Process: 177/2016-T

Date: October 25, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

In Process 177/2016-T, an SGPS holding company (A... SGPS, SA) challenged ten VAT liquidation assessments and one interest assessment before the CAAD arbitral tribunal. The dispute arose from arithmetic corrections made by the Portuguese Tax Authority following a VAT reimbursement request submitted in the company's periodic tax return. The Tax Authority initially raised a jurisdictional exception, arguing that the arbitral tribunal lacked competence because the case involved a reimbursement request rather than assessment acts. The tribunal firmly rejected this exception, ruling that the subject matter clearly involved challenges to tax assessment acts resulting from disallowed VAT deductions, which falls squarely within CAAD's jurisdiction under articles 2 and 10 of RJAT (Decreto-Lei 10/2011). The tribunal emphasized that accepting the Tax Authority's position would unreasonably exclude arbitral competence over any VAT assessment dispute, contrary to the explicit statutory framework. The case centers on whether an SGPS company has the right to deduct input VAT on acquired goods and services, with the claimant asserting entitlement to deductions that the Tax Authority rejected through arithmetic corrections. The tribunal cited precedent from cases 354/2015-T and 764/2014-T, confirming that arbitral tribunals have full competence to examine matters relating to the existence or non-existence of rights underlying tax assessments. The procedural framework established by RJAT was fully respected, including arbitrator designation by the Deontological Council, defense filing, written arguments, and adherence to statutory deadlines, demonstrating the structured nature of Portuguese tax arbitration for resolving complex VAT disputes involving multiple assessment acts.

Full Decision

ARBITRAL AWARD

The arbitrators Judge Counsellor José Baeta de Queiroz (arbitrator-president), Professor Doctor Maria do Rosário Anjos and Professor Doctor Daniel Taborda (arbitrator-members), designated by the Deontological Council of the Centre for Administrative Arbitration to form the collective Arbitral Tribunal, constituted on 03-06-2016, agree as follows:

I – REPORT

A) The Parties and Constitution of the Arbitral Tribunal

  1. A… Sgps, SA, legal entity no. …, with registered office at …, no. …, …-… Lisbon, hereinafter designated as "Claimant", filed an application for constitution of an Arbitral Tribunal, pursuant to the provisions of paragraph a) of no. 1 of article 2, no.1, paragraph a), article 3, no.1, article 6, no.1 and article 10, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January, hereinafter designated as "RJAT", for challenging ten assessments of Value Added Tax (VAT) and one assessment of VAT interest, in which the Tax and Customs Authority is named as Respondent, hereinafter designated as "AT". The Claimant seeks a declaration of illegality of the challenged assessments and consequent annulment.

The application for constitution of the arbitral tribunal was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 23-03-2016.

Pursuant to the provisions of paragraph a) of no. 2 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated, on 18-05-2016, the panel of arbitrators composed of Mr. Judge Counsellor José Baeta de Queiroz (President), Mrs. Professor Doctor Maria do Rosário Anjos and Mr. Professor Doctor Daniel Taborda to constitute the collective arbitral tribunal. Immediately thereafter, the parties were duly notified of this designation and did not manifest any intention to refuse the designation of the indicated arbitrators, pursuant to the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in compliance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December, the singular arbitral tribunal was constituted on 03-06-2016. On this same date an arbitral order was issued and the AT was notified to present its defence within the legal timeframe.

  1. The Tax and Customs Authority responded on 05-07-2016, contesting the arbitral application, by way of exception, invoking the incompetence of the arbitral tribunal and by way of objection, arguing that it should be ruled unfounded, in the terms and with the grounds set out in the Response, attached to the file, which is hereby deemed fully reproduced herein.

On 06-07-2016, an arbitral order was issued scheduling the meeting provided for in article 18 of the RJAT for 22-07-2016. By petition, the Respondent AT manifested its unavailability to meet on the date proposed by the Tribunal, given the judicial recess period and the greater difficulty in the availability of AT's legal staff. Accordingly, this meeting was cancelled and a new arbitral order was issued on 18-07-2016, whereby the holding of the meeting under article 18 was dispensed with, and alternatively, an equal and successive period of 10 days was set for the parties to submit written arguments, and to pronounce themselves, in writing, on all matters they deemed relevant.

The parties submitted their arguments, respectively, the Claimant on 27-09-2016 and the Respondent on 09-09-2016. By arbitral order of 12-09-2016 a date was set for the delivery of the Arbitral Award by 2-12-2016.

B) PROCEDURAL REQUIREMENTS:

  1. The arbitral tribunal was regularly constituted. The parties enjoy legal personality and capacity, are legitimate and are represented (articles 4 and 10, no. 2, of the same enactment and article 1 of Administrative Order no. 112-A/2011, of 22 March).
  • As regards the alleged exception of incompetence of the arbitral tribunal:
  1. The Respondent AT raised the exception of incompetence of the arbitral tribunal, arguing that, as stated in article 9 of the application, the Claimant is not challenging acts of additional assessment but correction amounts that were made in the context and as a consequence of a reimbursement request that it made in the periodic tax return of 15/03T. Accordingly, the Respondent AT alleges that the arbitral tribunal has no competence to hear the application, which it characterizes as a reimbursement request.

As regards the raised exception, a matter necessarily prior to the examination of the merits of the case, the AT's position is not well-founded. It is absolutely clear that the application in the present case is limited to the question of whether the additional VAT assessments are vitiated by illegality or not. The matter at hand is not to assess the alleged reimbursement right but rather the (il)legality of the purely arithmetic corrections that were made and that form the basis of the challenged assessments. We are, therefore, faced with an application for a declaration of illegality of tax assessment acts.

If the position alleged by the AT were to be followed, it would result in the exclusion of the competence of any arbitral tribunal to examine the illegality of tax assessment acts whenever any VAT assessment was at issue, which is entirely unreasonable in light of the explicit wording of the law, properly and clearly expressed in articles 2 and 10 of the RJAT, as well as in article 2 of the Binding Administrative Order.

The subject matter of the case is not a question of recognition of a reimbursement right, although this was the origin of the inspection carried out on the Claimant, following which the aforementioned arithmetic corrections occurred that generated the additional tax assessments objectively challenged here. Therefore, what the Claimant questions in the present arbitral application, or in other words, the subject matter of the application, are the assessment acts resulting from the alleged disregard, on the part of the AT, of a certain set of tax deductions to which the Claimant considers itself entitled. We are, therefore, at the heart of the process of challenging assessment acts, which falls within the competence of the arbitral jurisdiction.

Finally, citing the jurisprudence set forth in the Arbitral Award rendered in case no. 354/2015-T, of 10 December, there is no legal prohibition against examination of matters relating to the existence or non-existence of rights underlying the assessments or any other matters of legality relating to acts of the types referred to in article 2 of the RJAT. This understanding has been followed in other arbitral decisions, notably the one rendered in arbitral case no. 764/2014-T, of 29-05-2015.

In these terms, without need for further consideration, the exception raised is deemed unfounded. Accordingly, the arbitral tribunal is deemed competent pursuant to the provisions of articles 2, no. 1, paragraph a), 5, 6 and 30, no. 1, of Decree-Law no. 10/2011, of 20 January, with no obstacle to examination of the merits of the case.

  1. The case is not affected by nullities that prevent examination of the merits of the case.

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

II. FACTUAL MATTER

A) Proven Facts

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

a) The Claimant A… SGPS, SA as well as the companies B… SGPS, SA (Tax ID no. …) and C… SGPS SA (Tax ID no. …), are owned to the extent of 95% of their respective share capital by D…, SGPS SA (Tax ID no. …) and this, ultimately, is owned by the Tourism Recovery Fund (FRT);

b) All included in the business group denominated Group E…;

c) Specifically, the Claimant A… SGPS SA is a holding company, constituted and regulated pursuant to Decree-Law no. 495/88, of 30 December, whose corporate purpose is the management of social participations in other companies;

d) The Claimant commenced its activity on 14/12/2012 and is classified under the quarterly VAT regime;

e) In the course of its activity the Claimant acquired various credits held by various financial institutions against the companies of the then Group E…;

f) Following the negotiation of various extrajudicial recovery agreements, restructuring agreements and acquisitions and purchase commitments for shares and shareholder credits, the Claimant concentrated on managing the relationship between the financial entities and the group companies, for the granting of specific financing that would allow the group's restructuring;

g) In the course of its activity the Claimant entered into a service provision contract with F… SA, a contract for management services, for financial, accounting and banking advice, preparation of business plans and legal advice;

h) It also entered into contracts with other subsidiaries for the provision of financial and legal advisory services, preparation of business plans and others, as well as all "back office" services (accounting, auditing, recruitment of various suppliers, and others);

i) In the first quarter of 2015 the Claimant requested reimbursement of its VAT credit, in the amount of € 243,365.24, which corresponds to the credit generated since the commencement of its activity (14-12-2012), given that it consistently presented an amount of tax to be deducted greater than the amount of tax to be paid to the State;

j) The Claimant was subject to a tax inspection, following the submission of its VAT reimbursement request, filed in the periodic tax return for the period of 15/03T;

k) As appears from the Tax Inspection Report (RIT) the inspection was carried out under service order no. OI2015…, with extension to the first quarter of 2015;

l) As a result of this inspection, corrections were made that gave rise to the assessments challenged here, as the AT considered that all services acquired between the fourth quarter of 2012 and the first quarter of 2015 were used exclusively in the development of the principal activity of management of social participations and, therefore, "the tax borne is not deductible";

m) The total sum of all corrections made is € 278,210.24;

n) The additional VAT assessments, challenged in the present case, are the following:

  1. Additional assessment no. …, corresponding to the taxation period of 12/12T, in the amount of € 1,697.28;

  2. Additional assessment no. …, corresponding to the taxation period of 13/03T, in the amount of € 95,141.02;

  3. Additional assessment no. …, corresponding to the taxation period of 13/06T, in the amount of € 70,444.98;

  4. Additional assessment no. …, corresponding to the taxation period of 13/09T, in the amount of € 239.50;

  5. Additional assessment no. …, corresponding to the taxation period of 13/12T, in the amount of € 30,653.57;

  6. Additional assessment no. …, corresponding to the taxation period of 14/03T, in the amount of € 39,746.21;

  7. Additional assessment no. …, corresponding to the taxation period of 14/06T, in the amount of € 13,654.87;

  8. Additional assessment no. …, corresponding to the taxation period of 14/09T, in the amount of € 11,708.44;

  9. Additional assessment no. …, corresponding to the taxation period of 14/12T, in the amount of € 12,960.97;

  10. Additional assessment no. 2015…, corresponding to the taxation period of 15/03T, in the amount of € 345.00.

  11. And also, the interest assessment no. 2015…, in the amount of € 3,141.86.

o) With respect to this total amount of corrections made, it cancelled the reimbursement request in the amount of € 243,365.24, and resulted in the assessment of the remaining amount;

p) Tax enforcement proceedings no. …2016…, were commenced in the amount of € 365.91, with the Claimant making the respective payment on 2 March 2016;

q) Tax enforcement proceedings nos. …2016… and …2016…, were also commenced, respectively in the amounts of € 34,690.13 and € 3,198.98, with the Claimant making payment of these amounts.

B) Unproven Facts

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

C) Justification of the Determination of Factual Matter

  1. The proven facts are based on the documents attached to the case file by the Claimant and the Respondent in the PA attached to the case, as well as on the agreement of the parties regarding facts that are not controversial. Moreover, there is no disagreement between the parties except regarding the legal question underlying the challenged assessments.

III - LEGAL MATTER

  1. It follows from the case file, as is apparent from the summary of the factual matter stated and from the Report, that the Claimant and Respondent differ only regarding the question of whether the Claimant should be allowed the right to deduct the VAT borne in relation to the provision of services to its subsidiaries.

From the perspective of the AT, the Claimant has no right to deduct the amounts of VAT borne by virtue of their being incurred in connection with the mere holding of social participations and not, therefore, arising from an economic activity. Even though, as emerges from the analysis of the report and the response that the AT attached to this case, the Claimant had been constituted to permit the restructuring of all the activity of the group and to advise on the management of all the economic activity of the group, which was in difficulties and in the phase of negotiation with its creditors, in an attempt to restructure itself.

Thus, the legal question under examination is whether the AT was correct when in the Report that supported the additional VAT assessments challenged here, it concluded that:

"(…) it is verified that all services acquired, between the fourth quarter of 2012 and the first quarter of 2015 were used exclusively in the development of the principal activity of management of social participations, and therefore the tax borne is not deductible."

Let us then examine whether the interpretation that the AT made is or is not in conformity with the applicable legal provisions contained in the Value Added Tax Code (CIVA) and the supporting European Directive.

  1. In accordance with article 2 of Directive no. 2006/112/EC, of the Council, of 28-11-2006, the following are subject to VAT, among others: supplies of goods effected for consideration in the territory of a Member State by a taxable person acting in that capacity, intra-Community acquisitions of goods effected for consideration in the territory of a Member State, supplies of services effected for consideration in the territory of a Member State by a taxable person acting in that capacity and imports of goods.

Similarly, the CIVA establishes in its article 1 that subject to this tax are transfers of goods and supplies of services effected in the national territory, for consideration, by a taxable person acting as such, imports of goods and intra-Community operations effected in the national territory, as defined and regulated in the VAT Regime for Intra-Community Transactions.

Pursuant to article 9 of the Directive, "'taxable person' means any person who carries out in any place any economic activity, whatever the purpose or results of that activity" and "'economic activity' means any activity of production, supply or provision of services, including extractive, agricultural and the activities of the professions. In particular, the exploitation of tangible or intangible property with the aim of obtaining income therefrom on a continuing basis is regarded as an economic activity."

The CIVA establishes that taxable persons are, among others, "natural or legal persons who, in an independent manner and with the character of habituality, carry out activities of production, commerce or provision of services, including extractive, agricultural and the activities of the free professions, and also those who, in the same independent manner, perform a single taxable transaction, provided that such operation is connected with the exercise of the aforementioned activities, wherever it occurs, or when, regardless of such connection, such operation meets the requirements for the real incidence of income tax on individuals (IRS) or income tax on legal entities (IRC)."

The right to deduction arises at the moment when the tax becomes due (article 167 of Directive no. 2006/112/EC and article 22, no. 1, of the CIVA) and, as a general rule, only the tax that has been charged on goods or services acquired, imported or used by the taxable person for the purposes of carrying out taxed transactions may be deducted (articles 168 of Directive no. 2006/112/EC and article 20, no. 1, of the CIVA).

  1. In the specific case discussed in this case file, it is verified that in accordance with the provisions of article 1 of Decree-Law no. 495/88, of 30 December, holding companies (SGPS), have as their sole contractual purpose the management of social participations in other companies, as an indirect form of exercise of economic activities, the participation in a company being considered an indirect form of exercise of the economic activity thereof when it does not have an occasional character and reaches at least 10% of the voting capital of the company in which it participates, either by itself or through participations of other companies in which the SGPS is dominant.

Article 4, no. 1, of the same enactment, permits SGPS to provide technical services of administration and management to all or some of the companies in which they hold participations.

VAT taxation requires the cumulative fulfilment of the rules of objective and subjective scope. In line with article 2 of Directive no. 2006/112/EC, of the Council, of 28-11-2006, article 1 of the CIVA establishes the real scope of the tax, stating that, among others, subject to VAT are "transfers of goods and supplies of services effected in the national territory, for consideration, by a taxable person acting as such" (paragraph a) of no. 1).

Article 2 of the CIVA addresses the personal scope of VAT. It follows article 9 of the Directive which establishes that "'taxable person' means any person who carries out in any place any economic activity, whatever the purpose or results of that activity." No. 2 of the CIVA provides that, apart from other persons, taxable persons are "natural or legal persons who, in an independent manner and with the character of habituality, carry out activities of production, commerce or provision of services, including extractive, agricultural and the activities of the free professions, and also those who, in the same independent manner, perform a single taxable transaction, provided that such operation is connected with the exercise of the aforementioned activities, wherever it occurs, or when, regardless of such connection, such operation meets the requirements for the real incidence of income tax on individuals (IRS) or income tax on legal entities (IRC)" (paragraph a) of no. 1).

The exercise of an economic activity in an independent and habitual manner constitutes an essential element for the qualification of a taxable person. The concept of economic activity is taken by the Court of Justice of the European Union (CJEU) in its broadest sense, including "preparatory acts of an economic activity, acts carried out in the course of such activity and certain unlawful transactions"[1].

Moreover, neutrality is a fundamental characteristic of VAT to which the mechanism of assessment and deduction contributes. The exercise of the right to deduction enables taxable persons participating in the economic circuit to free themselves from the VAT borne in upstream operations, eliminating the undesirable and harmful cumulative or cascade effect.

Thus, implementing neutrality, the CIVA establishes as a general rule the deductibility of the tax borne by taxable persons in acquisitions of goods and services from other taxable persons[2]. And since this right extends only to taxable persons who exercise economic activities, it is reinforced, once again, that this notion should be understood in a broad sense.

  1. The SGPS, regulated by Decree-Law no. 495/88, of 30 December, an enactment that underwent two revisions (Decree-Laws no. 318/94, of 24 December, and no. 378/98, of 27 November), have as their contractual purpose the management of social participations in other companies, as an indirect form of exercise of economic activities (article 1, no. 1). However, in addition to these activities, the SGPS are recognized as having the possibility of providing technical support services for management to their subsidiaries (ancillary activities). SGPS are not necessarily pure holdings, being able to maintain an active presence and involvement in the management of subsidiaries (directive holdings). Not being mere passive "investors" of capital, taking a participation aims not merely to secure the right to obtain possible dividends, but rather constitutes an activity subject to VAT[3].

See, in the case of the present proceedings, the activity developed for the restructuring and recovery of the group's businesses.

  1. With regard to Community Jurisprudence[4], no. 30 of the CJEU Award, relating to the SKF case, of 29 October 2008, (concerning the transfer of social participations) states that:

"(…) the Court of Justice has already held that the situation is different where a financial participation in a company is accompanied by direct or indirect interference in the management of the companies in which a participation was acquired, without prejudice to the rights which the holder of the participation has in the capacity of shareholder or partner (see the judgments of 20 June 1991, Polysar Investments Netherlands, C‑60/90, Reports, p. I‑3111, no. 14; of 14 November 2000, Floridienne and Berginvest, C‑142/99, Reports, p. I‑9567, no. 18; of 12 July 2001, Welthgrove, C‑102/00, Reports, p. I‑5679, no. 15; and judgment of 27 September 2001, Cibo Participations, C‑16/00, Reports, p. I‑6663, no. 20), to the extent that such interference involves the carrying out of transactions subject to VAT within the meaning of article 2 of the Sixth Directive, such as the supply of administrative, accounting and data processing services (judgment Floridienne and Berginvest, already cited, no. 19; order Welthgrove, already cited, no. 16; judgments Cibo Participations, already cited, no. 21, and of 26 June 2003, MKG‑Kraftfahrzeuge‑Factoring, C‑305/01, Reports, p. I‑6729, no. 46)".

In a similar sense, the Judgment of 16 July 2015 (Larentia and Minerva + Marenave, joined cases C-108/14 and C-109/14, paragraphs 19 and 20) holds that "the mere acquisition and the mere holding of shares should not be considered economic activities within the meaning of the Sixth Directive, conferring on the person carrying them out the status of taxable person, … the situation is different where the participation is accompanied by direct or indirect interference in the management of the companies in which a participation was acquired, without prejudice to the rights which the holder of the participations has in the capacity of shareholder or partner." (emphasis ours)

Finally, mention should be made of the CJEU Judgment of 6 September 2012, in the Portugal Telecom case, Case no. C-496/11, the no. 45 of which establishes that "should it be considered that all services acquired upstream have a direct and immediate link with downstream economic operations conferring the right to deduction, the taxable person concerned would have the right, under article 17, no. 2, of the Sixth Directive, to deduct the whole of the VAT charged on the acquisition upstream of the services in question in the main proceedings. This right to deduction cannot be limited by the mere fact that national legislation, by reason of the corporate purpose of the said companies or their general activity, qualifies the taxed operations as ancillary to their main activity".

  1. The dominant position of Community Jurisprudence supports the view that the direct or indirect involvement of a company holding participations in the management of the companies in which it holds participations, providing them with various services for consideration (in this specific case, in a centralized manner, providing strategic, financial, legal advice and also accounting, auditing, recruitment of various suppliers, among others), included within the scope of VAT, allows the conclusion that there exist operations resulting from the exercise of an economic activity. This is the case in the situation we now analyze in this proceeding.

On the one hand, the services provided to the subsidiaries constitute operations subject to VAT and not exempt from it, which confer the right to deduction, and on the other, the mere holding of social participations constitutes an activity not subject to it. From the simultaneity of operations that confer the right to deduction and those that do not confer such right results the necessity to separate the inputs used in the pursuit of the non-economic activity, not subject to VAT, from those for which VAT is deductible, because related to the provision of the aforementioned services.[5]

  1. For the reasons set out above, the exercise of a permanent and regular activity of management of social participations by A… SGPS, S.A. is subsumed within the concept of economic activity, subject to and not exempt from VAT, and therefore the VAT borne with the acquisition of inputs is deductible.

Thus, in the specific case, the issue is not the segregation of inputs between non-subject activity and activity subject to and not exempt from VAT, notwithstanding the fact that the Claimant is a mixed taxable person with actual allocation of all assets. It should be noted that the deduction of VAT in an operation exclusively allocated to a taxed operation results only from the general regime of the right to deduction provided for in articles 19 and 20 of the CIVA.

Moreover, the right to deduction of the services acquired is not precluded if no direct and immediate allocation of the services provided to each subsidiary company considered individually is made. The lack of individualized allocation does not imply that the inputs are disconnected from the provision of services to the subsidiaries, or from the overall economic activity of the SGPS. In fact, the deductibility of VAT on inputs is based on their use for the purposes of carrying out taxable operations, or, in the words of article 168 of the Directive, "where the goods and services are used for the purposes of his taxed transactions (…)". Naturally, article 20 of the CIVA adheres to this understanding, accepting the deduction of the tax that has been charged on goods or services acquired, imported or used by the taxable person for the purposes of carrying out the operations listed in that provision, including transfers of goods and supplies of services subject to tax and not exempt from it. This is, therefore, as concluded in the Arbitral Decision of 27-12-2012, relating to Case no. 77/2012-T, "a relationship of use".

  1. Now, the Respondent, refraining from any exercise of understanding as to the Claimant's active participation in the management of the companies in which it held participations, or of linking the inputs borne to this activity, considered that the services acquired were used exclusively in the activity of holding social participations and concluded that the tax borne would not be deductible. It furthermore disregarded the reasons that lay behind the establishment and commencement of activity of the Claimant, reasons determined by the need to recover and restructure all the activity of the Group.

Having not been demonstrated that the expenses whose VAT was deducted were related to the mere holding of social participations, and it being proven that the service provisions whose VAT was deducted were related to the activity of accounting, tax and legal advice, preparation of business plans, recruitment of suppliers and others, connected with the group's economic activity, it is concluded that these are operations related to an economic activity and, to that extent, the additional assessments do not conform with the CJEU's jurisprudence relating to the right to deduction of VAT by holding companies.

The question subject to decision, framed by the factual matter determined, is whether a holding company that provides services to its subsidiaries and whose staff are primarily and almost exclusively dedicated to providing such services can deduct all the VAT borne upstream with the acquisition of goods and services connected with the economic activity developed by the Group, in a phase of restructuring and recovery, guided by various extrajudicial agreements concluded with the group's principal creditors, for its viability. In the case at hand, it is not disputed that the Claimant is an SGPS that provides services to the companies in which it holds participations.

In fact, as already stated above, it follows from CJEU jurisprudence that, should it be considered that all services acquired upstream have a direct and immediate link with downstream economic operations conferring the right to deduction, the taxable person concerned has the right, under article 17, no. 2, of the Sixth Directive, to deduct all the VAT. This right to deduction cannot be limited by national legislation or by the interpretation that the internal administrative authority makes of the application of these principles.

Moreover, national legislation is in line with European legislation and jurisprudence, by establishing in article 20 of the CIVA, that the tax charged on goods or services acquired, imported or used by the taxable person may be deducted for the purposes of carrying out the operations indicated there, which include transfers of goods and supplies of services subject to tax and not exempt from it. In the case of the Claimant, on the basis of the facts proven above, it was proven that its interference in the management of the companies in which it acquired participations developed through the preparation of business plans, the recruitment of suppliers, the renegotiation of contracts and through accounting, financial and legal advice services indispensable for the extrajudicial recovery of the business group, and therefore there is no doubt that its actions constitute an economic activity, for purposes of VAT taxation, and the Claimant is authorized to deduct the VAT paid. Moreover, in the case at hand, the AT failed to demonstrate that the Claimant could not deduct the VAT that it deducted, limiting itself to drawing a conclusion merely because it is an SGPS.

  1. Being thus, it is necessary to conclude that the challenged assessments are illegal, due to error as to the factual and legal presuppositions, which constitutes a breach of law, and therefore their annulment is required with all its legal consequences.

IV. As Regards the Request for Compensatory Interest

  1. The Claimant combines, with the application seeking annulment of the tax acts which are the subject matter of these proceedings, a request for condemnation of the AT to pay compensatory interest pursuant to article 43 of the General Tax Law (LGT).

Given the success of the application for annulment, the amounts unduly paid should be restituted to the Claimant. In the case at hand, it is manifest that the illegality of the assessment acts, the amounts of which the Claimant paid by way of compensation with credits it had to receive from the AT, is attributable to the AT, by reason of the incorrect interpretation and application of the law. Consequently, the Claimant is entitled to compensatory interest, pursuant to articles 43, no. 1, of the LGT and 61 of the Code of Tax Procedure and Process (CPPT).

Compensatory interest is due from the date of the payments made, calculated on the basis of the respective amount, until their full restitution to the Claimant, at the legal rate, pursuant to articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, 61 of the CPPT and 559 of the Civil Code and Administrative Order no. 291/2003, of 8 April (without prejudice to any subsequent changes to the legal rate).

Pursuant to the provisions of no. 5, of article 24 of the RJAT "payment of interest is due, regardless of its nature, pursuant to the provisions of the general tax law and the Code of Tax Procedure and Process" should be understood as allowing recognition of the right to compensatory interest in the arbitral proceedings.

The AT should therefore give effect to this arbitral decision, both in the part in which it annulled the decision not to permit the deduction of the VAT in question, and also pursuant to article 24, no. 1, of the RJAT, and restitute to the Claimant the amounts unduly paid, increased by the respective compensatory interest, at the legal rate applicable to civil debts, pursuant to articles 35, no. 10, and 43, nos. 1 and 5, of the LGT, 61 of the CPPT, 559 of the Civil Code and Administrative Order no. 291/2003, of 8 April (or the enactment or enactments that succeed it).

Compensatory interest is due from the dates of the payments made (or respective compensation of credits) until the date of processing of the credit note in which they are included (article 61, no. 5, of the CPPT).

V - DECISION

In these terms this arbitral tribunal decides:

a) To find the application for declaration of illegality of the assessment acts challenged in these proceedings well-founded, for breach of law;

b) In accordance with this decision, all the challenged assessments are hereby annulled, with the legal consequences thereof, namely the restitution to the Claimant of the amounts unduly paid, increased by compensatory interest at the legal rate in force, to be counted until full payment.

c) To condemn the Respondent to pay the costs of the proceedings.

VALUE OF THE CASE

The value of the case is set at € 278,210.24 pursuant to article 97-A, no. 1, a), of the CPPT, applicable by virtue of paragraphs 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 value of the arbitration fee is set at € 5,202.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the unsuccessful party, pursuant to articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the aforementioned Regulation.

Lisbon, 25 October 2016

Let it be notified.

The collective Arbitral Tribunal,

(José Baeta de Queiroz – President)

(Maria do Rosário Anjos - Member)

(Daniel Taborda - Member)

(Document prepared by computer, pursuant to article 131, no. 5 of the Code of Civil Procedure, applicable by cross-reference from article 29, no. 1, paragraph e) of the Legal Regime for Tax Arbitration).

[1] CLOTILDE CELORICO PALMA Commentary on article 2, VAT Code and RITI, Notes and Commentary, Almedina, Clotilde Celorico Palma and António Carlos dos Santos (coord), 2014, p.47.

[2] Thus, XAVIER DE BASTO and MARIA ODETE OLIVEIRA, "Clarifying Misunderstandings on the Right to Deduction of Value Added Tax: Recent amendments to article 23 of the VAT Code", Journal of Public Finance and Tax Law, Year 1, 2008, p. 38 refer that "The right to deduct the tax borne on goods and services instrumental to production constitutes, as is well known, the fundamental part of the value added tax system".

[3] XAVIER de BASTO and OLIVEIRA, op. cit., p.66 refer that a pure holding "does not interfere in the activities of the companies in whose capital it participates". They argue that the mere receipt of dividends and interest does not constitute economic activity, and therefore the right to deduction of the inputs used in these activities is not admitted. In the same sense, RITA LA FERIA, "The Nature of Activities and Right to Deduction of Holdings under VAT", Journal of Public Finance and Tax Law, Year 4, no. 3, 2012, pp. 171-197 supports that when certain conditions are met, it is considered that holding companies interfered directly or indirectly in the management of subsidiaries and, thus, "should be considered as having carried out economic activities for purposes of the VAT Directive" (p.173). Based on Community Jurisprudence, the author lists the conditions that must be satisfied: "(a) the activities are not exercised only occasionally; (b) the activities do not limit themselves to managing investments in the manner of a private investor, (c) the activities are carried out within a business objective or commercial purpose; (d) at least part of these activities constitute transactions subject to VAT for purposes of article 2 of the Directive" (p. 189).

[4] As well explained by XAVIER de BASTO and OLIVEIRA, op. cit, p. 39, the national rules on the right to deduction "must be interpreted and applied in conformity with community law, complying, where applicable, with the sense that this law has been given by the jurisprudence of the Court of Justice of the European Communities". In the same sense RITA LA FERIA, op. cit, p.197, "(…) the provisions of the VAT Code, namely those relating to the concept of economic activity and the right to deduction of holdings, should be interpreted in accordance with European provisions set out in the VAT Directive, as interpreted by the European Court, and these latter may be invoked by individuals against the State".

[5] Thus, XAVIER de BASTO and OLIVEIRA, op. cit, p. 48 refer that "direct attribution either leads to the full deduction of the tax – in the case that goods and services are entirely used in operations conferring the right to deduction – or leads to the fact that no portion of the tax borne can be deducted – if the goods and services are used only and solely in operations that do not confer the right to deduction".

Frequently Asked Questions

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Can an SGPS holding company deduct input VAT on acquired goods and services in Portugal?
An SGPS holding company's right to deduct input VAT depends on whether it carries out taxable transactions under the Portuguese VAT Code. The central issue in Process 177/2016-T involved whether the claimant SGPS could deduct VAT on acquired goods and services. The Tax Authority made arithmetic corrections disallowing certain deductions, which the SGPS challenged before CAAD. While SGPS companies primarily hold participations in other companies, they may have VAT deduction rights if they perform taxable services or activities that generate output VAT. The specific determination requires analysis of the actual economic activities performed and their qualification under IVA legislation.
What are the legal grounds for challenging VAT liquidation assessments before the CAAD tax arbitration tribunal?
The legal grounds for challenging VAT liquidation assessments before CAAD are established in Decreto-Lei 10/2011 (RJAT), specifically articles 2(1)(a), 5, 6, and 10. Article 2 defines the tribunal's jurisdiction over challenges to tax assessment acts, including VAT liquidations. Taxpayers must file an application for constitution of an arbitral tribunal within the statutory deadline, identifying the challenged acts and grounds for illegality. The CAAD tribunal confirmed in Process 177/2016-T that challenges to VAT assessments, even those arising from reimbursement request contexts, fall within arbitral competence when they contest the legality of assessment acts themselves, not merely the recognition of reimbursement rights.
How does the CAAD arbitration process work for disputes involving multiple IVA liquidation assessments?
The CAAD arbitration process for multiple IVA assessments follows a structured procedure: (1) Filing an application for tribunal constitution identifying all challenged acts; (2) Automatic notification to the Tax Authority; (3) Designation of arbitrators by the Deontological Council (single or collective tribunal); (4) Defense filing by the Tax Authority within legal deadlines; (5) Optional article 18 meeting or written arguments phase; (6) Examination of procedural requirements including competence exceptions; (7) Analysis of factual and legal matters; (8) Issuance of the arbitral award within the statutory timeframe. In Process 177/2016-T, the tribunal addressed ten VAT assessments and one interest assessment collectively, first resolving a competence exception before proceeding to merits examination.
Does the Portuguese Tax Authority have the right to deny VAT deductions to SGPS companies under the IVA Code?
The Portuguese Tax Authority has the power to review and correct VAT deductions claimed by taxpayers, including SGPS companies, during inspections and reimbursement request analyses. However, this power must be exercised in accordance with the VAT Code and applicable legal principles. In Process 177/2016-T, the Tax Authority made arithmetic corrections disallowing certain VAT deductions claimed by the SGPS, but the legality of these corrections was challenged before CAAD. The tribunal must determine whether the Tax Authority correctly applied VAT deduction rules or whether the corrections violate the taxpayer's substantive rights under IVA legislation. Tax authorities cannot arbitrarily deny deductions that meet legal requirements.
What is the role of the RJAT (Decreto-Lei 10/2011) in resolving VAT deduction disputes between taxpayers and the Tax Authority?
The RJAT (Decreto-Lei 10/2011) establishes the legal framework for resolving VAT deduction disputes through administrative arbitration. It defines CAAD's jurisdiction over challenges to tax assessment acts (article 2), procedural requirements for tribunal constitution (articles 6 and 10), arbitrator designation procedures (article 11), defense filing obligations, and award deadlines. Process 177/2016-T demonstrates RJAT's role in providing taxpayers an alternative to judicial courts for contesting Tax Authority decisions. The tribunal's decision on competence clarified that RJAT grants arbitral tribunals full authority to examine the legality of VAT assessments, including substantive questions about deduction rights, ensuring effective administrative justice in tax matters.