SGPS VAT Deduction Rights: CAAD Process 178/2016-T Analysis

Q: What are the VAT deduction rights for SGPS holding companies in Portugal?

SGPS holding companies in Portugal have the right to deduct input VAT when they engage in economic activities that constitute taxable supplies under the VAT Code. While mere passive shareholding (acquisition, holding, and disposal of shares) is generally exempt from VAT and does not confer deduction rights, a SGPS that actively intervenes in the management of portfolio companies by providing administrative, accounting, technical, IT, or other management services performs taxable activities. For these taxable activities, the SGPS can deduct VAT incurred on related inputs. The key criterion is whether the SGPS provides services that constitute economic exploitation of property for consideration, as established by CJEU jurisprudence. Article 4 of the Legal Regime of SGPS expressly permits these companies to provide technical and management services, supporting their classification as taxable persons with deduction rights for those specific activities.

Q: How is a mixed taxable person (sujeito passivo misto) treated for VAT purposes under Portuguese law?

A mixed taxable person (sujeito passivo misto) under Portuguese VAT law is an entity that performs both activities conferring the right to deduct VAT (taxable or zero-rated operations) and activities not conferring this right (exempt operations or non-economic activities). Under Article 23 of the Portuguese VAT Code (CIVA), mixed taxable persons must apply the pro-rata deduction method to apportion input VAT between deductible and non-deductible activities. The pro-rata is calculated based on the ratio of taxable turnover to total turnover. For a SGPS, this means segregating VAT on expenses related exclusively to taxable management services (fully deductible), expenses related exclusively to passive shareholding activities (non-deductible), and common expenses (subject to pro-rata apportionment). The taxpayer bears the burden of demonstrating the direct and immediate connection between input VAT and taxable output activities to establish deduction rights.

Q: Can an SGPS challenge additional VAT assessments through tax arbitration at CAAD?

Yes, an SGPS can challenge additional VAT assessments through tax arbitration at CAAD (Centro de Arbitragem Administrativa). Under Article 2(1)(a) of the Legal Regime of Tax Arbitration (Decree-Law 10/2011), taxpayers may submit requests for arbitral pronouncement to challenge the legality of tax assessment acts, including additional VAT assessments. The procedure requires filing a request for constitution of an arbitral tribunal within the statutory deadline (generally 90 days from notification of the challenged act, or longer if hierarchical review was pursued first). The request must identify the contested acts, state the grounds for illegality, and include supporting documentation. CAAD has jurisdiction over VAT disputes regardless of the taxpayer's legal form, including SGPS entities. In this case, the claimant successfully initiated arbitration proceedings challenging ten additional VAT assessments, demonstrating that holding companies have full access to the administrative arbitration system for resolving VAT disputes, subject to applicable procedural requirements and jurisdictional limits.

Q: What criteria determine the right to deduct input VAT for holding companies with mixed activities?

The criteria for deducting input VAT for holding companies with mixed activities are: (1) Nexus requirement: input VAT must have a direct and immediate link to taxable output activities (management services provided to portfolio companies); (2) Economic activity test: the holding company must engage in economic exploitation of property for consideration, not merely passive shareholding; (3) Activity segregation: expenses must be categorized as related exclusively to taxable activities (fully deductible), exclusively to exempt/non-economic activities (non-deductible), or common to both (subject to pro-rata); (4) Pro-rata calculation: for common expenses, deduction is limited to the proportion of taxable turnover under Article 23 CIVA; (5) Documentary evidence: the taxpayer must maintain adequate records demonstrating the connection between inputs and taxable outputs; (6) Substantive management: the holding company must demonstrate active, substantive involvement in portfolio company management beyond mere oversight; (7) EU law compliance: interpretation must respect the VAT Directive and CJEU jurisprudence on fiscal neutrality and the fundamental right to deduction. The burden of proof rests with the taxpayer to establish these criteria are met.

Q: What is the procedure for filing a request for arbitral pronouncement (pedido de pronúncia arbitral) under the RJAT?

The procedure for filing a request for arbitral pronouncement (pedido de pronúncia arbitral) under the RJAT (Legal Regime of Tax Arbitration) involves: (1) Submit a request for constitution of an arbitral tribunal to CAAD within the applicable deadline, identifying the contested acts and legal grounds; (2) Pay the initial arbitration fee; (3) The CAAD President reviews the request for formal compliance and either accepts or rejects it; (4) If accepted, parties are notified and the Deontological Council appoints arbitrators (one or three depending on the case value); (5) Parties may challenge arbitrator appointments within 10 days; (6) The arbitral tribunal is formally constituted once arbitrators accept and any challenges are resolved; (7) The Tax Authority submits its response within 30 days; (8) The tribunal may order preliminary proceedings, hearings, or additional evidence; (9) The tribunal issues a written decision within 6 months (extendable); (10) The decision has the same enforceability as court judgments and may be appealed to the Court of Appeal on limited grounds. In this case, the tribunal was constituted on June 3, 2016, following the standard procedural timeline after the request was filed on March 21, 2016.

Process: 178/2016-T

Date: September 30, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 178/2016-T) addresses the VAT deduction rights of a Portuguese SGPS (holding company) classified as a mixed taxable person. The claimant challenged ten additional VAT assessments totaling €72,687.28 covering tax periods from 2012 to 2015. The central issue concerns whether a SGPS can deduct input VAT on expenses related to its economic activities, particularly when providing management, administrative, and technical services to its portfolio companies. The claimant argued that the right to deduction is a fundamental principle of the EU VAT system, emphasizing that VAT treatment depends on the nature of activities performed, not the legal form of the entity. The company contended it actively managed invested companies through taxable services, making it entitled to full VAT deduction. The claimant also challenged the validity of Tax Authority Circular Letter 30.103/2008, asserting it violates EU law and CJEU jurisprudence on holding company VAT rights. The Tax Authority raised preliminary objections regarding arbitral jurisdiction, questioning whether the tribunal had competence to review corrections to a VAT reimbursement request. This case illustrates critical issues for Portuguese holding companies operating as mixed taxable persons: the distinction between passive shareholding (exempt) and active management services (taxable), the application of pro-rata deduction rules, and the interpretation of Portuguese VAT law in light of the EU VAT Directive and CJEU case law, particularly regarding economic activity and the principle of fiscal neutrality.

Full Decision

ARBITRAL DECISION

The arbitrators, Maria Fernanda Maçãs (arbitrator-president), Professor Doctor João Ricardo Catarino and Professor Doctor Leonor Ferreira, (arbitrators rapporteurs) appointed by the Deontological Council of the Administrative Arbitration Center ("CAAD") to form the Collective Arbitral Tribunal, constituted on 03-06-2016, agree on the following:

I. REPORT

A A...SGPS, S.A. (hereinafter referred to as Claimant) with tax residence at Street..., no. ...-..., ...-... Lisbon and tax identification number (NIF)..., filed a request for constitution of an Arbitral Tribunal ("AT") on 21-03-2016 and the Request for Arbitral Pronouncement ("RAP") in accordance with the provisions of article 2.º, no. 1, paragraph a), article 3.º, no. 1, article 6.º, no. 2 and article 10.º, no. 1, paragraph a), of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to only as "LRATM"), and of articles 1.º and 2.º of Regulation no. 112-A/2011, of 22 March, in which the Tax and Customs Authority ("TCA") is respondent.

The Claimant seeks to have declared the illegality of acts of assessment of Value Added Tax ("VAT"). There are ten tax acts that are the subject of the request for arbitral pronouncement by the Arbitral Tribunal whose constitution is hereby requested:

i. the additional assessment no. ..., with a correction value of € 853.07, corresponding to the tax period of 12/12T;

ii. the additional assessment no. ..., with correction value of € 36,736.51, corresponding to the tax period of 13/03T;

iii. the additional assessment no. ..., with correction value of € 20,014.14, corresponding to the tax period of 13/06T;

iv. the additional assessment no. ..., with correction value of € 237.43, corresponding to the tax period of 13/09T;

v. the additional assessment no. ..., with correction value of € 6,845.86, corresponding to the tax period of 13/12T;

vi. the additional assessment no. ..., with correction value of € 3,981.19, corresponding to the tax period of 14/03T;

vii. the additional assessment no. ..., with correction value of € 1,883.01, corresponding to the tax period of 14/06T;

viii. the additional assessment no. ..., with correction value of € 282.21, corresponding to the tax period of 14/09T;

ix. the additional assessment no. ..., with correction value of € 1,682.36, corresponding to the tax period of 14/12T; and

x. the additional assessment no. 2015..., with correction value of € 172.50, corresponding to the tax period of 15/03T.

The request for constitution of the arbitral tribunal was accepted by the Honorable President of CAAD on 23-03-2016, and notified to the Tax and Customs Authority on 04-04-2016. In accordance with the provisions of paragraph a) of no. 2 of article 6.º and paragraph b) of no. 1 of article 11.º of the LRATM, the Deontological Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the charge within the applicable time period.

On 18-05-2016 the Parties were duly notified of this appointment, having expressed no willingness to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11.º no. 1, paragraphs a) and b) of the LRATM and articles 6.º and 7.º of the Code of Ethics.

In conformity with the provision of paragraph c) of no. 1 of article 11.º of the LRATM, the collective arbitral tribunal was constituted on 03-06-2016.

In the arbitral request, the Claimant invokes, in summary, the following:

• The issue concerns the analysis of the Claimant's right to deduction, in its capacity as a SGPS (Holding Company), in the exercise of the part of its activity that confers such right, which in this case takes expression through the reimbursement requested in the periodic VAT return relating to the period of 2015/03T.

• It is not prohibited for a SGPS to have the right to deduct VAT incurred in the course of the exercise of its economic activity.

• The definition of the sole corporate purpose of a SGPS does not condition, in itself, its classification for VAT purposes, since the performance of an activity of acquisition, holding and disposal of shareholdings is not incompatible with meeting the concept of economic activity.

• The true factor that determines the definition of the VAT regime applicable lies in the nature of the activity carried out and never in the nature of the taxable person.

• The nature of the taxable person is irrelevant for the purposes of determining the VAT regime, but it is not irrelevant "whether or not this taxable person has direct or indirect interference in the management of the invested companies" the right to deduction constitutes a fundamental element of the common VAT system, which allows the taxable person to purge from its burden the VAT borne upstream, not reflecting it as an operational cost of its activity and thus guaranteeing the economic neutrality of the tax.

• The distinction between principal activities and ancillary activities, in addition to being formal, should not result in relegating to the background the exercise of activities related to the provision of technical and management services by a SGPS, which is expressly provided for in article 4.º of the LRSGPS. (The activity developed by a holding company that actively intervenes in the management of the activity of its invested companies may, by way of example, consist of the provision of administrative, accounting or IT services).

• It is imperative that the Additional Assessments be annulled because they are not in conformity with the case law of the CJEU regarding the right to deduction of tax incurred by holding companies. The legal regime of SGPS is not exclusively directed at the existence of merely "passive" holdings.

• All goods or services acquired for which the Claimant bore VAT were related to the practice of activities subject to VAT and not exempt from it, and the totality of VAT borne is deductible.

• The right to deduction constitutes a fundamental element of the common VAT system, which allows the taxable person to purge from its burden the VAT borne upstream, not reflecting it as an operational cost of its activity and thus guaranteeing the economic neutrality of the tax.

• The right to deduct VAT cannot be restricted beyond what is permitted in the VAT Directive, in accordance with the case law of the CJEU, under penalty of violation of EU law.

• The understanding expressed in Circular Letter no. 30.103 of 23 April 2008 violates EU law, as unanimously decided by the CJEU, for which reason all conclusions drawn from this administrative guidance are consequently tainted by violation of EU law.

• The generic guidance contained in the understanding expressed in the Circular Letter are only binding on the TCA's own services, and never on taxpayers.

• National courts must disregard not only the application of rules, but also administrative acts of national authorities, as is the case of the TCA, when these are contrary to EU law.

THE CLAIMANT concludes by requesting the declaration of illegality and annulment of the acts of additional assessment relating to the years 2012 to 2015, indicated above, under numbers i. to x., on the ground of their illegality and, by virtue of such annulment, the condemnation of the TCA to pay compensatory interest calculated on the amount wrongly paid, in accordance with the provision of article 43.º of the General Tax Law.

The Tax and Customs Administration submitted a response, defending itself by exception and by objection.

3.1. In its defense by exception, the TCA raised the incompetence of arbitral jurisdiction on the grounds that, in its view, the object of the present request translates to the challenge of corrections made to the amount requested by the Claimant when submitting the request for reimbursement, in the amount of € 72,711.17, which it had made when submitting the periodic return relating to the first quarter of 2015. According to the TCA, the arbitral jurisdiction is incompetent to hear the Claimant's claim, since the corrections made to it represent the total rejection of the reimbursement and are not tax assessment acts.

3.2. In its defense by objection, the TCA alleges, among other things:

• The Claimant infringed articles 19º and 20.º of the VAT Code.

• The Claimant is not permitted, as a SGPS, to deduct the VAT borne for the purposes of rendering services to its invested companies.

• The total VAT borne by the Claimant in the period in the development of financing operations, contracted in the sole interest of the SGPS, which are classified as operations carried out from a business strategy perspective of valuing shareholdings, expanding the activity and protecting the company's assets, whose effects produce results in the principal activity, is not subject to tax, and therefore is not susceptible to deduction.

• The understanding set out in the Inspection Report essentially corresponds to the understanding expressed in Circular Letter no. 30.103, of 23 April 2008, from the Tax Management Area – VAT of the Office of the Deputy Director-General of Taxes. In accordance with point 5 of said paragraph B, the TCA states that: "in the context described, the consideration of the profits or income indicated above as arising from operations not classifiable within the concept of economic activity, thus outside the scope of VAT is, as a rule, independent of the nature of the taxable person who receives them or of the activity pursued by this person, and it is also irrelevant whether or not this taxable person has direct or indirect interference in the management of the invested companies."

• The Claimant could not, given its nature as a mixed taxable person, in any circumstance, have the right to full deduction of VAT borne upstream, under penalty of subverting the applicable tax rules – cf. articles 2.º, 9.º, 167.º and 174.º of Directive no. 2006/112/CE and articles 1.º, 20.º, 22.º and 23.º of the VAT Code.

• The Claimant, contrary to what it claims, does not conduct a single remunerated activity.

• The Claimant, existing as a SGPS, was the beneficiary of goods acquired and services that are used jointly both in the activity of managing shareholdings and in the conduct of its own activities.

• The Claimant deducted all VAT borne upstream during the years 2012 to 2015, without demonstrating a direct and immediate connection of these inputs with the activity subject to tax, did not provide proof of any nexus, with respect to the inputs specifically identified in the Inspection Report, and therefore its claim cannot be accepted.

• The Claimant can never admit full deduction of its VAT, since the tax borne in an upstream operation can only be deductible to the extent that it can be related, without doubt, in a direct, causal and immediate nexus, with a downstream operation actually taxed, and the relation in question should be assessed based on the inclusion of the cost borne in the price of the taxed operation; Only a direct allocation of services provided by third parties to each of the invested companies would allow the exercise of the right to deduct VAT.

• The TCA concludes that the services were acquired in the sole interest of the SGPS, in the context of its activity of management and administration of shareholdings, all services acquired were used exclusively in the development of the said principal activity of holding shareholdings, and therefore the tax borne would not be deductible.

• The TCA argues that it is irrelevant for this purpose to determine whether or not the taxable person has direct or indirect interference in the management of the invested companies (According to the Inspection Report).

• The TCA invokes the judgment of the South TAC of 15-01-2013, rendered in case no. 01949/07.

• It should be observed whether the inputs are related to the maintenance of the source that produces the taxable activity, thereby verifying whether these costs are susceptible to being reflected in the formation of the prices of the taxable outputs.

• It confirmed the right to deduct VAT incurred with the acquisition of goods and services when such expenses can be qualified as "general expenses of the activity" and are integrated into the constituent elements of the price of operations subject to and not exempt from VAT, as manifestly occurs in the present case.

The Claimant exercised the right to be heard in relation to the dilatory exception on 15-07-2016, defending its lack of merit, because, essentially, the arbitral request does not aim at the annulment of the rejection of the tax reimbursement request formulated by it, but rather the annulment, due to illegality, of ten acts of additional VAT assessment that were notified to it, and are duly identified in the request.
Given that, in this case, none of the purposes that are legally entrusted to the meeting referred to in art. 18.º of the LRATM were present and taking into account the principles of procedural economy and prohibition of futile acts, the tribunal dispensed with the holding of that meeting. At that meeting the tribunal set as the deadline for pronouncing the arbitral award the date of 3 December 2016.
The parties submitted written submissions reiterating the positions taken in the previous pleadings.

II – CLARIFICATION

In its objection, the CLAIMANT raised the absolute incompetence, as to subject matter, of the present Tribunal.

As the basis for the exception raised, it invoked that the object of the request for arbitral pronouncement would translate to the challenge of "corrections made" to the amount requested by the Claimant when requesting a reimbursement (formulated when submitting the periodic return relating to the first quarter of 2015).

In exercise of the right to be heard, the Claimant argued for the material competence of the Tribunal.

The possible merit of the exception invoked would bar the tribunal's knowledge of the merits of the case, for which reason it is necessary to decide on it forthwith.

The material scope of competence of arbitral tribunals is legally circumscribed.

The competence of tax arbitral tribunals is defined, in the first place, by the provision of art. 2.º, no. 1, of the Legal Regime of Tax Arbitration.

In accordance with such rule:

"1. The competence of arbitral tribunals comprises the assessment of the following claims:

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

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

The legislator was thus clear when establishing, in the LRATM, the arbitrability of tax acts, excluding, however, from the jurisdiction of tax arbitral tribunals, the assessment of the (il)legality of acts in tax matters.

As CASALTA NABAIS teaches, "acts in tax matters are those acts that integrate the category of administrative acts, included in the concept contained in article 148.º of the CPA, carried out in the context of tax legal relations through which various and autonomous procedures are concluded apart from the procedure that ends in a tax act or act of assessment of the tax.

(…)

Tax acts stricto sensu, those of which there has been talk, may be the subject of judicial challenge or, as has been seen from the preceding points, of arbitral proceedings.

As for administrative acts in tax matters, in accordance with article 97.º, no. 2, of the CPPT, they will only be subject to review by means of special administrative action, regulated in articles 50.º and following of the CPTA, which are, strictly speaking, true administrative acts."

From art. 4.º, no. 1, of the LRATM it follows that the binding of the Tax and Customs Administration to the jurisdiction of tax arbitral tribunals depends on a regulation of the government members responsible for the areas of finance and justice. A regulation corresponding to Regulation no. 112-A/2011, of 12 March (Binding Regulation), in whose art. 2.º is outlined, in a negative manner, the said scope of binding, establishing the following:

"The services and bodies referred to in the previous article are bound to the jurisdiction of arbitral tribunals operating at CAAD that have as their object the assessment of claims relating to taxes whose administration is entrusted to them referred to in no. 1 of article 2.º of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

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

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

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

d) Claims relating to tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or steps to be taken by another Member State in the context of administrative cooperation on customs matters".

Which means that the competence of arbitral tribunals operating at CAAD is limited to the declaration of illegality of acts of the types referred to in article 2.º of the LRATM, being thus faced with mere annulment proceedings, structured according to the procedural model prior to the 2002-2004 administrative dispute reform, which continues to apply in tax proceedings.

Faced with this legal and doctrinal context, it is necessary to integrate the factuality at issue in the present action.

It is true that the Claimant formulated a request for reimbursement with the Tax and Customs Authority, when submitting the periodic return relating to the first quarter of 2015, and it is certain that, according to some doctrine, the concept of VAT reimbursement used for the purposes of numbers 4 and following of article 22.º of the VAT Code corresponds to a situation in which, from the balance determined in the period, there results a VAT credit in favor of the taxable person that will be used in subsequent periods (in a running account logic), unless the taxable person uses the faculty to request reimbursement of the same, avoiding its reporting and application in subsequent periods. In such a way that "the request for reimbursement, as well as its assessment by the Tax Authority do not constitute legal facts, since they do not constitute per se any fact that determines a legal change in the situation of any of the parties".

Doctrine that follows the case law of the STA, recorded in the Judgment of 12/7/2007, case no. 0303/07, where it can be read, among other things, that only "acts of assessment, in the strict sense", cause "a modification in the tax situation of the taxpayer, defining the existence of an obligation (which through this act becomes certain, liquid and enforceable, including by coercive means in case of non-voluntary compliance). In the same sense, cf., among others, the Arbitral Judgment of 4 April 2014, case no. 238/2013-T, where it can be read that regarding the request for reimbursement, the competence of the arbitral tribunals operating at CAAD is not expressly provided for to assess the legality of acts of rejection of requests for reimbursement of amounts paid, in compliance with previous acts of assessment.

It is also true that the TCA made corrections.

It is not true, however, either that the legal acts carried out by the respondent correspond to mere corrections, or that the present action, as the Claimant configured it in the statement of claim, has corrections as its object.

As to the first aspect - the legal acts carried out by the respondent do not correspond to mere corrections.

It is true that the additional assessments that took place were preceded by a request for reimbursement and corrections made by the respondent. Such acts do not cease, however, to correspond to tax acts – acts of official VAT assessment.

Indeed, "assessment is the operation through which the tax rate is applied to the taxable matter, thus determining the amount owed by the taxpayer, and the act of assessment is the act through which this is concretized by the Tax Administration".

What is specific to official assessment is the fact that it is "that which is carried out by the Tax Administration in the absence of impulse or assessment by the taxable person" (cf. Carla Trindade (2016), Legal Regime of Tax Arbitration Annotated, pp. 60 and 61). In the present case, there are thus tax acts of official assessment.

It is also important to note, in this regard, two other aspects.

As follows from Docs. nos. 1 to 13, attached to the arbitral request, the respondent notified the claimant of the acts carried out by it (respondent) in response to the request formulated by the claimant.

In such notification, the Tax and Customs Authority indicates, in a clear, central, express and unequivocal manner, that the notified acts correspond to assessment acts, assigning, moreover, an identifying number (which it designates as an assessment number) to each of the assessments in question and detailing the type of methods (indirect) to which it resorted to carry out such assessment acts.

It is, therefore, the respondent itself that not only qualifies the acts in question as assessment acts but makes known to the claimant that the acts carried out by it and notified assume this nature.

Furthermore, the respondent, in addition to formulating and transmitting to the claimant the said information, made clear in each of the mentioned notifications that from the assessment notified the claimant could challenge in court, within three months (in addition to administrative appeal, within 120 days).

Indeed, the notified assessment acts are damaging to the interests of the claimant, and therefore their judicial challengeability (either through state courts or through arbitration) must be assured in favor of respect for the principle of access to law and effective judicial protection, enshrined in arts. 20.º, no. 1, and 268.º, no. 4, of the Constitution of the Republic.

Thus, not only do the acts carried out correspond to true assessments, but the respondent: expressly qualifies them as such; formally makes this known to the claimant and also formally clarifies that, because these are assessment acts, they can be the subject of judicial challenge (from which follows recognition of the competence of arbitral tribunals - as tax tribunals they also are - for the purposes of challenging assessment acts).

In this way, and because tax acts of assessment are at issue, the appropriate procedural means of reaction in court will be judicial challenge – when the claimant opts for the judicial route – or the request for arbitral pronouncement – when, as in the present case, the claimant opts for the arbitral route (and not the Special Administrative Action, which is intended, in the context of tax proceedings, for the exclusive assessment of acts in tax matters).

It is necessary to assess the second aspect – the object of the present action.

The object of the action corresponds to the claim and the cause of action on which it is based.

With regard to the latter, the claimant enunciates, in a clear manner, in art. 9.º of its statement of claim, that what gives rise to the action it proposes are the ten assessment acts (acts which, in the same article, it duly identifies), expressly subordinating such article to the heading "The object of the arbitral pronouncement".

As follows from the specification it makes, the assessment acts it identifies as being part of the object of the action are the following:

• the additional assessment no. ..., with correction value of € 853.07, corresponding to the tax period of 12/12T;

• the additional assessment no. ..., with correction value of € 36,736.51, corresponding to the tax period of 13/03T;

• the additional assessment no. ..., with correction value of € 20,014.14, corresponding to the tax period of 13/06T;

• the additional assessment no. ..., with correction value of € 237.43, corresponding to the tax period of 13/09T;

• the additional assessment no. ..., with correction value of € 6,845.86, corresponding to the tax period of 13/12T;

• the additional assessment no. ..., with correction value of € 3,981.19, corresponding to the tax period of 14/03T;

• the additional assessment no. ..., with correction value of € 1,883.01, corresponding to the tax period of 14/06T;

• the additional assessment no. ..., with correction value of € 282.21, corresponding to the tax period of 14/09T;

• the additional assessment no. ..., with correction value of € 1,682.36, corresponding to the tax period of 14/12T; and

• the additional assessment no. 2015..., with correction value of € 172.50, corresponding to the tax period of 15/03T.

On the other hand, it is also on such assessment acts that the second element of the object of the action is focused – the claim. In fact, the claimant requests "(i) the annulment of the Additional Assessments, on the grounds of their illegality, with the other consequences resulting from such annulment; and (ii) by virtue of such annulment, to condemn the TCA to pay compensatory interest calculated on the amount wrongly paid, in accordance with the provision of art. 43.º of the General Tax Law".

Constituting, in summary, the acts that are the object of the present action, acts of assessment, the Tribunal benefits from material competence to hear the same, because it is a matter that, in accordance with the legal regime referred to above, is integrated within its scope of arbitral jurisdiction (in particular, of art. 2.º, no. 1, a) of the LRATM).

In such terms, including the challenge of assessment acts within the scope of tax arbitral jurisdiction and this being the object of the present action, the exception of absolute incompetence invoked by the respondent lacks merit.

7.1. The Arbitral Tribunal is thus materially competent and is regularly constituted, in accordance with article 2.º of the LRATM.

7.2. The parties have legal personality and capacity, are legitimate and are regularly represented (cf. articles 4.º and 10.º, no. 2 of the LRATM and article 1.º of Regulation no. 112-A/2011, of 22 March).

7.3. The proceedings do not suffer from nullities and no obstacle is raised to the assessment of the merits of the case.

III – ON THE MERITS

III.1. Proven Facts

The following facts are considered proven:

• A A... SGPS, S.A. has tax residence at Street..., no. ... –..., ...-... Lisbon, and tax identification number (NIF)....

• The Claimant is a Holding Company ("SGPS") incorporated in accordance with the Legal Regime of Holding Companies ("LRSGPS") contained in Decree-Law no. 495/88, of 30 December, successively amended.

• The Claimant commenced activity on 14 December 2012 and operates under the CAE code..., activity of non-financial holding companies.

• The Claimant is held by 95 percent of its share capital by B..., SGPS, S.A. (NIF...), with the remaining five percent held by the company C..., S.A. (NIF...), as proven in Point III.1.3 of the Examination Report.

• The Claimant has held, since December 2012, shareholdings in the following companies, corresponding to 100 percent of their respective share capital:

• D..., S.A. (NIF...);

• E..., S.A. (NIF...);

• F..., S.A. (NIF...);

• G..., S.A. (NIF...);

• H..., S.A. (NIF...); and

• I..., S.A. (NIF...).

• In the exercise of its activity, the Claimant entered into a management services contract with F... on 30 January 2015, advising it "in defining strategic and business positioning, financial advisory, relations with banking entities and business plan preparation, and legal advisory", as proven in the Examination Report, point III.1.4.

• The Claimant entered into management services contracts with other subsidiaries, in the national market, such services being provided on a continuous basis, covering accounting, audit, supplier contracting, advisory in defining strategic and business positioning; financial advisory, relations with banking entities and business plan preparation; and legal advisory, as is proven in the Examination Report prepared by the TCA, pages 7 and 10 to 12, which are partially transcribed here:

• B..., SGPS, S.A. is controlled by Fund... and its constitution was aimed at implementing the acquisition of a set of assets, receivables and companies in the real estate and tourism sector, inserted in the business group previously denominated Group K... (Group K...).

• The subsidiaries of B... SGPS – which include the Claimant – acquired receivables held by various financial institutions on the companies of the then Group K..., which were financed by supplementary capital contributions.

• A global restructuring agreement was concluded with the then shareholder of the debtor companies whose receivables were acquired by various subsidiaries of B... SGPS, S.A. of the then Group K....

• That global agreement included Extrajudicial Recovery Agreements for various companies of the then Group K..., Restructuring Framework Agreements, a promise to sell contract and a stock and shareholder receivables option purchase contract.

• After the conclusion of the said contracts, B..., SGPS, S.A. and its invested companies concentrated on managing the relationship between financial entities and the companies of the then Group K... for the granting of specific financings that would allow its restructuring, a process of corporate reorganization, rationalizing the holding of receivables and shareholdings transforming the then Group K... into what can be designated as Group J....

• The Claimant is classified under the normal quarterly periodicity regime for VAT purposes, a mixed taxable person with real allocation of all assets.

The Claimant deducted all VAT borne upstream during the years 2012 to the third quarter of 2015.
In the periodic return for the tax period of the first quarter of 2015 (201503T), the Claimant requested reimbursement of the VAT corresponding to the credit accrued since the start of activity (14-12-2012), in the amount of € 72,711.17.
The Claimant was the subject of an internal partial scope inspection action, in the context of VAT, in which the exercise of its right to deduct VAT was scrutinized.
As a result of that inspection action, the Claimant suffered corrections to the VAT appraisal relating to the years 2012 to 2015, under service order no. OI2015..., opened on 04-06-2015, with extension to the first quarter of 2015.
On 13-08-2015 the TCA requested an official letter from the Claimant (official letter no. ...), which "regarding all services acquired, from the fourth quarter of 2012 to the first quarter of 2015, and for which it bore and deducted tax, would indicate: the detailed description of the service object of the document, the invested company that directly benefited from the acquisition of that service and the description of the direct benefit derived by the invested company" (Point III.1.7 of the Report / Conclusions of the inspection action, p.10).
The taxpayer responded on 25-8-2015 (entry no. 2015...). The Claimant was notified by the TCA (official letter no. ..., of 12-06-2015) to send information, and on 25-08-2015, sent a listing with information relating to documents whose tax borne was deducted: VAT period; document name, supplier NIF, document object, service value (without VAT) and identification of the invested company that directly benefited from the acquisition of the services (Annex 1 to the Tax Inspection Report).
On the said listing can be read in the Report what is transcribed below:
The Claimant was notified of the draft Tax Inspection Report to exercise the right to be heard, through notification no. ..., of 04-11-2015.
The TCA subsequently opened service orders nos. OI 2015..., OI2015... and OI2015..., all with order dated 03-12-2015 and notification on 07-12-2015 (correction document), and, based on corrections made by the Tax Inspection Services, on 22 December 2015, ten acts of additional VAT assessment were issued whose taxable person is the Claimant, namely:

• The additional assessment no. ..., with correction value of € 853.07, corresponding to the tax period of 12/12T;

• The additional assessment no. ..., with correction value of € 36,736.51, corresponding to the tax period of 13/03T;

• The additional assessment no. ..., with correction value of € 20,014.14, corresponding to the tax period of 13/06T;

• The additional assessment no. ..., with correction value of € 237.43, corresponding to the tax period of 13/09T;

• The additional assessment no. ..., with correction value of € 6,845.86, corresponding to the tax period of 13/12T;

• The additional assessment no. ..., with correction value of € 3,981.19, corresponding to the tax period of 14/03T;

• The additional assessment no. ..., with correction value of € 1,883.01, corresponding to the tax period of 14/06T;

• The additional assessment no. ..., with correction value of € 282.21, corresponding to the tax period of 14/09T;

• The additional assessment no. ..., with correction value of € 1,682.36, corresponding to the tax period of 14/12T;

• The additional assessment no. 2015..., with correction value of € 172.5, corresponding to the tax period of 15/03T, which, taking into account that the Claimant calculated tax in its favor of € 72,711.17, reflected an additional assessment of the remainder.

The Claimant did not accept the corrections, which amounted to € 72,883.67 (cf. point III. 2 at the end of the Inspection Report) and did not make voluntary payment of the said amount.
The Claimant was therefore summoned, in the context of fiscal execution proceedings no. ... 2016..., on 2 March 2016, for payment of the total amount of € 193.41 (Document no. 12).
The Claimant subsequently made payment of the amount demanded in fiscal execution proceedings no. ... 2016... (Document no. 13).

III.2. Facts Not Proven

There are no facts relevant to the assessment of the case that have not been proven.

III.3. Justification for the Determination of the Facts

With respect to the facts, the Tribunal does not have to pronounce on all that was alleged by the parties; it is incumbent on it to select the facts that matter for the decision and to distinguish the proven matter from the unproven (cf. art. 123.º, no. 2, of the CPPT and article 607º, no. 3 of the CPC, applicable ex vi article 29.º, no. 1, paragraphs a) and e), of the LRATM). In this manner, the facts relevant to the judgment of the case are chosen and delineated based on their legal relevance, which is established in light of the various plausible solutions of the legal question(s) [cf. article 511.º, no. 1, of the CPC, applicable ex vi article 29.º, no. 1, paragraph e), of the LRATM].

With respect to the proven facts, the conviction of the Arbitral Tribunal was based on the set of documents attached to the proceedings, as well as on the administrative instructional process that includes the final report of the tax inspection mentioned in the statement of claim, it being certain that the documents presented were not challenged.

In the assessment of the evidence produced, there is no detection in the pleadings submitted of any essential controversy between the parties regarding the factual framework, limiting itself to the question of law underlying, namely: whether or not the tax acts now subject to review are illegal due to alleged disregard of the Claimant's right to recovery/deduction of VAT, in particular arising from recalculation operations carried out by the TCA.

III. 4. THE LAW

1. On the nature and scope of the exercise of the right to deduction under VAT

a) SGPS can provide technical administration and management services to invested companies or companies with which they have concluded a subordination contract (cf. art. 4.º of the LRSGPS). These services include, in particular, the preparation of reorganization studies, training of personnel, definition of strategic plans and support in various matters relevant to the organization and administration (e.g., accounting, legal, human resources support, etc.), especially in the context of management of the invested companies by the SGPS.

The provision of the so-called ancillary services constitutes a relevant factor for the inclusion of part of its activity within the scope of application of VAT and, in particular, within the scope of activities subject to and not exempt from VAT, which confer the right to deduction.

In the case at hand, the issue concerns the deductibility of the VAT borne by the Claimant as a result of the provision of services to its invested companies, services that include advisory in defining strategic and business positioning, financial advisory, relations with banking entities and business plan preparation, and legal advisory.

In the context of the inspection procedure that followed the request for reimbursement of VAT, it was concluded that it is not permitted for the Claimant, as a SGPS, to deduct VAT because "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 shareholdings, and therefore the tax borne is not deductible." According to the TCA "the Claimant deducted all VAT borne upstream during the years 2012 to 2015, without demonstrating a direct and immediate connection of these inputs with the activity subject to tax, did not provide proof of any nexus, with respect to the inputs specifically identified in the Inspection Report, and therefore its claim cannot be accepted."

For the Claimant, and in summary, the additional assessments in question are illegal because they are not in conformity with the case law of the CJEU on the right to deduction of tax incurred by holding companies.

Let us examine this.

b) The CAAD has pronounced itself, in various cases, on the right to deduction in VAT in SGPS, in terms that appear to us to be coherent and pertinent, and therefore, in this part, we follow closely the guiding sense followed, for example, in the Arbitral Decisions rendered, first of all, in Cases no. 148/2012-T, no. 18/2013-T and no. 15/2015-T.

VAT is based on a fundamental principle which is that of granting the right to deduct from the amount of tax assessed by the taxable person in economic operations carried out by it in a given tax period, the amount of tax it bore in acquisitions or imports of goods and services provided to it.

The difference between those two amounts, in accordance with the provision of article 21.º of the Code, corresponds to the tax the taxable person must pay into the State Treasury. However, it should be noted that the right to deduction suffers an important restriction: it can only be exercised provided that the goods or services were acquired for the realization of taxable operations, thus excluding from this principle exempt operations. When a taxable person acquires goods and services for the realization of VAT-exempt operations (incomplete exemption), the tax contained in the price is not deductible, and therefore constitutes a cost of the activity of the exempt taxable person. This person behaves as a final consumer.

Since it operates through the so-called indirect subtractive method, the right to deduction constitutes a structuring element in the functioning of the tax, with a view to guaranteeing a characteristic of the tax, which is its neutrality.

In accordance with this method, and in accordance with what is provided in article 19.º of the VAT Code, taxable persons are permitted, through an arithmetic subtraction operation of the tax determined on sales and provision of services (outputs) and identifiable in their respective invoices, to deduct the tax borne in purchases and other expenses (inputs). This is what specifically results from the 2nd paragraph of no. 2, of article 1.º, of the VAT Directive (hereinafter VAT Directive) where it can be read that: "In each operation, VAT, calculated on the price of the good or service, is chargeable, with prior deduction of the amount of tax that has directly affected the cost of the various elements making up the price."

It is important to note that the rules of the exercise of the right to deduct tax contemplate objective requirements, linked to the type of expenses, subjective, related to the taxable person, and temporal, relating to the period in which it is possible to exercise the right to deduct VAT, which must be verified simultaneously to exercise the right to deduction. As objective requirements of the exercise of the right to deduct tax we have, in particular, the fact that the tax borne must be stated on an invoice issued in legal form (that is, it must comply, in its requirements, with the general terms provided for in article 36.º, no. 5, of the VAT Code), that it is Portuguese VAT, and that the expense, in itself, confers the right to deduct VAT (that is, it should not be an expense excluded from the right to deduction, in accordance with the provision of article 21.º of the VAT Code).

As subjective requirements of the exercise of the right to deduct tax it is determined, in particular, that the goods and services should be directly related to the exercise of the activity in question.

In accordance with the provision of article 168.º of the VAT Directive, transposed, in part, by article 20.º, no. 1, paragraph a), of the VAT Code, the taxable person can deduct the VAT borne in the Member State where it is established in transmissions of goods and provisions of services, as well as in assimilated operations in intra-Community acquisitions of goods and in imports located there, "When the goods and services are used for the purposes of its taxed operations (…)".

In the case of a mixed activity, the law grants those taxable persons one of two solutions:

. Either the non-separation of activities (exempt and non-exempt), in which case a calculation of non-deductible tax included in the total acquisitions of the taxable person must be carried out according to the pro rata method or the deduction percentage;

. Or the accounting separation of activities, exempt and taxable – the real allocation method which consists of the possibility of making the full deduction of the tax contained in the acquisition of goods and services intended for taxable activity in general terms, but which, in the same manner, simultaneously prevents the deduction of the tax borne in operations that do not confer the right to deduction.

The VAT Directive and the Portuguese VAT Code establish, as a general rule, the deductibility of the tax due or paid by the taxable person in acquisitions of goods and services made from other taxable persons. Thus, cases of exclusion of the right to deduction are exceptional and relate to specific cases enumerated by the national legislator in taxative terms, depending on the type of expenses in question.

Art. 20.º no. 1 par. a) of the VAT Code (and art. 168.º of the VAT Directive) permit the taxable person to deduct the VAT borne in transmissions of goods and provisions of services, as well as in assimilated operations in intra-Community acquisitions of goods and in imports located there, "When the goods and services are used for the purposes of its taxed operations (…)". Therefore, it is required that there be an unequivocal nexus of causality between the good or service acquired (input) and the taxed output, so that the VAT is susceptible to being deductible. That is, the VAT borne upstream in a given operation is only deductible if it is related downstream with an operation actually taxed, and the relation should be assessed based on the inclusion of the cost borne in the price of the taxed operation.

The CJEU has further decided that there must be a direct and immediate relationship between the taxable operations carried out by the taxable person and the goods or services supplied by another taxable person, i.e., between the expenses whose VAT is sought to be deducted and the taxed operations (Judgments BLP, of 6.6.1995, case C-4/94, Collection, p. I-983, nos. 18 and 19 and Midland Bank, 8.6.2000, Case C-98/98, Coll. p.I-4177, no. 25). It is clear that, as the CJEU has stated, if the taxable person develops only activities taxed in general terms, this relationship does not need to be established, to the extent that all VAT borne upstream can be deducted in general terms, since all goods and services (upstream) are, provided there is a clear relationship with the company's activity, used or likely to be used "for the purposes of its own taxed operations".

So the inverse is also true: it is necessary that there be a direct and immediate relationship of the upstream operation with a specific taxed operation whenever the taxable person carries out a mixed activity. As was decided in Arbitral Case no. 15/2015-T, "one should assess whether the upstream operation subject to VAT presents a direct and immediate relationship with one or more operations that confer the right to deduction, presupposing the inclusion of its cost in the price of the operations. Should this not be the case, it is then necessary to analyze whether the expenses incurred for the acquisition of goods or services upstream are part of the general expenses linked to the whole economic activity of the taxable person, presupposing the inclusion of its cost in the prices of goods or services supplied by the taxable person in the context of its economic activities."

This right to deduct tax arises "at the moment the deductible tax becomes chargeable" and provided that the taxable person has in its possession the invoice or receipt of tax payment (cf. art. 36.º of the VAT Code). In light of no. 1 of article 19.º of the VAT Code, it confers the right to deduction, in particular, the tax due or paid by the taxable person in acquisitions of goods and services made from other taxable persons and the tax paid for the acquisition of the services referred to in paragraphs e), h), i), j) and l) of no. 1 of article 2.º of the VAT Code. No. 1 of article 20.º of the VAT Code confers, in particular, the right to deduction of VAT in transmissions of goods and provisions of services subject to tax and not exempt from it and transmissions of goods and provisions of services that consist of operations carried out abroad that would be taxable if carried out in Portugal.

In the case at hand, it is not disputed that the Claimant is a SGPS that incurred expenses in the interest and with a view to economic restructuring and management of the Group, which it developed in the tax periods in question here, until December 2014, as proven above, in monitoring the course of the PER and in managing the relationship between financial entities and the companies of the ex-Group K..., of which it holds shareholdings.

It appears to us that the Claimant is right when it argues, in the first place, that the right to deduction arises from a relationship of use: if the expenses are incurred and were used by the Claimant in a group logic in activities that confer the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by this activity compared to the totality of income, as results from the provision of article 168.º of the VAT Directive (Directive 2006/112/CE) which establishes that, when goods and services are used for the purposes of its taxed operations, the taxable person has the right, in the Member State where it carries out such operations, to deduct from the amount of tax for which it is liable the amounts of VAT due or paid in that Member State in relation to goods that have been or will be delivered to it and in relation to services that have been or will be provided to it by another taxable person and also results from article 20.º of the VAT Code.

2. On the concept of economic activity and the connection with the right to deduct VAT upstream relating to the acquisition of shareholdings

Conceptually, it is possible to distinguish, for VAT purposes, operations that constitute non-economic activities and operations that constitute the exercise of an economic activity (cf. above all, the Judgment of the CJEU, Régie Dauphinoise, of 11.7.1996, C-306/94, Collection, p. I-3695, no. 22). Both in this and in other Judgments the CJEU has stated that only the latter should be considered as covered by the VAT Directive and, within these, as noted above, non-subject, subject and exempt and non-exempt or taxed activities in VAT.

For VAT purposes, taxable person is anyone who independently and with regularity carries out an economic activity, regardless of the purpose or result of that activity and also those who likewise carry out a single operation, in accordance with the provisions of articles 9.º and following of the VAT Directive and article 2.º of the VAT Code). As can be seen, the concepts are not coincidental. The person who bears the tax charge is not always a "taxable person" in the sense of the common system. Taxable person is anyone who, by engaging in an economic activity, practices, in principle with continuous character, taxable operations. A taxable person is anyone who habitually and independently carries out an activity of production, commerce or provision of services (cf. art. 2.º of the VAT Code). The CJEU has consistently and uniformly held that the concept of taxable person is unequivocally linked to that of economic activity, and it is this that justifies the qualification of the taxable person with the right to deduction (cf. Case I/S Fini and Skattemisteriet, Judgment of 3 March 2005, Case C-32/03, Collection p. I-01599, no. 19).

The concept of economic activity must be as broad as possible, to the extent that it is its independent exercise that is configured as a condition of subjective incidence of this tax, and it is from this that the possibility of exercising the right to deduct VAT contained in inputs is constructed, which is, as we have seen, the guarantee of tax neutrality. The activity need not be developed with a profit motive nor is it necessary that it be developed with principal character, and can have an accessory nature, but the VAT Directive frames in its article 9.º, no. 1, 2nd paragraph, 2nd part, as a VAT taxable person anyone who carries out an "(…) economic activity [of] operating a tangible or intangible asset with the aim of obtaining income with a character of permanence (…)."

The notion of tax debtor is broader, as it includes in this concept not only the taxable persons themselves but also, broadly, all persons who, e.g., acquire, import goods or acquire services.

On the basis of this distinction, VAT should only be borne by individuals who use the goods or services for private consumption. Consequently, VAT that has been charged on goods or services relating to the activity of any taxable person that does not have the nature of economic activity, in the sense given to it by the VAT Directive, cannot be deducted.

Although the exercise of the right to deduction is a fundamental right, it only operates in the context of economic activities and, within this, if there exists such a direct and immediate relationship between the goods and services acquired and the activity of the VAT taxable person, as referred to above.

However, although this is an important restriction, directly connected with the logic of the tax, it is noted that, conversely and as is well noted in the Arbitral Decision rendered in case 15/2015-T, the CJEU has even "come to embrace an increasingly comprehensive interpretation, in particular for the purposes that now concern us regarding the management of shareholdings, without which the establishment of a causal nexus between the deductible VAT and a particular, individualized and concretized operation, cannot be accepted."

The concept of economic activity adopted by the CJEU is very important for the elucidation of the question before us, to the extent that, although it is imperative that there be an unequivocal relationship with the economic activity of the taxable person, it is also admitted "a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of goods it supplies or services it provides. These costs do indeed have a direct and immediate nexus with the totality of the economic activity of the taxable person" (see Judgment of 29 October 2009, case SKF, Case C-29/08, Collection p. I-10413, no. 58 and further case law cited therein).

It should be noted that although the judgments cited and referred to below were issued applying the regime of the 6th Directive (no. 77/388/EEC, of 17-5-1977) which was repealed by Directive no. 2006/112/CE of the Council, of 28-11-2006, which entered into force on 1-1-2007, the regime of the latter is essentially similar to the former in what is relevant here, so that judgment should be applied to the situation in the case, although facts occurred before its entry into force.

There is abundant further CJEU case law on the management of shareholdings, where the exact meaning and scope of the concept of economic activity has been discussed and on which it has been said that it should not contain the mere exercise of the right of ownership by the owner of the assets. Thus, the CJEU has held that the mere purchase, the simple transfer of financial stakes in another company or the receipt of dividends do not configure an operation of an asset with the objective of obtaining permanent income, because the dividend resulting from that stake is the result of mere property of the asset and not the consideration for the exercise of any economic activity (see also Judgments of 22 June 1993, Case Satam/Sofitam, Case C-333/91, Collection p. I-3513, of 14 November 2000, Case Floridienne and Berginvest, Case C-142/99, Collection p. I-9567, and of 27 September 2001, and various other CJEU case law cited therein).

This residual exercise is thus excluded from the concept of economic activity, as is the mere acquisition and holding of shareholdings, without intervention in the management of other companies, developed by pure holdings, which do not confer on its author the quality of taxable person because they are not considered an economic activity, in the sense of the Sixth Directive and the VAT Directive. (see cases Polystar, of 20.6.1991, Case C-60/90, Collection, p. I-3111 and Judgment of 20 June 1996, concerning the purchase and sale of shares in the context of the management of a "trust", in Case Wellcome Trust, Case C-155/94, Case C-155/94, Collection p. I-3013).

To the contrary, the CJEU has held that interest received by a holding with respect to loans granted to its invested companies cannot, in accordance with the conclusions of that Judgment, be excluded from the scope of application of VAT. This understanding was reinforced in various Judgments of the CJEU, such as the case Cibo Participations, in particular §§ 1 to 3 of the conclusions, where it was decided that "1) The interference of a holding in the management of the companies in which it took stakes constitutes an economic activity in the sense of article 4.°, no. 2, of the Sixth Directive 77/388/EEC of the Council of 17 May 1977, on the harmonization of the legislation of the Member States concerning taxes on turnover - Common system of value added tax: uniform collectible matter, to the extent that it implies the realization of transactions subject to value added tax in accordance with article 2.° of that directive, such as the supply, by the holding to its subsidiaries, of administrative, financial, commercial and technical services. (See WWW: <URL: http://eur-lex.europa.eu/).

The expenses incurred by a holding with the various services it acquired in the context of taking a stake in a subsidiary are part of its general expenses, and therefore have, in principle, a direct and immediate nexus with the totality of its economic activity. Therefore, if the holding carries out both operations conferring the right to deduction and operations not conferring the right to deduction, it follows from article 17.°, no. 5, first paragraph, of the Sixth Directive 77/388 that only the part of value added tax proportional to the amount relating to the first category of operations can be deducted."

In such manner it can be said that the CJEU makes a clear distinction between holdings that interfere, directly or indirectly, in the management of the invested companies and those that do not. In this regard, the Court has decided that it constitutes an economic activity framed within VAT rules [for the purposes of the provision of no. 1 of art. 9.º of the VAT Directive] that developed by holdings that interfere directly or indirectly in the management of invested companies (Cf. Judgments Floridienne SA and Berginvest, against the Belgian state, Case 142/99, Coll. I-9567 and Welthgrove BV, Case C-102/00, Coll. I-5679, both concerning the intervention of a holding in the management of the subsidiaries).

Consequently, it can be concluded that a holding has "direct or indirect interference in the management" of invested companies whenever the following conditions are met: (a) The activities are not exercised only occasionally (Ac. Floridienne); (b) The activities are not limited to managing the investments like a private investor (Ac. Floridienne); (c) The activities are carried out in the context of a business objective or commercial purpose (Ac. Floridienne); (d) at least part of the activities constitute transactions subject to VAT for the purposes of article 2.º of the Directive (Judgment Welthgrove).

As can be seen, the CJEU places the emphasis on the question of whether, for the purposes of the (possible) exercise of the right to deduct VAT, the company that is a VAT taxable person is or is not involved in the actual management of the companies in which a stake has been taken. And it has concluded that the exercise of the activity of management of shareholdings, including their acquisition and disposal, accompanied by actual interference by the parent company in the management of the invested companies, in the context of broader business activity, takes the nature of economic activity, in which case it should be considered that these develop taxed activities.

In the Judgment rendered in Case C-29/08, case AB SKF, of 29.10.2009, the CJEU considered that "the transfer, by a parent company, of all the shares it holds in the capital of a subsidiary held at 100% and the remaining participation in a company previously held at 100%, to which it supplied taxable value added tax services, constitutes an economic activity covered by the scope of application of the said directives." And that "The right to deduct value added tax paid upstream on services intended to realize a transfer of shares is conferred, by virtue of article 17.°, nos. 1 and 2, of the Sixth Directive 77/388, as amended by Directive 95/7, and article 168.° of Directive 2006/112, if there is a direct and immediate relationship between the expenses related to the upstream services and the totality of the economic activities of the taxable person. It is for the referring court to determine, taking into account all the circumstances in which the operations in the main proceedings take place, whether the expenses incurred are susceptible to being incorporated into the price of the shares sold or whether they form part solely of the constituent elements of the price of the operations covered by the economic activities of the taxable person".

Thus, the CJEU understood, in the SKF Case, that if there is a direct and immediate relationship between the expenses related to the upstream services and the totality of the (taxed) economic activities of the taxable person, the right to deduct VAT paid upstream on services intended to realize a transfer of shares [article 168.° of the VAT Directive] should be permitted. Having these upstream services, in the understanding of the CJEU, a direct and immediate relationship with the taxable person's economic activity, the right to deduct VAT of the said services should be permitted to exercise.

As a consequence, and well noted in the Arbitral Decision rendered in case 15/2015, p. 41, the CJEU, invoking the principle of equal treatment, considered [in the Ac. SKF] that refusing the right to deduct VAT paid upstream for advisory expenses related to a transfer of shares exempted by reason of involvement in the management of the company whose shares are transferred, and admitting this right to deduction for such expenses related to a transfer outside the scope of VAT because they constitute general expenses of the taxable person, would lead to different tax treatment of operations that are objectively similar, in violation of the principle of fiscal neutrality.

This unjustified differentiation of treatment is equally felt by Doctrine, as is the case of the study by Rui da Costa Bastos, which pronounces itself to the effect that "The right to deduct general expenses susceptible to being imputed to the taxed component of the economic activity of the taxable person (management support services) should not be seen as conditioned, as could happen with legal assistance contracted to third parties, studies on internationalization of the group, administrative expenses, etc., provided that the allocation of resources, such as human resources, to said taxed activity is proven, qualifying those expenses as activity expenses and, as such, repercussible in the price of taxed operations and, therefore, susceptible to conferring full deduction of VAT, and it is not seen, at this level, any reason for differentiated treatment of a mixed holding from an operational company".

The author considers that for parent companies with respect to the acquisition, holding or disposal of shares, the treatment for VAT purposes of deductibility of inputs should be the same. Treating differently the deductibility of VAT of inputs depending on the strategic choice of business organization or a business plan for expansion of an economic activity, whether by establishment of a subsidiary or creation of a mere branch, direct management of a taxed activity or, indirectly, through intermediation of a stake, would lead to an unacceptable discriminatory treatment of situations that are objectively identical.

This principle would indeed be ignored, in the understanding expressed in the Ac. of CAAD rendered in case 15/2015-T (p. 43), if a parent company managing a group of companies could be taxed for expenses incurred in the context of the sale of shares that is part of its economic activity, whereas a holding company that carries out the same operation outside the scope of VAT would benefit from the right to deduct VAT that charged the same expenses because they are part of the general expenses of its overall economic activity.

Regarding specifically the possibility of VAT deduction, various other Arbitral Decisions of CAAD have decided that it has legal coverage the deduction by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided by SGPS to its invested companies conferring the right to deduction or that, not having a direct and immediate nexus with certain services, are VAT borne with costs that are part of the general expenses that have a direct and immediate nexus with the totality of its economic activity – cf. case 77/2012-T. This Arbitral Decision invokes the Conclusions of the CJEU Portugal Telecom Case, Case C‑496/11, of 6.9.2011, which decided that "a holding company such as the one at issue in the main proceedings, which, accessorily to its principal activity of management of shareholdings in companies of which it holds all or part of the share capital, acquires goods and services which it subsequently invoices to the said companies, is authorized to deduct the value added tax paid upstream, provided that the services acquired upstream have a direct and immediate nexus with downstream economic operations conferring the right to deduction. When the said services are used by the holding company to carry out simultaneously economic operations conferring the right to deduction and economic operations not conferring the right to deduction, deduction is only permitted for the part of value added tax that is proportional to the amount relating to the first category of operations and the national Tax Administration is authorized to provide one of the methods of determining the right to deduction enumerated in the said article 17.°, no. 5. When the said goods and services are used simultaneously for economic activities and for non-economic activities, article 17.°, no. 5, of the Sixth Directive 77/388 is not applicable and the deduction and apportionment methods are defined by the Member States, which, in the exercise of this power, must take into account the purpose and economy of the Sixth Directive 77/388 and, to that extent, provide a mode of calculation that objectively reflects the part of actual allocation of upstream expenses to each of these two activities."

The Arbitral Decision rendered in case 77/2012-T concluded that the Claimant there was right in arguing that the right to deduction arises from a relationship of use: if the resources were used by the Claimant in activities which, if they had been invoiced, would have conferred the right to deduction, the VAT would be deductible regardless of the relative weight in terms of value generated by this activity compared to the totality of income.

Moreover, in the Portugal Telecom Judgment of the CJEU, it is also stated that "a right to deduction is likewise admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of goods it supplies or services it provides. These costs do indeed have a direct and immediate nexus with the totality of the economic activity of the taxable person".

(In this regard, see Case Kretztechnik in which a share issue was at issue, Case C-465/03, Collection p. I-4357, and further case law cited therein, where it is admitted (cf. §§ 57 and 58) "the right to deduction in favor of the taxable person, even in the absence of a direct and immediate relationship between a particular upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of goods it supplies or services it provides. These costs do indeed have a direct and immediate relationship with the totality of the economic activity of the taxable person.").

In this context, the Arbitral Tribunal decided in the arbitral case previously mentioned, to the effect that full deduction should be permitted by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its invested companies conferring the right to deduction or that, not having a direct and immediate nexus with certain services, is VAT borne with costs that are part of expenses that have a direct and immediate nexus with the totality of its economic activity.

In the same sense pronounced the CAAD – Case 128/2012-T -, by deciding to the effect that expenses incurred by an operational company should be deductible, "which has as principal activities the manufacture of ... and products intended for its production and acquires stakes in other companies and intervenes in their management with the objective of enhancing its principal activity, in particular by expanding internationally its sales area to new markets and ensuring conditions for the commercialization of its products".

It is stated in the same Judgment that it is likewise admitted "a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question are part of its general expenses...... These costs do indeed have a direct and immediate nexus with the totality of the economic activity of the taxable person".

In these terms, this Tribunal concludes that "thus, the deduction by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its invested companies conferring the right to deduction with costs that are part of the general expenses of the Claimant that have a direct and immediate nexus with the totality of its economic activity has legal coverage.

"In the case at hand, it was proven that the acquisition of stakes and studies related to them, as well as the intervention of personnel of the Claimant in invested companies, supervising the activity developed and the training of human resources in these, are part of its overall commercialization strategy of its products (... and...), with a view to obtaining new markets with connection with local companies (Lebanon and various African countries) and ensuring transport of these products (port terminal at...) in internal commercialization (in the case of the acquisition of J... –, S.A.).

Thus, although it has not been proven that there is a direct and immediate nexus between the advisory expenses that were the subject of corrections made by the Tax and Customs Authority and one or more downstream operations conferring the right to deduction, it has been proven that there exists a direct and immediate nexus between these expenses and the totality of the economic activity of the Claimant, and therefore the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of goods it supplies or services it provides, being, therefore, costs with "a direct and immediate nexus with the totality of the economic activity of the taxable person", which, in light of the CJEU case law referred to above, is sufficient to confer the right to deduction."

3. Application of Doctrine and Case Law to the Concrete Case

In the sense of the above, various Arbitral Judgments of CAAD also pronounced themselves, such as those rendered in Cases 15/2005-T; 70/2014-T, 77/2012-T and 409/2014-T, among others, both as to the general rule of VAT deduction, and as to the concept of economic activity and its exercise in the context of activity from which results the actual interference of a company in the management of affiliated companies as an economic activity, to the extent that it implies the realization of transactions subject to VAT, such as the supply of administrative, financial, commercial and technical services. This latter direct or indirect interference in the management of the invested company alters the framing within the scope of economic activity of holdings and raises the right to deduct VAT borne with related expenses incurred upstream (e.g., case CAAD 15/2015-T). And in which the deductibility of VAT (upstream) of expenses associated with it, in whole or in part, would be conditioned by the manner in which this activity is exercised, either in a merely passive form, with the SGPS limiting itself to the receipt of the profits associated with it or, alternatively, in an active manner, with direct or indirect interference in its management, resulting from it a continuation of a taxed activity.

In the case at hand, it appears from the proven facts that the Claimant not only concluded restructuring agreements with the subsidiaries but also various contracts, management or otherwise, in the context of the restructuring activity and management of the Group, thus invoking and proving that it interfered or participated in the management, and also ensured a set of services to its subsidiaries, which include:

a) Advisory in redefining strategic positioning, business and restructuring of the group, accompanying, for example, the course of the PER and the management of the relationship between financial entities and the companies of the ex-Group K... for the granting and investments specifically allowing the restructuring of the Group, with various judgments that became final during 2013;

b) The acquisition of the totality of the share capital of company R..., and the corporate reorganization of Group J...;

c) Legal and economic advisory and various management.

In summary, it was proven that the Claimant's expenses are related to the acquisition of operations relating to assistance and consultancy services in the restructuring operation identified above and accessory operations, including the legal, management and administration areas, as results from the Map attached to the Examination Report, given as reproduced.

Thus, it does not appear to us that the TCA's position should be accepted regarding the invocation of the argument that the expenses in question do not present a direct connection with the management operations carried out in the interest of the Group, invoiced or not to the invested companies.

Indeed, such argumentation is contradicted by the proven facts, to the extent that, as we have seen, the Claimant entered into Agreements with its invested companies and with third parties, identified above, which shape and regulate the terms of the management undertaken and the respective actual management activity, well beyond mere management of shareholdings.

The Claimant is not a SGPS that dedicates itself only to management of shareholdings. On the other hand, the expenses borne do not respect merely dividends of shareholdings, capital gains from the sale of shares or other negotiable securities, income from applications in investment funds, interest on bonds, interest due from the occasional granting of credit by holdings using the profits distributed by the invested companies, capital contributions to companies and issuance of shares representing the capital of a commercial company.

On the contrary, it is clear that the expenses borne are exclusively or mainly related to operations that fall within the concept of economic activity, first of all because these are operations/services directly related to restructuring operations and management of the Group and the activity of the invested companies. It is proven that the Claimant developed an activity that went well beyond mere management of shareholdings, having also developed an entire activity of restructuring and management in the interest of the Group.

It is thus concluded that the expenses in question are configured as necessary to develop the totality of its activity, including the economic restructuring of the Group, especially since most of the invoices refer to "Essential structural costs for the activity". And, as a consequence, the expenses described above and the services related to restructuring and management of the group, or which relate to the functioning of the Claimant as a SGPS, are necessary for its operation as a mixed holding that it is.

As well decided, in Arbitral Case no. 70/2014-T (p. 34, 35), are to be considered constituent elements of the price of services provided by the Claimant to its invested companies, since without the functioning of the Claimant these services could not be provided. There is, then, a direct and immediate nexus between such expenses and the economic activity of active provision of services by the Claimant, which enables the right to deduction, in light of the case law cited.

The CAAD, through the arbitral decision rendered in case 70/2014-T – understood that with respect to payments of tax advisory, legal consultancy and strategic consultancy relating to the holding, acquisition and disposal of shareholdings as a shareholder, investment and disinvestment opportunities, business development of the company and others related, although directly related to the acquisition or disposal of shareholdings, these are general costs of a mixed holding. Therefore, VAT can be deducted "even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations conferring the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of goods it supplies or services it provides".

The criterion for assessing deductibility that results from this case law is not that of whether or not these are costs that a pure holding would have or would not have incurred, but rather that these costs are or are not costs of the Claimant, because, according to that case law, the costs, by being costs, are constituent elements of the price of services subsequently provided. Therefore, in the said case, it was concluded that the corrections made by the Tax and Customs Authority regarding such costs had no legal foundation.

Now, in the case at hand, it is repeated, costs or expenses essential to the activity are at issue, such as legal services, fees relating to the transfer of receivables, collection of elements of Group K..., audit services to the Group, legal services relating to receivables claims and in the context of the claims procedure, which the Claimant proves to have incurred in the interest and in a group logic. Therefore, the Claimant thus proves to have borne VAT in the invoices contained in the said Map Attached to the Examination Report, without the same and their respective content having been challenged by the TCA within the framework of the examination report.

Finally, it should further be added that the participation of the Claimant in the capital of other companies, by being a SGPS, is considered as an indirect form of exercise of an economic activity, in accordance with the provision of article 1.º, nos. 2 and 3 of the LRSGPS, provided that two cumulative requirements are met, which in the Claimant are observed. One of the requirements is the non-occasional character of the participation, i.e., the conservation of ownership of the same for a period exceeding one year – which, moreover, is verified in this case to the extent that the Claimant has held shareholdings in its invested companies since December 2012. The other requirement is the holding of at least 10 percent of the capital, to which is associated the right to vote of the invested company – which is also verified to the extent that the Claimant holds...

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Frequently Asked Questions

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What are the VAT deduction rights for SGPS holding companies in Portugal?

SGPS holding companies in Portugal have the right to deduct input VAT when they engage in economic activities that constitute taxable supplies under the VAT Code. While mere passive shareholding (acquisition, holding, and disposal of shares) is generally exempt from VAT and does not confer deduction rights, a SGPS that actively intervenes in the management of portfolio companies by providing administrative, accounting, technical, IT, or other management services performs taxable activities. For these taxable activities, the SGPS can deduct VAT incurred on related inputs. The key criterion is whether the SGPS provides services that constitute economic exploitation of property for consideration, as established by CJEU jurisprudence. Article 4 of the Legal Regime of SGPS expressly permits these companies to provide technical and management services, supporting their classification as taxable persons with deduction rights for those specific activities.

How is a mixed taxable person (sujeito passivo misto) treated for VAT purposes under Portuguese law?

A mixed taxable person (sujeito passivo misto) under Portuguese VAT law is an entity that performs both activities conferring the right to deduct VAT (taxable or zero-rated operations) and activities not conferring this right (exempt operations or non-economic activities). Under Article 23 of the Portuguese VAT Code (CIVA), mixed taxable persons must apply the pro-rata deduction method to apportion input VAT between deductible and non-deductible activities. The pro-rata is calculated based on the ratio of taxable turnover to total turnover. For a SGPS, this means segregating VAT on expenses related exclusively to taxable management services (fully deductible), expenses related exclusively to passive shareholding activities (non-deductible), and common expenses (subject to pro-rata apportionment). The taxpayer bears the burden of demonstrating the direct and immediate connection between input VAT and taxable output activities to establish deduction rights.

Can an SGPS challenge additional VAT assessments through tax arbitration at CAAD?

Yes, an SGPS can challenge additional VAT assessments through tax arbitration at CAAD (Centro de Arbitragem Administrativa). Under Article 2(1)(a) of the Legal Regime of Tax Arbitration (Decree-Law 10/2011), taxpayers may submit requests for arbitral pronouncement to challenge the legality of tax assessment acts, including additional VAT assessments. The procedure requires filing a request for constitution of an arbitral tribunal within the statutory deadline (generally 90 days from notification of the challenged act, or longer if hierarchical review was pursued first). The request must identify the contested acts, state the grounds for illegality, and include supporting documentation. CAAD has jurisdiction over VAT disputes regardless of the taxpayer's legal form, including SGPS entities. In this case, the claimant successfully initiated arbitration proceedings challenging ten additional VAT assessments, demonstrating that holding companies have full access to the administrative arbitration system for resolving VAT disputes, subject to applicable procedural requirements and jurisdictional limits.

What criteria determine the right to deduct input VAT for holding companies with mixed activities?

The criteria for deducting input VAT for holding companies with mixed activities are: (1) Nexus requirement: input VAT must have a direct and immediate link to taxable output activities (management services provided to portfolio companies); (2) Economic activity test: the holding company must engage in economic exploitation of property for consideration, not merely passive shareholding; (3) Activity segregation: expenses must be categorized as related exclusively to taxable activities (fully deductible), exclusively to exempt/non-economic activities (non-deductible), or common to both (subject to pro-rata); (4) Pro-rata calculation: for common expenses, deduction is limited to the proportion of taxable turnover under Article 23 CIVA; (5) Documentary evidence: the taxpayer must maintain adequate records demonstrating the connection between inputs and taxable outputs; (6) Substantive management: the holding company must demonstrate active, substantive involvement in portfolio company management beyond mere oversight; (7) EU law compliance: interpretation must respect the VAT Directive and CJEU jurisprudence on fiscal neutrality and the fundamental right to deduction. The burden of proof rests with the taxpayer to establish these criteria are met.

What is the procedure for filing a request for arbitral pronouncement (pedido de pronúncia arbitral) under the RJAT?

The procedure for filing a request for arbitral pronouncement (pedido de pronúncia arbitral) under the RJAT (Legal Regime of Tax Arbitration) involves: (1) Submit a request for constitution of an arbitral tribunal to CAAD within the applicable deadline, identifying the contested acts and legal grounds; (2) Pay the initial arbitration fee; (3) The CAAD President reviews the request for formal compliance and either accepts or rejects it; (4) If accepted, parties are notified and the Deontological Council appoints arbitrators (one or three depending on the case value); (5) Parties may challenge arbitrator appointments within 10 days; (6) The arbitral tribunal is formally constituted once arbitrators accept and any challenges are resolved; (7) The Tax Authority submits its response within 30 days; (8) The tribunal may order preliminary proceedings, hearings, or additional evidence; (9) The tribunal issues a written decision within 6 months (extendable); (10) The decision has the same enforceability as court judgments and may be appealed to the Court of Appeal on limited grounds. In this case, the tribunal was constituted on June 3, 2016, following the standard procedural timeline after the request was filed on March 21, 2016.

VAT Deduction Rights for SGPS Holding Companies: Mixed Taxable Persons Under Portuguese Tax Law

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

II – CLARIFICATION

III – ON THE MERITS

III.1. Proven Facts

III.2. Facts Not Proven

III.3. Justification for the Determination of the Facts

III. 4. THE LAW

1. On the nature and scope of the exercise of the right to deduction under VAT

2. On the concept of economic activity and the connection with the right to deduct VAT upstream relating to the acquisition of shareholdings

3. Application of Doctrine and Case Law to the Concrete Case

Frequently Asked Questions

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Table of Contents

VAT Deduction Rights for SGPS Holding Companies: Mixed Taxable Persons Under Portuguese Tax Law

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

I. REPORT

II – CLARIFICATION

III – ON THE MERITS

III.1. Proven Facts

III.2. Facts Not Proven

III.3. Justification for the Determination of the Facts

III. 4. THE LAW

1. On the nature and scope of the exercise of the right to deduction under VAT

2. On the concept of economic activity and the connection with the right to deduct VAT upstream relating to the acquisition of shareholdings

3. Application of Doctrine and Case Law to the Concrete Case

Frequently Asked Questions

Tags

FRESH Legal Group

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