VAT on Compensation for Public Concession Termination: CAAD Ruling 170/2017-T on Article 16(6) CIVA

ARBITRAL AWARD

The arbitrators Dr. José Pedro Carvalho (arbitrator-president), Prof. Dr. Maria do Rosário Anjos and Dr. Emanuel Vidal Lima, appointed, respectively, by the Claimant and the Respondent, to form the Collective Arbitral Tribunal, constituted on 05-06-2017, hereby decide to render the following arbitral award:

I – REPORT

The company "A…, S.A.", with tax identification number … and registered office at … …, …-… …, taxpayer within the jurisdiction of the Financial Services Office of …, hereinafter referred to as the "Claimant", filed a request for constitution of a Collective Arbitral Tribunal, under the provisions of article 2, no. 1, subparagraph a), of Decree-Law no. 10/2011, of 20 January (RJAT) and Ordinance no. 112 – A/2011, of 22 March, for the challenge and declaration of illegality of the express denial of the Administrative Reclamation, notified on 14/12/2016, and of the additional levy of Value Added Tax (VAT) effected by the Tax Authority (TA), following an inspection procedure for the years 2013 and 2014, through service orders nos. OI2014…, OI2015… and OI2015…. In the course of this inspection action, corrections were made and the following assessments were issued as detailed below:

VAT Assessments

Interest Assessments

In the total amount of €858,733.08.

1. The aforementioned acts of additional VAT assessment were issued as a result of the inspection action carried out by the Tax Inspection (TI), promoted by the Finance Office of Braga, as per the Tax Inspection Report (RIT) attached to the proceedings as document no. 1 annexed to the arbitral request (PA), and which forms part of the administrative file held by the TA. The assessments in question represent a technical correction in VAT, promoted by the TI, by virtue of the recording in the Claimant's accounts of the receipt of compensation in the amount of €3,500,000.00 (three million five hundred thousand euros), fixed judicially by decision of an arbitral tribunal, following the termination of a concession and operation contract for public domain and public works, designated as "…", located in the municipality of …, entered into between the Claimant and the Municipality of … (as Grantor). The assessments now being challenged are based on the understanding of the TA, according to which the receipt of this compensation constitutes a taxable transaction for VAT purposes. The Claimant disagrees and substantiates its arbitral request, among others, on the grounds of violation of law due to error regarding the factual and legal assumptions, violation of the provisions of article 16, no. 6, a) of the VAT Code, as well as on the ground of unconstitutionality.

The request for constitution of the Arbitral Tribunal was submitted by the Claimant on 14-03-2017; on the same date it was accepted by the Honorable President of CAAD and automatically notified to the TA, in accordance with the legally provided terms and effects.

The Claimant opted to appoint an arbitrator, having for that purpose designated as arbitrator Dr. Maria do Rosário Pereira Cardoso dos Anjos, listed on the CAAD List of arbitrators in tax matters. Accordingly, the TA appointed as party arbitrator Dr. Emanuel Vidal Lima, listed on the CAAD List of arbitrators in tax matters. By agreement between the arbitrators appointed by the parties, Dr. José Pedro Carvalho was appointed as President Arbitrator, who accepted the appointment as evidenced by the declaration on file dated 17-05-2017. In these terms, by order issued on 19-05-2017 by the Honorable President of the Deontological Board of CAAD, the arbitrators composing the present collective arbitral tribunal were confirmed and appointed, which tribunal was constituted on 05-06-2017.

On 05-06-2017 an arbitral order was issued to the Tax and Customs Authority (TA) to submit a response within the legal deadline, in accordance with the terms and for the purposes of nos. 1 and 2 of article 17 of the RJAT. The Respondent submitted its response to the proceedings on 10-07-2017, the contents of which are deemed fully reproduced, in which it acknowledges the similarity of the case in the present proceedings with that mentioned in the binding information attached to the arbitral request as document no. 9. Nevertheless, it concludes, out of duty of representation, for the maintenance of the acts being challenged.

On 11-07-2017, in light of the positions of the parties as evidenced in the proceedings, an arbitral order was issued inviting the Claimant to state whether it was interested in producing the testimonial evidence indicated in the arbitral request and, in the event of maintaining such interest, to specify the matter of fact for such examination. In the same arbitral order, the TA was notified to attach the administrative file to the proceedings. On 31-07-2017 the TA requested the attachment of the administrative file to the proceedings.

By petition submitted on 17-07-2017, the Claimant declared its acceptance of the specific admission of the Tax Administration, set forth in article 2 of the Response submitted herein, with respect to the similarity of content with the situation at issue in these proceedings of the Binding Information whose copy was attached with the initial request as document no. 9. On 04-09-2017, the Claimant expressed itself regarding its interest in maintaining the testimony examination procedure, in the following terms:

"The Claimant specifically accepted the admission of the Respondent set forth in article 2 of its Response and the position of the TA that 'the similarity of content' with respect to the situation underlying Binding Information no. 2061, of 02-03-2011, 'should not be disregarded when rendering a decision in the context of the present proceedings' (a position in which the Claimant concurs and which, in the Claimant's view, would be, by itself, determinative for the decision of this Tribunal).

1. Nevertheless, out of caution and because the TA considers reproduced 'everything that is contained in the administrative reclamation proceeding', the Claimant maintains an interest in the examination of the witnesses summoned by it, not waiving this evidentiary procedure [all the more so since the opinion expressed in the tax inspection report (RIT) is based, to a large extent, on an interpretation of the factuality underlying the arbitral award – see, in particular, point 38 of that report – and the Claimant summoned as a witness the person who held the office of arbitrator-president].

2. The following are the points of the initial request on which the Claimant intends to produce testimonial evidence: 15th, 16th to 20th, 22nd to 27th, 32nd, 35th to 40th, 44th to 47th, 57th to 60th, 63rd to 66th, 71st, 72nd, 75th, 90th to 93rd, 114th, 161st, 173rd to 175th, 178th, 179th, 182nd and 239th to 242nd."

On 19-09-2017 an Arbitral Order was issued with the following tenor:

"Notified to indicate which facts are intended to be covered by the testimonial evidence summoned by it, the Claimant indicated points 15 to 20, 22 to 27, 32, 35 to 40, 44 to 47, 57 to 60, 63 to 66, 71, 72, 75, 90 to 93, 114, 161, 173 to 175, 178, 179, 182 and 239 to 242 of its arbitral submission.

Upon examination of that request, it is found that:

• points 15 and 16 have no relevance to a proper decision of the case, from the perspective of any of the applicable legal solutions, being a matter concerning the option of using the faculty granted by Decree-Law no. 67/2016, of 3 November, which does not require justification, is not disputed and does not relate to the resolution of the request;

• points 17 to 20, 22 to 27, 75, 92 are documentarily proven, with the initial Submission itself referring to the pertinent documentation;

• points 32, 35 to 40, 44 to 47, 57 to 60, 63, 64, 71, 72, 90, 91, 93, 114, 161, 173 to 175, 178, 179, 182, and 242 constitute conclusive matter and/or matters of law, as such incapable of proof, with the conclusions in question to be drawn from the matter of fact that is accepted; in particular, points 32, 35 to 40, 44 to 47, 57 to 60, 63, 71, 72, 91, 114, 173 to 175, 178, 179, 182 should result from the interpretation made of the arbitral decision attached as document 5, whose dispositional value, as that of any other judicial decision, will be what results from its objective interpretation, and not what, subjectively, the parties or the judges involved in it may seek, extra-procedurally or extra-decision, to grant it.

• points 65 and 66 and 239 to 241 concern the VAT assessment on parking services, and the payment of VAT for the construction and conception of the car park, and are not contested by the Respondent, either in the arbitral proceeding or in the RIT, being necessarily within its personal knowledge.

In light of the foregoing, considering that:

• there is no need for the production of additional evidence beyond the documentary evidence already incorporated in the proceedings;

• there are no matters of exception on which the parties need to express themselves;

• the general procedural principles of procedural economy and prohibition of useless acts apply in the arbitral process;

• the other arbitrators consulted, who expressed their agreement with the present order, pursuant to the provisions of subparagraphs c) and e) of article 16 and no. 2 of article 29, both of the RJAT:

• The holding of the meeting referred to in article 18 of the RJAT is dispensed with;

• The parties are afforded the possibility of, should they wish, submitting written submissions, with the Claimant being able to do so within 10 days, counted from notification of the present order, and the TA within the same period, counted from notification of the Claimant's submissions, or failure to submit them.

The final decision will be rendered within 30 days after submission of submissions by the Respondent, or the expiration of the respective deadline, with the Claimant being required, up to 10 days before the expiration of such period, to deposit the subsequent arbitration fee."

On 29-09-2017 the Claimant attached its written submissions to the proceedings.

The respondent TA did not submit submissions.

B) THE REQUEST FORMULATED BY THE CLAIMANT:

In summary, the Claimant bases its request on the following grounds:

Erroneous qualification of the taxable fact, inasmuch as what is at issue is compensation fixed by judicial decision, rendered by an arbitral tribunal, for the reparation of damages emerging from breach of a concession contract, which does not constitute a taxable transaction for VAT purposes. Indeed, the dispute decided by the arbitral tribunal "A…, S.A./Municipality of…" originates from the breach of the concession contract entered into between the Claimant and the Municipality of …, insofar as the latter did not provide the necessary means for performance of the contract it had entered into with the Claimant. In this arbitral action, the Claimant requested that the Tribunal recognize the right to terminate the concession contract, in accordance with the provisions of no. 3 of article 332 of the Public Contracts Code, and that, as a consequence of such termination, it condemn the Grantor to pay compensation for all damages (emergent damages and loss of profit) arising from the contractual breach. The arbitral award rendered in that proceeding found the Claimant's claims therein to be well-founded, with the exception of the claim concerning loss of profit, which was entirely dismissed.

Thus, the arbitral award then rendered partially upheld the Claimant's claim, deciding:

• The termination of the Concession Contract, due to facts attributable to the Grantor Municipality of …; and, as a consequence:

• The payment of compensation to the Concessionaire, now Claimant, in the amount of €4,577,233.21, plus default interest;

• The delivery of the concession establishment to the Grantor (Municipality) in the state in which it was, fixing for such purpose a transitional period;

• The complete dismissal of the claim for compensation regarding loss of profit.

After the arbitral award was rendered, the Claimant and the Municipality of … reached a payment agreement, agreeing to reduce the compensation amount fixed for emergent damages from €4,577,233.21 to €3,500,000.00 (three million five hundred thousand euros), with the obligation to deliver the concession establishment being maintained. "Thus it is apparent that it was not understood, either by the Parties or by the Arbitral Tribunal itself, as an economic transaction falling within the scope of VAT, as provided for in the VAT Code."

The Claimant alleges that, contrary to what the TA stated in the RIT, we are not dealing with a supply of services materialized in the delivery of the underground car park to the Grantor, nor did the compensation assume the nature of "onerous consideration" for the delivery of the car park. It adds that "even if it were understood that it constituted a transaction for VAT purposes – which is not conceded, but is mentioned for the sake of argument – it would still be excluded from taxation under article 16, no. 6, subparagraph a) of the VAT Code. This means that the TA, in order to suggest the taxation of compensation, would always have to, a priori, clearly assess whether the payment of such compensation, based on the correct factual, legal and doctrinal framing, represents or not a taxable transaction."

Non-existence of the taxable fact, given that in accordance with article 62 of Directive 2006/112/EC, of the Council, of 28 November 2006 (VAT Directive), the taxable event is understood to be "the event by means of which the legal conditions necessary for the exigibility of the tax are fulfilled". Also, in accordance with article 1, no. 1, subparagraph a) of the VAT Code, taxable transactions include "supplies of goods and supplies of services carried out in the national territory, for consideration, by a taxable person acting as such". In the case of the proceedings, according to the Claimant, we are not dealing with a supply of goods or a supply of services, of an onerous nature, therefore there is no taxable event. In this regard, the Claimant extensively discusses each of the requirements to conclude that there is no taxable event. First of all, because the Grantor is not a consumer, therefore no economic transaction or "identifiable" consumer can be discerned that could support the incidence of VAT.

Non-existence of taxable supply of services, therefore the content of article 48 of the RIT is entirely devoid of sense, and likewise the understanding upheld by the TA underlying all the acts being challenged, in considering that "the taxpayer receives €3,500,000.00 and delivers the car park to the Municipality of … (nexus between the service provided and the consideration received)". However, this interpretation by the TA is entirely devoid of logical-legal sense, because it confuses two distinct realities: on the one hand the compensation and on the other the delivery of the Car Park. Indeed, the compensation received by the Claimant is not a consideration for the delivery of the car park (which the TA treats as a "supply of services"), but merely the reimbursement for the damages caused by the Grantor. (…) The TA confuses two distinct realities: the compensation owed for damages, claimed in accordance with article 562 of the Civil Code, according to which "whoever is obliged to repair a loss must restore the situation that would have existed had the event giving rise to the obligation not occurred" and the delivery of the car park which occurred as a legal consequence of the contractual termination, determined by the Tribunal. And this is also what follows from the arbitral action, in which the Claimant claimed its right "to be compensated for the damages suffered".

At issue in the present proceedings is the correct qualification of the compensation received for damages suffered, emerging from the breach of the concession contract. In this regard, it cites the teachings of Xavier de Basto when he states: "care must be taken not to go too far in the meaning and implications of the Directive's refusal to define, in a positive manner, supplies of services and to identify their content. It seems necessary that, in any case, there exists a service. A patrimonial attribution made by a taxable person cannot be considered, without more, as consideration for a service". It concludes, therefore, that "the TA, before framing the compensation in a putative supply of services, should have verified at least two cumulative requirements, namely: a) The onerous character of the transaction; b) The existence of a direct nexus between the putative service and the compensation received."

It further alleges that the exercise of the right to terminate the contract is independent of the right that the co-contractor may have to be compensated for damages suffered as a consequence of breach of the public contract. Therefore, even if the Arbitral Tribunal had not concluded that the Claimant had the right to be compensated, the termination of the contract obligated the reversal of the car park to the Grantor. On the other hand, the asset of the concession is worth much more than the amount of the compensation fixed and received, which only represents emergent damages, that is, the costs that the Claimant incurred with the concession. Therefore, the compensation could not be understood as the price of the concession and, consequently, as "onerous consideration" for it, as is evidenced in the Arbitral Award.

It further alleges that there is no reciprocity of performances, which presupposes a direct nexus between the "consideration" and the "service". In this regard, the Claimant, with support in doctrine and the jurisprudence of the CJEU, which it develops in detail, concludes that "when the Concession reverts to the Grantor, as a legal consequence of the contractual termination, there is no transfer of ownership. The Grantor is not acquiring a good, nor is the Concessionaire selling it".

It further alleges the exclusion from taxation by virtue of the provisions of article 16, no. 6, subparagraph a) of the VAT Code, which provides that "from the taxable amount referred to in the preceding number [that is, from the taxable amount of supplies of goods and supplies of services] are excluded interest for deferred payment of the consideration and amounts received as compensation declared judicially, for total or partial breach of obligations".

In accordance with this article, for compensation to be excluded from taxation, two requirements must be met: a) it must be compensation for breach of obligations; b) the compensation must be declared judicially.

The analysis of article 16, no. 6, subparagraph a) of the VAT Code is sufficient to understand that the fiscal legislator, without distinguishing the nature of compensations, excluded them from the list of taxable transactions. The compensation received by the Claimant met and meets all the requirements to be excluded from taxation, in accordance with and pursuant to article 16, no. 6, subparagraph a) of the VAT Code, which the TA improperly disregarded.

In support of the reparatory nature of the Compensation, which it considers proven by the documentation attached to the proceedings and, first and foremost, by the content of the Arbitral Award which fixed it, the Claimant invokes and cites extensive doctrine and jurisprudence, concluding that it would always be excluded under article 16, no. 6, subparagraph a) of the VAT Code. And, if a different understanding were to prevail, then the obligation to pay VAT is that of the consumer/recipient (Municipality of …), pursuant to article 37 of the VAT Code and not that of the Claimant, therefore the assessments would always be vitiated by illegality.

Finally, it also invokes the unconstitutionality of the acts being challenged for calling into question, in particular, (i) the principle of equality; (ii) the principle of separation of powers; (iii) the principle of res judicata; and (iv) the principle of legal certainty and security.

With emphasis on the alleged violation of the principle of equality arising from the TA itself having recognized in an identical situation and in a binding information attached to the proceedings, that the compensation at issue was reparatory and as such was not subject to VAT.

The said binding information depicts a dispute between a company and a Municipality, arising from the breach of a concession contract entered into for the construction and operation of a car park for light passenger vehicles. As in the case of the present proceedings, also in the case mentioned in the binding information, by virtue of the Municipality's breach, an arbitral action was instituted to demonstrate the consequences of the breach and the justified termination. The Municipality paid compensation, as a consequence of termination for breach, and the claimant in that case delivered the concession to the Municipality, which received it. "That is: the same situation as in the present proceedings!"

In that binding information the TA stated that: "if compensations sanction the injury to any interest without a remuneration character because they do not remunerate any transaction, but rather are intended to repair a loss, they are not taxable in VAT, to the extent that they do not have an underlying supply of goods or supply of services". And it concluded that: "we are dealing with compensation declared judicially, which in accordance with the attached agreement, resulted from the breach of a set of obligations of the Concession Contract for the Construction and Operation of a car park for light passenger vehicles and for the installation and operation of parking meters. Given the foregoing, we can conclude that, should the Arbitral Tribunal's sentence be confirmed, the compensation in question falls within the scope of subparagraph a) of no. 6 of article 16 of the VAT Code, and is consequently not subject to tax".

The Claimant concludes that the TA, when confronted with the fiscal framing of compensation, obtained as a consequence of the termination of a concession and operation contract of an underground car park, entered into with a Municipality and terminated due to that Municipality's contractual breach, understood that the compensation is remunerative and is excluded from taxation, pursuant to article 16, no. 6, subparagraph a) of the VAT Code. Therefore, in deciding differently in the present case under consideration, it violated the principle of equality enshrined in the Constitution of the Portuguese Republic (CRP).

It further alleges violation of the Principle of Separation of Powers (article 2 of the CRP), inasmuch as with its conduct the TA "interfered with the understanding and decision of the Arbitral Tribunal, redefining it with a meaning that was not intended by the Tribunal (…) disregarded the qualification made by the Tribunal, rendered the award "dead letter" and concluded, without authorization, that after all the compensation is a remuneration and not a reparation. Now, it is settled, both in doctrine and in jurisprudence, that the spirit of article 16, no. 6, subparagraph a) of the VAT Code is precisely to confer on the Tribunal's decision the security that facts which should be taxed are not being disguised." It cites the doctrine of Afonso Arnaldo and Pedro Vasconcelos Silva, according to which "whenever we are dealing with the payment of compensation that has been the subject of judicial recognition, the same will not give rise to implications at the level of VAT assessment. In fact, the legislator will have recognized that in these cases judicial proof will be sufficient to classify certain transactions as compensations, avoiding the risk of dissimulation of taxable transactions under the guise of apparently innocuous concepts."

For identical reasons and grounds it also invokes violation of the principle of the inviolability of res judicata, calling into question the principles of legal certainty and protection of legitimate expectations, therefore its conduct was manifestly unconstitutional.

Finally, it invokes violation of community guidelines and CJEU jurisprudence, with the grounds it develops in detail in its arbitral request and which are here deemed fully reproduced. It concludes that without doubt it follows from all these guidelines that the "basic principle is that of taxation only of consideration for taxable transactions and not the compensation for damages which do not have a remunerative character". The acts being challenged violated the principle of fiscal neutrality, which, associated with the principle of equal treatment and uniformity, "is based on the exercise of the right to deduction which in the present case the Claimant can never or will never exercise, which constitutes a blatant violation of the fundamental principles of the tax."

The Claimant concludes that, with the act denying the administrative reclamation, which maintained the additional VAT assessments, the TA committed a manifest error regarding the factual and legal assumptions, given that it has been demonstrated that:

• The Claimant did not act within the scope of an economic transaction, there being no consumption on which VAT can be imposed;

• There is no taxable fact, as we are not dealing with an onerous transaction of goods or a taxable supply of services;

• It follows from article 16, no. 6, subparagraph a) of the VAT Code the exclusion, which is objective and unequivocal, of taxation of compensation for breach of obligations. Nevertheless, even if it were understood that only compensations of a reparatory nature are excluded from taxation, it has been demonstrated that the compensation at issue is merely reparatory of the damages borne by the Claimant due to the contractual breach by the Grantor Municipality of …;

• The understanding expressed by the TA in the acts being challenged is unconstitutional, by violation of the most elementary principles of the Democratic Rule of Law (equality, separation of powers, inviolability of res judicata and legal certainty);

• The understanding expressed by the TA in the acts being challenged is illegal, inasmuch as it violates the guidelines already expressed by the TA in an identical case and violates the VAT Directive, by constituting a violation of the principles underlying the tax, properly rooted in the light of CJEU jurisprudence.

It concludes by seeking a favorable decision on its arbitral request, with the consequent annulment of all the acts being challenged, and the condemnation of the TA to reimburse the amounts paid in the meantime by the Claimant, plus interest for damages, pursuant to the provisions of articles 43 of the General Tax Law and 61 of the Tax Court Procedure Code. Subsidiarily and without waiving, should this tribunal otherwise understand, it should "promote the appropriate preliminary ruling to the CJEU, pursuant to the provisions of article 277 of the TFEU, so that it may pronounce itself on the essential issue being considered in the present proceedings and which is whether the compensation that only partially repairs the direct damages of a company due to breach of a concession contract, may be a transaction/supply of services, for VAT taxation purposes."

C – THE RESPONDENT'S REPLY

In its reply, attached to the proceedings on 10-07-2017, the Respondent stated as follows:

"1st - For purposes of defense, everything contained in the administrative reclamation with no. …2016…, of 06.12.2016, is deemed fully reproduced.

2nd - Nevertheless, the TA is aware of the existence of Binding Information no. 2061, of 02-03-2011, issued by the VAT Services Office, a copy of which was attached with the initial request as document no. 9, and which, given the similarity of content with the situation at issue, should not be overlooked when rendering a decision in the context of the present arbitral submission.

3rd - In any case, and as a matter of professional obligation, the tax acts pending consideration in the context of the present arbitral submission should be maintained intact in the legal order, inasmuch as they are not vitiated by any illegality."

It concluded, therefore, out of professional obligation, for the maintenance of the tax acts.

The Respondent did not submit written submissions (optional) within the prescribed period.

II - PROCEDURAL REQUIREMENTS

1. The Arbitral Tribunal is regularly constituted. The Parties possess legal personality and capacity, are legitimate and are legally represented (cf. articles 4 and 10 no. 2 of the RJAT and article 1 of Ordinance no. 112/2011, of 22 March).

The proceeding is not vitiated by defects that would invalidate it, therefore all procedural requirements for the arbitral tribunal to take cognizance of the request are satisfied.

1. Taking into account the documentary evidence attached to the proceedings and the allegations of the parties, it is necessary to determine the relevant matters of fact for the decision.

III – Matters of Fact

Proven Facts

1. As relevant matters of fact, this tribunal takes as established the following facts:

a) The Claimant was the subject of an inspection by the TA, the procedure for which was initiated on 09/09/2015, as a result of special action determined by central selection of taxpayers, within the scope of the National Plan of Activities of the Tax and Customs Inspection (PNAITA) 2014.

b) In the course of the tax inspection action carried out by the Tax Inspection, promoted by the Finance Office of Braga, a technical correction was proposed, in a Tax Inspection Report ("RIT"), in VAT, related to the recording, in the Claimant's accounts, of the receipt by the latter of compensation in the amount of €3,500,000.00 (three million five hundred thousand euros).

c) Compensation received by virtue of the termination, decreed by an arbitral award of an Arbitral Tribunal, of an administrative concession contract (the contract for the operation of public domain and public works related to the implementation of "…", in the municipality of …), entered into between the Claimant (as Concessionaire) and the Municipality of … (as Grantor).

d) In the inspection procedure, the TA considered that the receipt of the said compensation constituted a taxable transaction for VAT purposes, therefore it processed the VAT Assessments, based on the tax corrections it understood should be made, as follows:

e) To the said amount of €805,000.25 related to VAT taxation, the TA added the amount of €53,732.83, as compensatory interest for delayed assessment.

f) The Claimant filed its administrative reclamation, by which it requested the TA to annul the said assessments.

g) By order issued by the Director of Financial Services of Braga on 09/12/2016 and notified to the Claimant by electronic data transmission on 14/12/2016, the TA expressly denied the claim formulated by the Claimant in the said administrative reclamation.

h) The Claimant – on a date prior to the act of express denial referred to – adhered to the extraordinary debt regularization plan for tax liabilities provided for in Decree-Law no. 67/2016, of 3 November.

i) The Claimant entered into a concession contract with the Municipality of …, on 18 August 2010, a concession contract designated as "Concession Contract for the Operation of Public Domain and Public Works" in which the Claimant figured as Concessionaire and the Municipality of … as Grantor.

j) Under the terms of the Concession Contract, it was incumbent upon the Claimant – in its capacity as Concessionaire – to construct, operate and ensure the maintenance of an underground car park at the market of …, in ….

k) Such car park was actually constructed and the concessioned activity operated by the Claimant until the termination of the concession contract.

l) The Claimant, as Concessionaire, provided services to the users of the parking facility, who paid to it a consideration on which VAT was levied, with the Claimant, at that time, liquidating the due amounts of that tax.

m) The Grantor (Municipality of…) incurred definitive breach of the Concession Contract, having made maintenance of that Contract impossible.

n) Faced with breach of the Contract by the Grantor Municipality, the Claimant promoted the constitution of an Arbitral Tribunal before which it petitioned for the termination of the Concession Contract pursuant to the provisions of no. 3 of article 332 of the Public Contracts Code and, as a consequence of such termination, the condemnation of the Municipality of … to pay compensation for the damages borne by the Claimant as a consequence of the contractual breach.

o) Namely, the Claimant requested condemnation of the Municipality to repair emergent damages, taking into account the costs it incurred with the conception and construction of the underground car park subject to the Concession Contract, corresponding to the amount of invoices that the Claimant had to liquidate with the company responsible for the construction of the car park, in the total amount of €4,403,668.80, corresponding to the costs it actually incurred.

p) The Claimant also requested condemnation of the Municipality in compensation for loss of profit, based on the profitability which, by virtue of the termination of the Contract, it would cease to obtain.

q) This claim for compensation for loss of profit was dismissed as unfounded by the Arbitral Tribunal.

r) The Arbitral Tribunal recognized the Claimant's right "to compensation that reimburses it for the investment made", referring to the loss that the Claimant had relative to the costs of the construction of the car park;

s) It was proven before the Arbitral Tribunal that the value of the concession varied, depending on the update rate, between €6,200,000.00 (equivalent to future net cash flows generated by the concession) and €14,286,014.00 (if the discount rate of 6.08% underlying the Economic Viability Study were considered).

t) The Arbitral Tribunal determined that: "as a consequence of the termination of the contract, the concessioned establishment (underground car park and parking meters on public roads) must be delivered, in the state in which it is and with all its appurtenances, by the Claimant to the Respondent, and the latter has the obligation to receive it".

u) The Arbitral Tribunal, in the decision rendered, decreed:

i) The termination of the Concession Contract, for definitive breach by the Municipality of…; and, as a consequence:

ii) The payment of compensation to the Claimant, for emergent damages (plus interest), in the amount of €4,577,233.21;

iii) The delivery to the Grantor of the concessioned establishment, in the state in which it was, fixing for such purpose a transitional period.

v) After the arbitral award was rendered, on 11/12/2013, the Claimant and the Municipality of … concluded a payment agreement, by which they agreed to the reduction – to the amount of €3,500,000.00 – of the compensation to be paid by the Municipality in compliance with the arbitral decision.

x) In that agreement, the Claimant and the Municipality of … agreed on aspects "of the performance of the said arbitral decision".

y) It was with respect to the said amount of €3,500,000.00 that the TA considered there to be a taxable transaction for VAT purposes.

Unproven Facts

1. There are no facts relevant to the decision which should be considered as unproven.

Substantiation of the Proven Facts

1. The facts described were taken as proven on the basis of the documentary evidence that the Claimant attached to the proceedings, confirmed by the administrative file held by the TA. Therefore, taking into account the positions assumed by the parties and the documentary evidence attached to the proceedings, the facts listed were considered proven, with relevance to the decision, as consensually recognized and accepted by the parties.

IV – LAW: Substantiation of the decision on merit

Article 124 of the Tax Court Procedure Code provides:

"1 - In the judgment, the court shall prioritarily assess the defects that lead to the declaration of non-existence or nullity of the act being challenged and, thereafter, the defects invoked that lead to its annulment.

2 - In the aforementioned groups the assessment of the defects is made in the following order:

a) In the first group, that of defects whose substantiation determines, according to the prudent discretion of the judge, more stable or effective protection of the injured interests;

b) In the second group, that indicated by the challenger, whenever the latter establishes a relationship of subsidiarity between them and no other defects are invoked by the Public Prosecutor or, in the remaining cases, that fixed in the preceding subparagraph."

As stated in the Judgment of the Supreme Administrative Court of 18-05-2016, rendered in case 0100/16:

"Pursuant to the provisions of no. 2 of article 124 of the Tax Court Procedure Code, cognizance must be taken, in the first place, of defects of violation of law stricto sensu (except in cases where the content of the act cannot be ascertained), thus ensuring more effective protection of the rights of the taxpayer."

Article 124 of the Tax Court Procedure Code, applicable ex vi article 29, no. 1, subparagraph a), of the RJAT, therefore establishes that the tribunal must prioritarily assess the defects that lead to the declaration of non-existence or nullity of the act being challenged and, subsequently, the defects that lead to its annulment (no. 1). With respect to defects that constitute non-existence or nullity, the judge must prioritarily take cognizance of the defects whose substantiation determines, according to his prudent discretion, more stable or effective protection of the injured interests. With respect to the defects that constitute annulability, the same criterion is established, which will only not apply if the challenger has established a relationship of subsidiarity between the defects imputed to the act – which is permitted by article 101 of the Tax Court Procedure Code –, since in that case primacy is given to its will (provided that the Public Prosecutor has not invoked other defects) (no. 2).

The rules emanating from this legal provision on the order of assessment of defects are designed to protect the interest of the challenger with maximum procedural economy, refraining from pronouncing on defects invoked when the defect or defects already recognized prevent the performance of the act with the same sense. Indeed, the establishment of this order of assessment of the defects presupposes that, taking cognizance of a defect that leads to the legal elimination of the act being challenged, the tribunal will refrain from assessing the remaining ones, since, if the judge had to assess all the defects imputed to the act, the order of assessment would be irrelevant.

The protection of the injured interests is more stable when the decision prevents the performance of the act injurious to the interests of the challenger and will be more effective when it allows the interested party, in execution of judgment, to obtain a better satisfaction of its interests, injured by the annulled act.

Thus, for example, if it is a defect of violation of law, the annulment of the act will prevent the practice of a new tax act in which the same rule that was at issue in the prior act is applied or not applied, which will result in the impossibility of practicing a new act that imposes taxation on the challenger.

As can be inferred from what has been stated, it is in light of the execution of the annulment judgment and the influence it has on the type of defect that founded the annulment that the establishment of an order of assessment of the defects of the act being challenged is justified.

In this framework, returning to the present case, it is therefore necessary to begin with the assessment of the defect of violation of article 16/6/a) of the applicable VAT Code, as, if substantiated, it will definitively preclude the possibility of imposing on the Claimant a new tax act imposing taxation, thereby achieving more stable and effective protection of its interests.

The said article 16/6/a) of the applicable VAT Code provides:

"6 - From the taxable amount referred to in the preceding number are excluded:

a) Interest for deferred payment of the consideration and amounts received as compensation declared judicially, for total or partial breach of obligations"

It is on the said provision that the Claimant bases its claim in the present arbitral proceeding, and it was its application that was refused in the tax assessments which are the subject thereof.

Upon examination of the facts taken as proven, it is found that the Arbitral Tribunal of the Commercial Arbitration Center decided that the awarded compensation had as its foundation the reimbursement to the Claimant for the investment made, not taking into consideration any component referring to loss of profit (cf. pp. 66 and 67 of the Arbitral Tribunal Award - Doc. no. 5 annexed to the Petition).

In this manner, it appears clear that the disputed transaction, the compensation for termination of the concession contract for the car park and parking meters, does not present a remunerative nature, therefore such transaction will not constitute a taxable transaction from the outset given that the value received by the Claimant is aimed at the compensation of the damages it suffered from non-performance by the municipality of its contractual obligations and will, therefore, have a reparatory nature, as provided for in articles 562 and following of the Civil Code.

In these terms, the said compensation cannot be subject to VAT since it does not correspond to the consideration owed for the performance of an economic activity, that is, it does not constitute a sinallagmatic fact since it does not remunerate any transaction, in other words, there is no direct nexus between the compensation performance and any other performance which the Claimant (in its capacity as the injured party) is obliged to perform, thus not validating the conclusion of the RIT, according to which "The taxpayer receives €3,500,000.00 and delivers the car park to the municipality of … (nexus between the service provided and the consideration received)".

Indeed, notwithstanding the fact that the Claimant, by force of the arbitral decision, has been obliged to deliver "as a consequence of the termination of the contract, the concessioned establishment (underground car park and parking meters on public roads) (…), in the state in which it is and with all its appurtenances", the fact is that, as administrative doctrine and jurisprudence cited by the Claimant point out, such is a necessary effect of the cessation of the concession, corresponding, moreover, that obligation of the Claimant, not to a right of the Concessionaire, but an obligation of the latter, as follows from the above-cited arbitral decision, which imposes on it "the obligation to receive it" (cf. point t) of the proven facts).

It should be noted, moreover, that had the concession contract been fully performed, the Claimant would have been obliged to deliver the concessioned asset, without receiving any consideration for such delivery and, consequently, without assessing VAT.

The fact that the compensation at issue was declared by a Tribunal obliges the application of the provisions of article 16, no. 6, subparagraph a), according to which amounts received as compensation for breach of obligations, declared judicially, are excluded from the taxable amount of VAT, that is, are not taxed.

Moreover, contrary to what the TA argues, the exclusion referred to in article 16, no. 6, subparagraph a), does not distinguish as to the nature of compensations. If it only applied to reparatory compensations, as the TA intends, it would have no useful effect since these are already excluded from taxation by their nature.

Article 16, no. 6, subparagraph a), will only have true utility in relation to remunerative, sinallagmatic compensations, since reparatory or non-remunerative (non-sinallagmatic) ones are already excluded from taxation by not constituting, even, transactions subject to VAT.

As stated by Afonso Arnaldo and Pedro Vasconcelos Silva in "VAT and Compensations", published in the FISCO Journal, no. 107/108, March, 2003, Year XIV, "whenever we are dealing with the payment of compensation that has been the subject of judicial recognition, the same will not give rise to implications at the level of VAT assessment. Indeed, the legislator will have recognized that in these cases judicial proof will be sufficient to classify certain transactions as compensations, avoiding the risk of dissimulation of taxable transactions under the guise of apparently innocuous concepts. Indeed, many penalty clauses may have as their sole aim the reduction of the value of taxable transactions, for example, with part of the price being configured as compensation. The court's scrutiny will allow in most situations to distinguish the true nature of the facts".

Also, the jurisprudence is in that direction, with the Supreme Administrative Court stating that:

"IV - Compensations, in the case of sanctioning the injury to any interest without a remunerative character, because they do not remunerate any transaction, but rather are intended to repair a loss, are not taxable in VAT, to the extent that they do not have an underlying supply of goods or a supply of services."[1]; and that:

"I - Based on a teleological and systematic interpretation of article 16, no. 6, subparagraph a), of the VAT Code, in conjunction with the provisions of articles 1, no. 1, and 4, no. 1, of the same normative, and having in mind the concept of compensation, compensations that correspond, directly or indirectly, to the consideration owed for the performance of an economic activity, that is, that aim to remunerate the supply of goods or the supply of services, will be taxed.

II - If compensations sanction the injury to any interest without a remunerative character because they do not remunerate any transaction, but rather are intended to repair a loss, they are not taxable in VAT, to the extent that they do not have an underlying supply of goods or a supply of services."[2]

The TA itself, in Binding Information no. 2061, of 02-03-2011, issued by the VAT Services Office, attached by the Claimant as Document 9, considered that:

In the case being considered, consideration must also be given to the fact that the value of the compensation does not correspond to what was decided in Court, with a lower value having prevailed subsequently agreed by the parties.

Such circumstance, it is judged, in no way alters what has been stated.

Indeed, the agreement of 11/12/2013 does not include any performance or counter-performance sinallagmatically linked to the performance of €3,500,000.00, which is founded on the reduction of the value of the compensation to be received by the Claimant, fixed by the arbitral decision.

Thus, the conclusion of the RIT is not validated, according to which "the compensation does not result from a judicial determination, but rather from an agreement concluded between the parties, without judicial intervention" which would presuppose that the obligation to pay the amount at issue only arose with the agreement, which is manifestly not the case, since that was contained in the obligation to pay €4,577,233.21 fixed by the Arbitral Tribunal.

In this manner, and in light of the foregoing, the assessments which are the subject of the present arbitral action, being vitiated by error in the factual assumptions, and consequent error in law, should be annulled, with the arbitral request proceeding and the assessment of the remaining questions raised being rendered unnecessary.

With respect to the request for compensatory interest formulated by the Claimant, no. 1 of article 43 of the General Tax Law establishes that compensatory interest is owed when it is determined that there has been error imputable to the services which results in payment of the tax debt in an amount exceeding that legally owed.

In the case, the errors affecting the assessments are imputable to the Tax and Customs Authority, which issued the illegal tax acts on its own initiative.

Therefore, the Claimant has the right to be reimbursed for the amount paid wrongfully (pursuant to the provisions of article 100 of the General Tax Law and no. 1 of article 24 of the RJAT) and, further, to be compensated for wrongful payment through the payment of compensatory interest, by the Respondent, from the date of payment of the amount, until reimbursement, at the legal default rate, pursuant to nos. 1 and 4 of article 43 and no. 10 of article 35 of the General Tax Law, article 559 of the Civil Code and Ordinance no. 291/2003, of 8 April.

V - DECISION

In these terms, this Arbitral Tribunal decides to grant the arbitral request formulated and, as a consequence:

a) Annul the tax acts of Assessment of tax and compensatory interest which are the subject of the present arbitral action and identified above, in the total amount of €858,732.83;

b) Condemn the Respondent to the restitution of the tax wrongfully paid by the Claimant in compliance with the assessments hereby annulled, plus compensatory interest, as set forth above.

VALUE OF THE CASE

The value of the case is fixed at €858,732.83 pursuant to article 97-A, no. 1, a), of the Tax Court Procedure Code, applicable by force of subparagraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

COSTS

The amount of the arbitration fee is fixed at €48,000.00 pursuant to Table II of the Regulation of Costs in Tax Arbitration Proceedings, to be paid in accordance with articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 5 of the cited Regulation.

Notify.

Lisbon, 08 November 2017

The Collective Arbitral Tribunal,

(José Pedro Carvalho - President)

(Maria do Rosário Anjos)

(Emanuel Vidal Lima)

[1] Judgment of the Supreme Administrative Court of 27-01-2016, rendered in case 0331/14, available at www.dgsi.pt.

[2] Judgment of the Supreme Administrative Court 31-10-2012, rendered in case 01158/11, available at www.dgsi.pt.