the right to opt in accordance with the above numbers, the taxable person is obliged to remain in the regime opted for during a period of at least five years, and, upon expiry of that period, should it wish to return to the exemption regime:

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

b) Subject to taxation the remaining inventories and proceed, in accordance with Article 24(5), to the adjustment of the deduction as regards fixed assets.

These exemptions are connected with Article 132 of Directive No. 2006/112/EC, of 28-11-2006, which establishes the following, insofar as relevant here:

The Member States exempt the following operations:

(...)

b) Hospitalization and medical assistance, and likewise operations closely related to them, ensured by public law bodies or, under conditions comparable to those applicable to these latter, by hospital establishments, medical and diagnostic assistance centres and other establishments of the same nature duly recognized;

c) Services of assistance provided in the course of the exercise of medical and paramedical professions, as defined by the Member State concerned;

5.3. Possibility of Waiver of Exemption

The said Article 12(1)(b) of the VAT Code permits waiver of the VAT exemption to "hospital establishments, clinics, dispensaries and similar, not belonging to public legal entities or private institutions integrated into the national health system, which carry out medical and health services and operations closely connected with them".

Article 9(2) of the VAT Code provides for the exemption of "medical and health services and operations closely connected with them carried out by hospital establishments, clinics, dispensaries and similar", and therefore, in light of the textual correspondence, it must be concluded that only those entities classified under this Article 9(2) may waive the exemption and not also those benefiting from the exemption under Article 9(1).

The Tax Authority and Customs Service understood that the fields of application of subparagraphs (b) and (c) of Article 132 of Directive No. 2006/112/EC correspond to the fields of application of Article 9(2) and (1), respectively, of the VAT Code, and with that premise, following the jurisprudence of the CJEU on the field of application of the provision of subparagraphs (b) and (c) of Article 13-A(1) of the Sixth Directive [literally corresponding to subparagraphs (b) and (c) of Article 132 of Directive No. 2006/112/EC], it understood that subparagraph (c) and, consequently, Article 9(1) of the VAT Code, encompasses the provision of health services by legal persons and that "subparagraph (b) of this provision exempts all services provided in the hospital setting, while subparagraph (c) is intended to exempt medical services provided outside that scope, both at the private address of the provider and at the patient's address, or in any other place" (point 36 of the Kügler judgment, of 10-09-2002, delivered in case No. C-141/00).

However, the CJEU, in the L.u.P. judgment ([2]), subsequent to the Kügler judgment, clarified that

"Article 13-A(1)(b) of Council Directive 77/388/EEC of 17 May 1977, (...) must be interpreted to mean that clinical analyses which have as their object the observation and examination of patients on a preventive basis, which are carried out, as are those in the main proceedings, by a private law laboratory external to a medical assistance establishment under the prescription of general practitioners, are capable of being covered by the exemption provided for in that provision as 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 assistance' provided for in Article 13-A(1)(b) of the Sixth Directive, a laboratory such as that in the main proceedings must be considered an establishment of 'the same nature' as the 'hospital establishments' and 'medical and diagnostic assistance centres' within the meaning of that provision" (point 35).

In a recent judgment, the CJEU reaffirmed "that a private law laboratory which carries out clinical analyses must be considered an establishment 'of the same nature' as the 'hospital establishments' and 'medical and diagnostic assistance centres' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical assistance' provided for in the said provision (point 35 of the De Fruytier judgment, of 02-07-2015, delivered in case No. C-334/14, citing the L.u.P. judgments, C-106/05, points 18 and 35 and CopyGene, C-262/08, point 60).

Therefore, it must be concluded that, in light of the jurisprudence of the CJEU, the exemption provided for in subparagraph (b) of Article 132 covers the services provided by entities of the types that the Claimant provides, regardless of whether the provision occurs in a hospital setting or not, an interpretation that is in manifest harmony with the text of this rule, by making reference to the exemption of operations closely related to hospitalization and medical assistance ensured to "medical and diagnostic assistance centres".

With regard to Article 9 of the VAT Code, the text of its Article 9(2) also does not provide explicit support for the thesis defended by the Tax Authority and Customs Service that only activity carried out in hospital settings falls under it and, in particular, that the provision of clinical analysis and diagnostic services connected with hospital activities is outside its scope.

In truth, in this Article 9(2) reference is made, in addition to hospital establishments, also to "clinics, dispensaries and similar".

The reference to "dispensaries" unequivocally encompasses the provision of health services outside that hospital setting, since the meaning of "dispensary" is that of "charitable establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines" ([3]), or "establishment for providing, free of charge, care and medicines to poor patients who can be treated at home" ([4]).

On the other hand, the reference to "similar", interpreted in harmony with the parallel provision of Article 132(1)(c) of Directive No. 2006/112/EC, which makes reference to "medical and diagnostic assistance centres and other establishments of the same nature", allows it to be concluded that entities of the type of the Claimant, which provide health services of clinical analyses and diagnosis in connection with hospital establishments, would also fall within that concept.

Accordingly, the thesis defended by the Tax Authority and Customs Service that the exemption applicable to establishments of the type of the Claimant is not provided for in Article 9(2) of the VAT Code has no textual support.

On the other hand, even if it were understood that Article 9(2) of the VAT Code only refers to services provided in hospital settings, it follows from the facts established that part of the Claimant's activity is developed in partnership with hospital establishments, in particular in Hospital … in Porto and establishments integrated into the Health Unit of …, and therefore, also for that reason, the exclusion of the possibility of waiver of the VAT exemption would not be justified, at least with respect to the totality of its activity. In truth, in the absence of any legal definition of what should be understood by "provision of health services in hospital settings", account should be taken of the natural meaning of the expression, which is to refer to the provision of services in hospitals, and therefore one acts in hospital settings who provides health services in hospital units.

Therefore, the assessments in question are vitiated by a defect of violation of law, due to error as to the legal prerequisites, which justifies their annulment.

6. Compensation for Undue Guarantee

The Claimant requests, as a subsidiary claim, that, accepting that the Claimant will be served in the course of the enforced collection proceedings for payment of the aforementioned VAT assessments and compensatory interest and that, as a consequence, it will be obliged to incur costs resulting from the provision of a bank guarantee by a financial institution, compensation for the undue guarantee be fixed, in accordance with Article 53 of the General Tax Code and Article 171 of the Code of Tax Procedure and Process.

The subsidiary claim is "the claim that is presented to the tribunal to be taken into consideration only in the event that a prior claim does not succeed" [Article 554(1) of the Code of Civil Procedure, subsidiarily applicable by virtue of the provision of Article 29(1)(e) of the RJAT].

Since the principal claim succeeds, there is no need to decide on the subsidiary claim.

7. Decision

In these terms, this Arbitral Tribunal agrees to:

a) Declare the principal request for arbitral pronouncement well-founded and annul the following VAT assessments and compensatory interest: