VAT Deduction Rights for SGPS Holding Companies: Activity Concept in Arbitration 179/2016-T

ARBITRAL DECISION

The arbitrators José Poças Falcão (presiding arbitrator), Ricardo Rodrigues Pereira and Luís Janeiro, appointed by the Ethics Council of the Center for Administrative Arbitration to constitute the Arbitral Tribunal, hereby agree as follows:

I. REPORT

1. On March 21, 2016, the commercial company A…, SGPS, S. A., NIPC…, with registered office in…, …, Lisbon (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraphs 1, subparagraph a), and 2, of Decree-Law no. 10/2011, of January 20, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, abbreviated as RJAT).

1.1. The Claimant seeks the declaration of illegality and consequent annulment of additional Value Added Tax (VAT) assessments relating to the tax periods 1212T, 1303T, 1306T, 1309T, 1312T, 1403T, 1406T, 1409T, 1412T and 1503T.

For this purpose, it submitted 13 (thirteen) documents, without requesting the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.2. The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph a) of paragraph 1 of article 11 of the RJAT, the Chairman of the Ethics Council of CAAD appointed as arbitrators of the collective Arbitral Tribunal Mr. José Poças Falcão, Mr. Ricardo Rodrigues Pereira and Mr. Luís Janeiro, who communicated acceptance of their appointment within the applicable deadline.

1.3. On May 18, 2016, the parties were duly notified of this appointment, neither having manifested the intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraphs b) and c), of the RJAT and articles 6 and 7 of the CAAD Code of Ethics.

1.4. Thus, in conformity with the provision of subparagraph c) of paragraph 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on June 3, 2016.

1. To support its request, the Claimant alleged, in a concluding summary of its own drafting, the following:

"A. There are ten tax acts that are the subject of the request for arbitral pronouncement by the Arbitral Tribunal, that is, the Additional Assessments that were issued as a consequence of an internal inspective action of partial scope, in the area of VAT;

B. At issue is the deductibility of VAT borne by A… for purposes of providing services to its subsidiaries, services that include advisory services in defining strategic and business positioning, financial advisory services in relation to banking entities and preparation of business plans, and legal advisory services;

C. In the first quarter of 2015, the Claimant requested VAT reimbursement in the amount of € 69,763.7;

D. And in the context of the inspection procedure that followed such request, the AT concluded that the Claimant, as a SGPS, is not permitted to deduct the VAT incurred in providing the aforementioned services, supporting its conclusion, in part, on the understanding expressed in Circular Letter;

E. According to the Inspection Report, it is irrelevant for this purpose to determine whether the taxpayer has or does not have direct or indirect interference in the management of the subsidiaries;

F. However, the right to deduction constitutes a fundamental element of the common VAT system, which permits the taxpayer to exclude from its burden the VAT borne upstream, not reflecting it as an operational cost of its activity and thereby guaranteeing the economic neutrality of the tax;

G. And that, to that extent, it cannot be restricted beyond what is permitted in the VAT Directive, in accordance with the jurisprudence of the CJEU, under penalty of violation of EU law;

H. But it is precisely this restriction, unlawful and unconstitutional, that is created by the Circular Letter, which in this case was reflected in the total denial of the right to deduction.

I. In any event, and even if by some means – which is admitted only for the sake of argument, without conceding – the understanding expressed in the Circular Letter could be considered legitimate, no conforming effect on the activities of individuals could ever be derived from it, since generic guidelines are only binding on the AT's own services, never on taxpayers;

J. Indeed, it is now evident that national courts are obliged to disregard not only the application of rules, but also of administrative acts of national authorities, such as the AT, when these are contrary to EU law;

K. Specifically, the annulment of the Additional Assessments is required in this case because they are not in conformity with the consistent jurisprudence of the CJEU on the right to deduction of tax incurred by holding companies;

L. The definition of the sole corporate object of a SGPS does not, by itself, affect its classification for VAT purposes, since the performance of an activity consisting of acquisition, holding and disposition of equity investments is not incompatible with meeting the concept of economic activity;

M. In reality, such activity is understood to be that carried out by a holding company that actively intervenes in the management of its subsidiaries, which may be evidenced by the provision of administrative, accounting or computer services, by way of example;

N. On the other hand, for purposes of exercising the right to deduction, it is necessary that upstream operations have a nexus with downstream operations that confer the right to deduction;

O. However, in the AT's view, only direct attribution of services provided by third parties to each of the subsidiaries would permit the exercise of the right to deduct VAT, which, as has been demonstrated, finds no legal or jurisprudential support;

P. And this even though the jurisprudence of the CJEU is absolutely settled in recognizing the full right to deduct VAT if that 'direct link' is established between the inputs whose VAT is deductible and a defined set of taxable economic activities.

Q. The CJEU has also confirmed the right to deduct VAT incurred in the acquisition of goods and services when such expenses may be qualified as 'general expenses of the activity' and form part of the constituent elements of the price of operations subject to and not exempt from VAT, as manifestly occurs in the present case;

R. In this sense, it is necessary to observe whether the inputs relate to the maintenance of the source producing the taxable activity, thereby ascertaining whether these costs are capable of being reflected in the formation of the prices of taxable outputs;

S. However, the AT asks for the impossible when it immediately concludes that the services were acquired solely and exclusively in the interest of the SGPS, in the context of its activity of managing and administering equity investments;

T. Forgetting, perhaps, that this is precisely the purpose of a SGPS, not only when it holds equity investments, but also when it provides services to its subsidiaries;

U. And, in doing so, the AT issued illegal Additional Assessments, whose annulment is requested, for all due purposes."

2.1. The Claimant concludes its initial pleading by requesting the following:

"Accordingly, and taking into account all the facts and arguments set forth, the Claimant respectfully requests of this learned Tribunal the full granting of the request for arbitral pronouncement that is the subject of this present petition, determining, in conformity:

(i) the annulment of the Additional Assessments, on the ground of their illegality, with the other consequences resulting from that same annulment; and

(ii) by virtue of that annulment, condemning the AT to pay indemnificatory interest calculated on the amount improperly paid, in accordance with the provisions of article 43 of the LGT."

1. On July 8, 2016, the Respondent, duly notified to do so, filed its Response in which it raised a procedural exception of material incompetence of the Arbitral Tribunal and specifically impugned the arguments advanced by the Claimant, having concluded by the merits of that exception, with its consequent absolution from the proceeding or, if that is not understood, by the lack of merit of the present action, with its consequent absolution from the claim.

3.1. In essence and also briefly, it is important to highlight the most relevant arguments on which the Respondent based its Response:

The Respondent begins by invoking the exception of incompetence of the Arbitral Tribunal ratione materiae, advancing the following argument:

The Claimant does not come to challenge assessment acts of taxes but correction amounts that were made to it within the scope and as a consequence of a reimbursement request that it filed "in the periodic declaration of the tax period 15/03T", with only the amount of correction that originated tax payable additionally being that contained in the "VAT assessment statement" no.…, in the amount of € 172.50, relating to the tax period 2015/03T and resulting from the settlement of accounts between the reimbursement amount requested and the corrections made in the context of the inspective procedure.

Now, if the object of the present proceedings consists of the tax corrections made as a consequence of a reimbursement request that ultimately resulted in a settlement of accounts, then this arbitral tribunal shows itself to be materially incompetent to know of such request, since the corrections that were made represent the complete denial of that reimbursement and not tax assessment acts.

In reality, neither the correction acts made and identified by the Claimant, nor the assessment statement no. 2015…, have the nature of assessment acts in the strict sense susceptible to arbitral challenge.

To that extent, we are faced with a procedural exception of absolute incompetence of the arbitral forum to know of the matter to which the request filed in the scope of the present proceedings refers, therefore the same cannot proceed.

Next, the Respondent proceeds to defend itself by impugning, arguing the following which we highlight here:

The disputed question concerns the susceptibility of a company that is a Manager of Equity Participations, like the Claimant, to deduct VAT borne in the acquisition of goods and services related to certain types of activities related to the management of equity participations, which according to the understanding of the Tax Administration is not considered to be covered by the concept of economic activity and, to that extent, does not permit the deduction of tax borne upstream in accordance with the provisions of article 20 of the CIVA.

The question also arises of what should be understood by economic activity for purposes of VAT.

The understanding supported by the Tax Administration is that contained in Circular Letter no. 30103, of April 23, 2008, where in its "Item VII - Concepts - B - Operations excluded from the concept of economic activity", it clarified the meaning and scope of article 23 of the CIVA, which came to apply, precisely, the Community discipline on the deduction regime, harmonizing it, and dispelling the doubts raised by the previous wording of the article in question (making it compatible with paragraph 5 of article 17 of the Sixth Directive, which corresponds to article 173 of the VAT Directive).

It follows from articles 168 and 169 of the VAT Directive that the taxable person can deduct the tax borne upstream to the extent that the goods and services are used for the realization of operations considered as constituting the concept of economic activity and that do not constitute exempt operations, without right to deduction (taxable outputs). Thus, the tax borne with inputs related to goods and services intended to be used in operations not subject, outside the scope of application of the tax, or that being exempt do not confer the right to deduction, cannot be deducted.

In the case now in question, since the services acquired are used solely and exclusively in the exercise of the activity of managing equity participations, it follows that the now Claimant is denied the right to deduction, in its entirety; and, as appears from the Tax Inspection Report, the Claimant neither proved nor discriminated which services it provided to its associates and to that extent the causal nexus between the services provided to its associates and the realization of the expenses it incurred, essential to the legitimation of the exercise of its right to deduction, remained undemonstrated.

Indeed, being it impossible to effect the separation between expenses, which are or are not connected with the services provided by the now Claimant, the VAT borne cannot be deducted in its entirety. Furthermore, the mere acquisition and management of equity participations does not constitute the exploitation of an asset with a view to producing income with the character of permanence and as such are operations excluded from the concept of economic activity. It is the mere enjoyment of an asset, hence the interest or dividends resulting from it constitute mere fruits resulting from the ownership of an asset and not proceeds derived from its exploitation.

To that extent, there is no doubt that the main activity of the Claimant, of managing the equity participations held by it, cannot be considered as economic, which is why the legal regime itself of SGPSs qualifies it as an "indirect form of exercise of economic activities".

Thus, it is concluded that the Claimant could never be considered a taxable person with the right to full deduction, that is, with the right to deduct 100% of the VAT borne on the inputs of its activity. In fact, the Claimant constitutes itself as a SGPS whose object consists of the activity of managing a set of equity participations in other companies, which constitute its assets, from which it derives the fruits (in the form of dividends, interest on loans, etc.) on which it depends, almost exclusively for the fulfillment of the obligations that are imposed on it and assumed by it.

In the present proceedings we are faced with expenses arising from the exercise of the Claimant's main activity, aiming solely and exclusively to serve its interests, and being related to its quality as a managing shareholder of equity participations, constituting a direct and necessary extension of the same, although it is admitted that they may have indirect effects on the activity of the subsidiaries; therefore, the VAT borne does not show itself to be susceptible of being deducted.

Furthermore, contrary to what is argued by the Claimant, no proof capable of proving its right to deduction was submitted to the proceedings, proof that is necessary for it to exercise that right.

The Respondent concludes its pleading thus:

"Accordingly, with the learned supplementation of Your Excellencies, the procedural exception of material incompetence of this Arbitral Tribunal should be judged well-founded, accordingly absolving the entity Respondent from the proceeding, or if that is not understood, the present request for arbitral pronouncement should be judged lacking merit, by not proven, and, consequently, the Respondent absolved of all claims with the legal consequences."

3.2. At the same time, the Respondent submitted to the proceedings the respective administrative file (hereinafter, abbreviated as PA).

1. The Tribunal dispensed with the holding of the meeting to which article 18 of the RJAT refers and set November 30, 2016 as the deadline for the issuance of the arbitral award.

2. Both parties submitted written submissions, in which they reiterated the positions previously assumed in their respective pleadings.

II. DISMISSAL OF PRELIMINARY ISSUES

The Arbitral Tribunal was regularly constituted.

The proceedings are not affected by any nullities.

The parties possess legal standing and capacity, are duly represented, and are legitimate.

The cumulation of claims is admitted, since it is established that their merits depend essentially on the appraisal of the same circumstances of fact and on the interpretation and application of the same principles or rules of law (cf. article 3, paragraph 1, of the RJAT).

II.1. THE INCOMPETENCE OF THE ARBITRAL TRIBUNAL RATIONE MATERIAE

The Respondent raised this exception, invoking the following argument which we hereby recover:

The Claimant does not come to challenge assessment acts of taxes but correction amounts that were made to it within the scope and as a consequence of a reimbursement request that it filed "in the periodic declaration of the tax period 15/03T", with only the amount of correction that originated tax payable additionally being that contained in the "VAT assessment statement" no.…, in the amount of € 172.50, relating to the tax period 2015/03T and resulting from the settlement of accounts between the reimbursement amount requested and the corrections made in the context of the inspective procedure.

Now, if the object of the present proceedings consists of the tax corrections made as a consequence of a reimbursement request that ultimately resulted in a settlement of accounts, then this arbitral tribunal shows itself to be materially incompetent to know of such request, since the corrections that were made represent the complete denial of that reimbursement and not tax assessment acts.

In reality, neither the correction acts made and identified by the Claimant, nor the assessment statement no. 2015…, have the nature of assessment acts in the strict sense susceptible to arbitral challenge.

To that extent, we are faced with a procedural exception of absolute incompetence of the arbitral forum to know of the matter to which the request filed in the scope of the present proceedings refers, therefore the same cannot proceed.

The Claimant pronounced itself on this exception, arguing for its lack of merit, in the following terms which it is important to highlight here:

"The ground of a claim for annulment of tax acts will always have to relate to a divergence between the judgment formulated by the AT and by the taxpayer regarding some aspect of the underlying tax legal relationship – in this case, whether or not the now Claimant is entitled to deduct VAT.

However, such 'logical dependency' does not justify the conclusion that the object of the Arbitral Request becomes the set of corrections to the deduction of VAT that are at the origin of the Additional Assessments.

It is inevitable that the illegality of such corrections is the ground, the cause of action; but it is the annulment of the Additional Assessments that constitutes the claim, the cause of action.

And it is certain that, as a result of the said corrections, the AT issued illegal Additional Assessments, whose annulment is requested in the Arbitral Request.

It is not in question, it is reiterated, the denial of the reimbursement request, which was simply the catalyst for the tax inspection that would result in the said Additional Assessments.

Additional Assessments that, moreover, the AT identified and numbered as such, indicating to the now Claimant the normal means of administrative review and contentious challenge.

Therefore, in total harmony with the arbitral jurisprudence on the matter, the competence of this Arbitral Tribunal is incontestable."

Given that the scope of competence ratione materiae of the tribunal is of public order and its knowledge precedes that of any other matter (art. 13 of the CPTA applicable ex vi art. 29, paragraph 1, subparagraph c), of the RJAT) and that the violation of the rules of competence ratione materiae determines the absolute incompetence of the tribunal, which is to be examined ex officio (art. 16, paragraphs 1 and 2, of the CPPT applicable ex vi art. 29, paragraph 1, subparagraph a), of the RJAT), it is necessary to appreciate, primarily, the procedural exception raised by the Respondent concerning the incompetence of the arbitral tribunal.

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124 of Law no. 3-B/2010, of April 28, it is proclaimed, as a primary directive of the institution of arbitration as an alternative form of jurisdictional resolution of disputes in tax matters, that "the tax arbitral process must constitute an alternative procedural means to the judicial impugning process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial impugning process is a procedural means that has as its object an act in tax matters, aiming to appraise its lawfulness and decide whether it should be annulled or its nullity or non-existence declared, as follows from article 124 of the CPPT.

By analysis of articles 2 and 10 of the RJAT, it is verified that only questions concerning the lawfulness of assessment acts or acts fixing the taxable matter and second-instance acts that have as their object the appraisal of the lawfulness of acts of those types, acts whose appraisal is inserted within the scope of judicial impugning processes, as results from subparagraphs a) to d) of paragraph 1 of article 97 of the CPPT, were included in the competencies of the arbitral tribunals functioning in the CAAD.

That is, it is ascertained that the legislator did not implement in the legislative authorization, insofar as it was foreseen the extension of the competencies of the arbitral tribunals to questions that are appraised in tax tribunals through an action for recognition of a right or legitimate interest.

But, in harmony with the intention underlying the legislative authorization to create an alternative means to the judicial impugning process, it should be understood that, as for requests for declaration of illegality of acts of the types referred to in its article 2, the arbitral tribunals functioning in the CAAD have the same competencies that state tribunals have in judicial impugning proceedings, within the limits defined by the undertaking that the Tax and Customs Authority came to make through Ordinance no. 112-A/2011, of March 22, pursuant to article 4, paragraph 1, of the RJAT.

Despite there being no express norm to that effect, it has been peacefully understood that, although the judicial impugning process has as its primary object the declaration of nullity or non-existence or the annulment of acts of the types referred to, condemnations of the Tax Administration to pay indemnificatory interest and compensation for wrongful guarantee can be issued within it.

Given this legal framework, it must be concluded that the competence of the arbitral tribunals functioning in the CAAD for appraising the lawfulness of acts denying reimbursement requests is not expressly provided.

That said, turning to the concrete case, it is necessary to examine the documents which, under nos. 1 to 10, are attached to the initial request, resulting from that analysis the following literal elements:

a) All documents numbered 1 to 9 contain the following mentions:

(i) "Additional Assessment made based on correction made by Tax Inspection Services";

(ii) "Assessment No."; and

(iii) "From the assessment made, you may, within 120 days, file an administrative review claim to be filed with the competent Finance Service or within three months, judicial impugning to be filed with the competent Tax Tribunal or Finance Service, in accordance with articles 70 and 102 et seq. of the Tax Procedure and Process Code (CPPT)."

b) Document no. 10 contains the following language:

(i) "VAT Assessment Statement";

(ii) "Assessment made based on correction made by Tax Inspection Services";

(iii) "From this assessment, Your Excellency may file, with the competent Finance Service, an administrative review claim or judicial impugning, in accordance with articles 70 and 102 of the same Code."

On an identical legal question, emerging from a factual situation with contours equal to that which presents itself here, arbitral tribunals constituted under the aegis of the CAAD have already pronounced themselves, with emphasis on the decision handed down in the arbitral award in proceeding no. 238/2013-T, to which we adhere, aiming, in that way, "to obtain a uniform interpretation and application of law" (cf. article 8, paragraph 3, of the Civil Code).

Following in the footsteps of that arbitral decision, it is our understanding that, faced with the documentary elements available, it should be concluded that, in the concrete case, whether well or poorly executed, 10 (ten) assessment acts were practiced, embodied in the documents notified to the Claimant and attached, under nos. 1 to 10, to the initial request.

The lawfulness of such acts – well or poorly executed – is susceptible to being appraised and is directly within the scope of the competencies of the arbitral tribunals functioning in the CAAD, specifically in subparagraph a) of article 2 of the RJAT, which means the lack of merit of the invoked exception of absolute incompetence of this Arbitral Tribunal.

Furthermore, as is mentioned in the cited arbitral judgment which we are following, "for a long time it has been understood that administrators should not be prejudiced in the exercise of procedural rights when they are misled by acts of competent public entities, a rule that has explicit manifestations, for the courts, in article 157, paragraph 6, and in article 191, paragraph 3, of the CPC of 2013 (prior articles 161, paragraph 1, 198, paragraph 3) and for acts of the administration, in article 7 of the CPA and in article 60, paragraph 4, of the CPTA.

That is, it has been understood, in short, that when an administrator is misled to use a particular procedural means by a particular conduct of the Administration, the latter cannot attempt to prevent the knowledge of the merits of the claim, taking refuge in the inadequacy of the procedural means whose use it itself, objectively, induced.

In the case, there is even doctrine, (JOSÉ XAVIER DE BASTO and GONÇALO AVELÃS NUNES), defending that, "a reimbursement contested by the tax administration is entirely equivalent to a tax assessment and the means of reacting against that act of administration, which denies or revokes a reimbursement, are identical to those that the law places at the disposal of taxpayers to annul, in whole or in part the assessment of the tax", a thesis that is in harmony with the application, determined by article 22, paragraphs 11 and 13 of the CIVA, to the acts of denial of reimbursement requests of the means of administrative and contentious challenge of VAT assessment acts, provided for in article 93 of the same Code.

In this context, since it is the Tax Administration itself that in the notification identified the notified act as being a VAT assessment, inducing the Claimant to use a procedural means adequate to its challenge, and it being uncertain that such qualification is wrong (as cannot but be understood when it is ascertained that the adequacy of such qualification is affirmed by two reputed university professors of tax law) furthermore, also by this route, the exception raised by the Tax and Customs Authority would have to be judged to lack merit."

There are no other exceptions or preliminary issues that prevent the knowledge of merit and that it is necessary to know.

III. REASONING

III.1. ON THE FACTS

§1. PROVEN FACTS

The following facts are considered proven:

a) The Claimant is a commercial company that is classified by the main activity of "COMPANY MANAGERS OF NON-FINANCIAL EQUITY PARTICIPATIONS" (CAE…), having commenced its activity on December 14, 2012, being classified under the normal VAT regime with quarterly periodicity (mixed with real allocation of all assets) and under the general regime for purposes of corporate income tax. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

b) The Claimant is part of a corporate group whose controlling company is "B…, SGPS, S. A." (NIPC…), which holds 95% of its capital, with the remaining 5% held by the company "C…, S. A." (NIPC…). [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

c) The incorporation of "B…, SGPS, S. A." had as its objective the implementation of the acquisition of a set of assets, credits and companies in the real estate and tourism sector, included in the previously named business group "Group D…" ("Group D…").

d) In accordance with the strategy outlined, the subsidiaries of "B…, SGPS, S. A." – which includes the Claimant – implemented the acquisition of credits held by various financial institutions over the companies of "Group D…", such acquisition being financed by shareholder loans.

e) Subsequently, an overall restructuring agreement of "Group D…" was entered into with the then shareholder of the debtor companies of the credits acquired by the various subsidiaries of "B…, SGPS, S. A.", in which were included extrajudicial recovery agreements for various companies of that group, restructuring framework agreements, a promise-to-sell contract and an option contract for the purchase of shares and shareholder credits.

f) Following the execution of the aforementioned contracts, "B…, SGPS, S. A." and its subsidiaries concentrated on managing the relationship between the financial entities and the companies of "Group D…" for the granting of specific financings that would permit the restructuring of the same, with the ultimate objective of, through the completion of the respective process of corporate reorganization, rationalizing the holding of credits and equity participations transforming "Group D…" into "Group E…".

g) The Claimant holds equity participations in the following commercial companies, corresponding to 100% of their respective capital: "F…, S. A." (NIPC…), "G…, Lda." (NIPC…) and "H…, S. A." (NIPC…). [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

h) The Claimant holds a direct participation of 45% and an indirect participation of 55% in the commercial company "I…, S. A.", NIPC… (through its subsidiary "H…, S. A." which fully holds the commercial company "J…, S. A." which, in turn, holds an equity participation of 55% in "I…, S. A."). [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

i) On January 30, 2015, the Claimant executed a management services provision contract with the commercial company "I…, S. A.", providing for the provision of the following management services, in accordance with its respective clause 1: "… advisory services in defining strategic and business positioning; financial advisory services in relation to banking entities and preparation of business plans; and legal advisory services". [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

j) The compensation for the services provided under that contract was stipulated in its respective clause 2, with three types of payments being provided for: the first, on the date of execution of the contracts for management services provided until that date; the second, for services provided after the date of execution of the contract and during the year 2015; and, a third, to be paid annually after 2015. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

k) In the periodic VAT declaration for the first quarter of 2015, the Claimant made a request for tax reimbursement in the amount of € 69,763.71, which corresponds to the credit formed since the beginning of its activity. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

l) On June 4, 2015, Service Order no. OI215…, with extension to the first quarter of the fiscal year 2015, was opened in the Tax Inspection Services of the Finance Office of Lisbon, in which the VAT resulting from the aforementioned reimbursement request made by the Claimant in the periodic VAT declaration 201503T was analyzed. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

m) That inspective procedure was internal and of partial scope, with its extension being expanded to the tax period 201212T, since it was in this period that the reclaimed VAT credit began to form, in successive carryforwards and accumulation. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

n) During the analysis of the said reimbursement request, Service Orders nos. OI2015…, OI2015… and OI2015… were opened in the Tax Inspection Services of the Finance Office of Lisbon. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

o) The Claimant was notified, through office no.…, of June 16, 2015, of the Tax Inspection Services of the Finance Office of Lisbon, to send additional elements, which were sent on June 25, 2015. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

p) On August 13, 2015, through office no. … of the Tax Inspection Services of the Finance Office of Lisbon, the Claimant was requested to, regarding all services acquired, from the fourth quarter of 2012 to the first quarter of 2015, and regarding which it bore and deducted tax, to indicate: the detailed description of the service that is the object of the document; the subsidiary that directly benefited from the acquisition of that service and the detailed description of the direct benefit received by the subsidiary. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

q) The Claimant replied on August 25, 2015, in the following terms [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]:

[Document content maintained as per original]

r) On that same occasion, the Claimant also sent a listing – which constitutes Annex no. 1 to the Tax Inspection Report and which is hereby given as entirely reproduced herein – with the following information relating to the documents whose borne tax was deducted by it: VAT period, name of document, NIF of supplier, object of document, value of service (without VAT) and subsidiary. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

s) With respect to the subsidiary, some of the documents listed in that listing – included in the VAT periods 1212T, 1303T, 1306T, 1312T, 1403T, 1406T and 1412T – contain the mention "Group D…", with other documents – included in the VAT periods 1212T, 1303T, 1306T, 1309T, 1312T, 1403T, 1406T, 1409T and 1503T – containing the mention "N/A". [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

t) Through office no.…, dated November 4, 2015, of the Tax Inspection Services of the Finance Office of Lisbon, the Claimant was notified of the Draft Tax Inspection Report and, if it wished, to exercise the right to be heard, with the following corrections being proposed in the area of VAT [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]:

[Document content maintained as per original]

u) The Claimant did not exercise that right to be heard, therefore the aforementioned corrections proposed in the area of VAT were entirely maintained in the Tax Inspection Report, with the reasoning contained therein and which is hereby given as entirely reproduced herein. [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

v) The Claimant was notified of the Tax Inspection Report, through office no.…, dated December 4, 2015, of the Tax Inspection Services of the Finance Office of Lisbon, sent by registered mail (RD…PT). [cf. PA attached to the proceedings and Doc. no. 11 attached to the initial request]

w) As a result of the aforementioned corrections, the following additional VAT assessments were made [cf. PA attached to the proceedings and Docs. nos. 1 to 10 attached to the initial request]:

• Additional assessment no.…, with the correction value of € 476.17, relating to the tax period 1212T;

• Additional assessment no.…, with the correction value of € 36,753.93, relating to the tax period 1303T;

• Additional assessment no.…, with the correction value of € 16,514.00, relating to the tax period 1306T;

• Additional assessment no.…, with the correction value of € 233.29, relating to the tax period 1309T;

• Additional assessment no.…, with the correction value of € 8,517.82, relating to the tax period 1312T;

• Additional assessment no.…, with the correction value of € 1,419.43, relating to the tax period 1403T;

• Additional assessment no.…, with the correction value of € 1,995.25, relating to the tax period 1406T;

• Additional assessment no.…, with the correction value of € 276.00, relating to the tax period 1409T;

• Additional assessment no.…, with the correction value of € 3,400.32, relating to the tax period 1412T; and

• Additional assessment no. 2015…, with the correction value to be paid of € 172.50, relating to the tax period 1503T, with voluntary payment deadline of February 18, 2016.

x) The Claimant did not proceed to voluntarily pay the aforementioned amount of € 172.50, therefore enforcement proceedings no. …2016… were commenced against it, in the Finance Service of Lisbon-…, for coercive collection of that value and legal accruals. [cf. Doc. no. 12 attached to the initial request]

y) On March 2, 2016, the Claimant proceeded to pay in full the amount owed (€ 193.41). [cf. Doc. no. 13 attached to the initial request]

z) On March 21, 2016, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings. [cf. CAAD's procedural management information system]

§2. FACTS NOT PROVEN

With relevance for the appraisal and decision of the case, there are no facts that have not been proven.

§3. REASONING REGARDING FACTUAL MATTERS

With regard to the proven factual matters, the conviction of the Tribunal was based on the facts alleged by the parties, whose correspondence with reality was not called into question, on the documents and on the administrative file attached to the proceedings.

III.2. ON LAW

The epicenter of the disagreement between the parties in the case sub judice is based on the existence or not of the right to deduct VAT borne by the Claimant with the acquisitions of services documented by the invoices contained in the listing that constitutes Annex no. 1 to the Tax Inspection Report (cf. proven fact r)) and which, according to it, aimed at the provision of advisory services in defining strategic and business positioning, financial advisory services in relation to banking entities and preparation of business plans, and legal advisory services to its subsidiaries.

In the Claimant's view, the realization of transactions subject to and not exempt from VAT consisting of services provided by the holding company to its subsidiaries is sufficient for the conclusion that the same exercises an economic activity and, to that extent, that it has the right to deduct the VAT incurred for its respective development. Consequently, the Claimant continues, it is legitimate the right to deduction of VAT given the nature of the activity it actually developed.

From the Respondent's perspective, the aforementioned services acquired by the Claimant were used solely and exclusively in the exercise of the activity of managing equity participations and, to that extent, the Claimant is denied the right to deduction of VAT, in its entirety. The Respondent further adds that the Claimant neither proved nor discriminated which services it provided to its subsidiaries and, therefore, the causal nexus between the services provided to its subsidiaries and the realization of the expenses it incurred, essential to the legitimation of the exercise of its right to deduction, remained undemonstrated.

That said.

It was proven that the Claimant is a SGPS (cf. proven fact a)), holding equity participations, corresponding to 100% of their respective capital, in "F…, S. A.", "G…, Lda." and "H…, S. A." (cf. proven fact g)).

The Claimant further holds a direct participation of 45% and an indirect participation of 55% in the commercial company "I…, S. A." (through its subsidiary "H…, S. A." which fully holds the commercial company "J…, S. A." which, in turn, holds an equity participation of 55% in "I…, S. A.") (cf. proven fact h)).

As was equally proven, that on January 30, 2015, the Claimant executed a management services provision contract with the commercial company "I…, S. A.", providing for the provision of the following management services, in accordance with its respective clause 1: "… advisory services in defining strategic and business positioning; financial advisory services in relation to banking entities and preparation of business plans; and legal advisory services" (cf. proven fact i)). The compensation for the services provided under that contract was stipulated in its respective clause 2, with three types of payments being provided for: the first, on the date of execution of the contracts for management services provided until that date; the second, for services provided after the date of execution of the contract and during the year 2015; and, a third, to be paid annually after 2015 (cf. proven fact j)).

We can thus, from this proven factuality, consider it established that the Claimant has active and direct involvement in the management of its subsidiaries.

And it is, precisely, as a result of that involvement that the present dispute arises regarding the possibility of deducting or not the VAT borne by the Claimant in the upstream inputs, with the positions of the parties being unable to be more antagonistic: the Claimant seeks full deduction and the Respondent accepts no deduction of VAT whatsoever.

Entering, then, in the resolution of that disagreement – the same being to say, of the concrete case – we can, from now advance, that reason is on the side of the Claimant, given the proven factuality and what shall be explained hereinafter regarding the legal regimes of companies managing equity participations (SGPS) and the right to deduct VAT.

§1. THE LEGAL REGIME OF SGPS

The concept of holding company is generically used to refer both to companies that limit themselves to managing portfolios of securities passively, in a logic of risk allocation, and to companies that hold controlling interests and that actively intervene in the management of their subsidiaries, providing them or not with remunerated services.

It is customary to distinguish, among other modes, between the pure holding and the mixed holding and between the financial holding and the managing holding. In the first case, the distinguishing criterion resides in the exclusive character of its corporate object, with the pure holding dedicating itself only to the holding of equity participations and the mixed holding also having as its object activities of a commercial and industrial nature. In the second case, the differentiating criterion resides in the purpose to which the management of equity participations is destined, with the managing holding aiming, more than the mere holding of equity participations, at the framing and management of the subsidiary companies, whereas the financial holding is vocated only for the profitability of the investment concentrated in the participations.

With respect to SGPSs, we find its legal regime defined in Decree-Law no. 495/88, of December 30 – successively amended by Decree-Law no. 318/94, of December 24, by Decree-Law no. 378/98, of November 27 and by Law no. 109-B/21, of December 27 – which provides in its article 1 that SGPSs "have as their sole contractual object the management of equity participations in other companies as an indirect form of exercise of economic activities" (paragraph 1), with "participation in a company being considered an indirect form of exercise of the economic activity thereof when it does not have an occasional character and reaches, at least, 10% of the capital with voting rights of the subsidiary company, either by itself or through participations of other companies in which the SGPS is dominant" (paragraph 2), with it being considered that "participation does not have an occasional character when it is held by the SGPS for a period exceeding one year" (paragraph 3).

Pursuant to article 4 of the same statute, SGPSs are permitted "the provision of technical services of administration and management to all or some of the companies in which they hold participations or with which they have executed subordination contracts" (paragraph 1), with that provision of services being required to be "the object of a written contract, in which the corresponding compensation must be identified" (paragraph 2).

In this framework, it is customary to qualify the SGPS as a pure holding – in the just measure that it is limited as to its corporate object, in accordance with the above-mentioned terms, which prevents it from directly developing economic activities of a commercial, industrial or other nature other than the mentioned provisions of services – and as a managing holding – since its activity goes beyond the mere acquisition, holding and disposition of equity participations, being able, complementarily to its main activity, to provide, in certain circumstances, technical services of administration and management to all or some of the companies in which it has interests or with which it has executed subordination contracts.

In summary, it flows from the legal regime of SGPSs that the management of equity participations in other companies, as an indirect form of exercise of an economic activity, constitutes the sole corporate object that, legally, any SGPS may have and pursue; this without prejudice to, as we have already said, its respective activity exceeding the simple acquisition, holding and disposition of equity participations.

§2. THE RIGHT TO DEDUCT VAT

The mechanism of the tax credit is one of the pillars of VAT, probably the most important; indeed, "what makes VAT a tax on value added is the faculty that is attributed to each economic operator to deduct from the tax that it accounts for in its sales the tax incurred in its purchases, delivering to the state only the difference, when the balance is positive."[1]

This very point has been highlighted by the CJEU in various decisions, as is the case with the Petroma judgment (delivered on May 8, 2013 in Case C-271/12): "the right to deduction constitutes a fundamental principle of the common VAT system that cannot, in principle, be limited and that is exercised immediately in relation to all taxes that have burdened upstream operations (…). The deduction regime thus established aims to relieve the entrepreneur entirely of the burden of VAT due or paid in the context of all of his economic activities. The common VAT system thus ensures the neutrality as to the tax burden of all economic activities, regardless of their purpose or their result, provided that those activities are themselves, in principle, subject to VAT".

The mechanism of the tax credit thus serves to ensure the neutrality characteristic of VAT, avoiding the cumulative effect and ensuring that the tax is ultimately borne by the final consumer. The right to deduct VAT borne upstream thus has special relevance in the system of this tax.

The mechanism of the tax credit and the right to deduction are regulated in articles 167 to 192 of the VAT Directive (Directive no. 2006/112/EC of the Council, of November 28, 2006) which, in essence, provides that taxable persons have the right to deduct from tax accounted for in a Member State the tax that in that same Member State they have borne in the acquisition of goods or services, provided that these are intended exclusively for the realization of taxed operations or operations with full exemption. In cases where goods and services acquired by VAT taxable persons are intended exclusively for the realization of those operations, the right to deduct the tax borne upstream is full; if they are intended indiscriminately for the realization of those operations and of others that do not confer the right to deduction, the tax borne upstream is only deductible in part, the VAT Directive establishing different calculation methods for that purpose.

From a subjective perspective, article 168 of the VAT Directive provides that the right to deduction can only be exercised by those who are VAT taxable persons, as the Directive itself defines them; thus, the holders of the right to deduction are the taxable persons referred to in article 9 of the VAT Directive – persons who, independently, engage in a continuing economic activity, whatever its nature – as well as those who carry out isolated acts, whenever the Member States decide to consider them as taxable persons in accordance with article 12 of the VAT Directive. Those who become liable for the tax through the reverse charge mechanism provided for in articles 194 to 199 of the VAT Directive are also covered by the right to deduction.

From an objective perspective, article 168, subparagraph a), of the VAT Directive provides that, in principle, taxable persons can deduct tax borne in the acquisition of all and any goods and services from other taxable persons, provided that these are used for their taxed operations. Also in principle, only goods or services that create confusion between the personal sphere and the business sphere, to which article 176 of the VAT Directive alludes, are excluded from the right to deduction.

As clarifies Sérgio Vasques, the "reference to 'taxed operations' serves to make clear that only when the effective application of the tax in the active operations occurs does the deduction of tax incurred in the passive operations become possible. Conversely, when the active operations benefit from simple exemption, the right to deduction is excluded in principle and the taxable person comes to occupy a position similar to that of a final consumer, bearing within its sphere the tax relating to its acquisitions. Only when the active operations benefit from full exemption is the right to deduction kept intact, being to those exemptions that article 169 refers, in its subparagraphs b) and c)."[2]

The existence of a direct and immediate relationship between the goods and services acquired and one or more activities of supply of goods or provision of services that confer the right to deduction is, thus, in principle, indispensable for the right to deduct VAT incurred in the goods and services acquired to be recognized to the taxable person and for determining the extent of that right.

However, the CJEU has clarified that that direct and immediate relationship is not required with respect to each output individually considered, admitting that such connection is verified with respect to the taxable person's activity globally considered[3].

Thus, in the absence of an operation-by-operation nexus, the right to deduction subsists if a direct and immediate link with the set of economic activity developed is verified, insofar as this confers that right, that is, provided that such relationship exists between the upstream acquisitions and the taxable activities of the taxable person[4].

Recently, the CJEU went even further in addressing this question of the direct and immediate nexus between acquisitions and taxable downstream operations, having in the Sveda judgment[5] downplayed the requirement of direct use of the acquisition of goods or services, concluding that only by considering the ultimate purpose of the acquisition will one achieve the rationality and neutrality of the VAT system. By disregarding the immediate allocation of the input, considering its final connection, the CJEU considers, therefore, sufficient an indirect nexus, provided that it is demonstrated that the inputs are integrated into the ultimate objective of pursuing an activity that confers the right to deduction or insofar as it confers it.

The CJEU has thus been following the interpretive trend that gives prevalence to neutrality in the VAT system, moving away from restrictive formulas in its concrete application and, therefore, has emphasized, on various occasions, that the norms of the VAT Directive that provide for limitations of the right to deduction – articles 176 and 177 – have an exceptional character within the VAT system, derogating from the principle of neutrality, and therefore should always be subject to strict interpretation[6].

In the national legal order, the VAT Code defines that taxable persons of the tax are, among others, "natural or legal persons who, independently and with the character of habituality, engage in activities of production, commerce or provision of services, including extractive, agricultural activities and those of free professions, and, likewise, those who, in the same independent manner, carry out a sole taxable operation, provided that such operation is connected with the exercise of the aforementioned activities, wherever it occurs, or when, regardless of such connection, such operation meets the requirements of actual incidence of personal income tax (IRS) or corporate income tax (IRC)" (article 2, paragraph 1, subparagraph a)).

On the other hand, we find the right to deduct VAT regulated in articles 19 to 26 of the VAT Code, with the following norms being important to highlight here:

"Article 19

Right to Deduction

1. For determination of the tax due, taxable persons deduct, in accordance with the following articles, from the tax incident on the taxable operations that they carried out:

a) The tax due or paid for the acquisition of goods and services from other taxable persons;

(…)"

"Article 20

Operations That Confer the Right to Deduction

1. Only the tax that has been incident on goods or services acquired, imported or used by the taxable person for the realization of the following operations can be deducted:

a) Transfers of goods and provision of services subject to tax and not exempt from it;"

"Article 23

Deduction Methods Relating to Goods of Mixed Use

1. When the taxable person, in the exercise of its activity, effects operations that confer the right to deduction and operations that do not confer that right, in accordance with article 20, the deduction of tax borne in the acquisition of goods and services that are used in the realization of both types of operations is determined as follows:

a) In the case of a good or service partially allocated to the realization of operations not resulting from the exercise of an economic activity provided for in subparagraph a) of paragraph 1 of article 2, the tax not deductible as a result of that allocation is determined in accordance with paragraph 2;

b) Without prejudice to the provision of the preceding subparagraph, in the case of a good or service allocated to the realization of operations resulting from the exercise of an economic activity provided for in subparagraph a) of paragraph 1 of article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction.

1. Notwithstanding the provision of subparagraph b) of the preceding paragraph, the taxable person may effect deduction in accordance with the real allocation of all or part of the goods and services used, based on objective criteria that permit determining the degree of utilization of those goods and services in operations that confer the right to deduction and in operations that do not confer that right, without prejudice to the General Tax Directorate being able to impose special conditions on it or to cease that procedure in the event that it is verified that they cause or could cause significant distortions in taxation."

§2.1. THE CONCEPT OF ECONOMIC ACTIVITY FOR PURPOSES OF VAT

As mentioned above, it follows from article 9 of the VAT Directive that those who independently develop an economic activity, whatever its purpose or result, are generically considered VAT taxable persons. Thus, the quality of taxable person of the tax stems from the realization of operations integrated within the scope of the objective incidence of the tax, which, first and foremost – that is, before being qualified as transfers of goods or provision of services – must constitute an economic activity.

The exercise of an economic activity thus constitutes, in this manner, the presupposition on which the subjective and objective incidence of VAT rests. Indeed, no one can be said "taxable person" who does not conduct an economic activity nor when this is lacking can we be faced with taxable transfers of goods or provision of services. The delimitation of the notion of economic activity becomes, thus, an exercise of the greatest importance in the application of the tax and a particularly delicate exercise insofar as VAT, as a general consumption tax, possesses a vocation of universality. Whatever constitutes economic activity must be defined in terms as broad as possible, if we wish to guarantee neutrality and equality of the tax"[7].

Article 9 of the VAT Directive determines that economic activity should be understood as "any activity of production, commercialization or provision of services, including extractive, agricultural and free professions or equivalent activities".

This is a notion of economic activity that generically encompasses all production and commerce of goods and any and all provision of services, whatever its nature. Faced with such a broad notion of economic activity, the CJEU has come to be called upon to fix the limits of what should be considered as having or not having economic content.

One of the types of operations whose economic content is revealed to be controversial within the VAT system is that concerning operations relating to equity participations, which are of special complexity.

The qualification of these operations as economic or not has important consequences in the application of VAT, with the most relevant being conditioning the right to deduction.

§2.2. SGPS AND OPERATIONS RELATING TO EQUITY PARTICIPATIONS

"The starting point for the framework of equity participations for VAT purposes is the Polysar judgment, of 1991 [delivered on June 20, 1991, in Case C-60/90], in which the CJEU fixes the principle that the acquisition and holding of equity participations does not represent true economic activity. A company that limits itself to acquiring and managing equity participations does not carry out genuine transfers of goods or provision of services but mere capital applications. (…)

In the eyes of the CJEU, the acquisition and holding of participations can only be said to be economic activity if it involves "direct or indirect interference" in the management of the subsidiaries. Whenever a holding actively intervenes in the management of the subsidiaries we can say that through them it exercises an economic activity, justifying recognition of its quality as a taxable person and the right to deduct VAT in which it incurs upstream.

The conditions in which the management of participations can give rise to economic activity were summarized somewhat further in the Harnas & Helm judgment, of 1997 [delivered on February 6, 1997, in Case C-80/95]. In this judgment, the CJEU held that these operations give body to economic activity when one of three conditions is met: (a) being carried out within the framework of a commercial activity of trading in securities; (b) being carried out with a view to ensuring direct or indirect interference in the management of the company in which participation was taken; or (c) constituting the direct, permanent and necessary extension of a taxable activity. (…)

As for the holding of participations, we must consider it always an operation devoid of economic content and, therefore, outside the scope of application of the tax [in this sense, the Sofitam judgment (delivered on June 22, 1993, in Case C-333/91) of the CJEU]. (…)

As for the acquisition of equity participations, the CJEU is of the understanding that this does not give body to an economic activity for purposes of VAT, excepting the three conditions that we have already referred to. It is certain that here too one can say that there is economic activity when the acquisition aims at "direct or indirect interference" in the management of the subsidiary. However, if we look carefully, the scope of the qualification is in this case limited, insofar as the acquisition of participations constitutes a passive operation and not an active operation. The costs incurred with an acquisition of participations – costs with legal or financial advice, for example – cannot therefore be associated with a concrete downstream operation, being able only to be associated with the general activity that the enterprise develops. Those costs never constitute direct costs but general expenses, similar to the expenses in which an enterprise incurs with a view to the acquisition of so many other assets.

Thus, the VAT borne in expenses necessary to an acquisition of participations shall be deductible in accordance with the general terms, wanting this to mean that it shall be fully deductible when the taxable person only realizes taxed operations and partially deductible when the taxable person, alongside taxed operations, realizes exempt operations [in this sense, the Cibo judgment (delivered on September 27, 2001, in Case C-16/00) of the CJEU]. (…)

The notion that a holding only exercises economic activity when it somehow intervenes in the line of the subsidiaries is reasonably intuitive. The criterion that the CJEU has used [to ascertain the direct or indirect interference in the management of the subsidiaries], however, is that there exists intervention only when the parent company performs taxable supplies for the benefit of the affiliates, as occurs when it provides them with financing, advice or computer services."[8]

Having, then, by reference to holding companies in general, the first question to be elucidated, in this framework, is whether a holding is or is not a VAT taxable person, that is, whether it develops or not an economic activity, being important, for such, to analyze whether, beyond the mere holding of equity participations, any activity of provision of services is practiced or not, particularly to its subsidiaries.

In the event that its conduct is merely passive, it will be a company that does not exercise an economic activity for purposes of VAT, since the dividends and interest it receives constitute mere fruits resulting from the ownership of an asset and not proceeds derived from its economic exploitation, therefore that company cannot be considered a taxable person for purposes of VAT.

If it is a holding company that has active intervention in the management of its subsidiaries, resulting in the realization of taxable outputs, it should be considered as an entity that exercises an economic activity, assuming the quality of a VAT taxable person.

With respect, specifically, to SGPSs, it is important to emphasize that it follows from their legal regime that their sole corporate object is the management – and not the mere holding – of equity participations, which when added to the fact that the law itself recognizes their competence for the provision of administration and management services to the subsidiaries, results in the exercise of an economic activity for purposes of VAT. This conclusion is not prevented, indeed, by the fact that their sole corporate object is "the management of equity participations in other companies as an indirect form of exercise of economic activities"; which also does not therefore matter, for purposes of ascertaining the right to deduct VAT, which must, therefore, be determined in conformity with the general criteria.

This very matter was decided by the CJEU in the Portugal Telecom judgment (delivered on September 6, 2012, in Case C-496/11), in which it concludes that if it is "to be considered that all services acquired upstream have a direct and immediate nexus with downstream economic operations with the right to deduction, the taxable person in question [a SGPS that, in the context of the provision of technical services of administration to its subsidiaries, re-invoices them, with VAT, the costs incurred with the acquisition of advisory and other services] would have the right, under article 17, paragraph 2, of the Sixth Directive, to deduct the entirety of the VAT that has burdened the upstream acquisition of the services in question in the main proceedings. This right to deduction cannot be limited by the simple fact that the national regulation, by reason of the corporate object of the aforementioned companies or their general activity, qualifies the taxed operations as subsidiary to their main activity."

Refining our analysis further, it is now important to ascertain whether a SGPS that actively intervenes in the management of its subsidiaries, performing taxable transactions under VAT, nonetheless performs operations outside the scope of application of the tax, regarding those same equity participations.

It is peacefully accepted that holding companies can have a dual status for purposes of VAT, that is, they can be a taxable person and a final consumer, since they can be involved in taxable activities – particularly the provision of services to subsidiaries – and in non-economic and, therefore, non-taxable activities – the mere holding and enjoyment of equity participations.

Thus being, it is important then to define the terms in which the ascertainment of the right to deduct VAT should be made, for which three possible tests exist, namely:

(1) Is VAT borne on inputs directly related to taxable outputs?

This test results directly from paragraph 2 (second paragraph) of article 1 of the VAT Directive, which provides that "in each transaction, the value added tax, calculated on the price of the good or service at the rate applicable to that good or service, shall be payable with a deduction of the amount of the value added tax that has directly burdened the cost of the various elements constituting the price".

By way of example, Mariana Gouveia de Oliveira refers that this would be "the case of a SGPS that incurred costs directly related to the provision of services to one of its subsidiaries, for example, with the contracting of a service provider who was strictly allocated to a subsidiary and whose costs were invoiced with VAT to that same subsidiary.

In these cases, it seems to us that there is a direct link between the VAT borne on the inputs and the taxed outputs of the SGPS. The VAT thus borne should be entirely deducted."[9]

(2) Is VAT borne on inputs directly related to one of the economic activities pursued?

Even in cases where there is no direct relationship between the inputs and the taxed outputs, the full right to deduct VAT can nonetheless be recognized if that direct link is established between the inputs and a defined set of taxed economic activities.

This very matter was decided by the CJEU in the Abbey National judgment (delivered on February 22, 2001, in Case C-408/98), in which it was considered that "if the various services acquired by the supplier in order to carry out the supply have a direct and immediate relationship with a clearly delimited part of its economic activities, so that the costs of the aforementioned services form part of the general expenses inherent to that part of the enterprise, and that all operations included in that part of the enterprise are subject to value added tax, that taxable person can deduct all the value added tax that has burdened the expenses that it has incurred to acquire the aforementioned services".

Thus, in these cases, VAT can be deducted if there exists a direct and immediate relationship with the economic activity developed, excluding the right to deduction when it is a matter of tax that was borne in the exercise of an activity not subject to VAT.

(3) Is VAT borne on general costs of the economic activity?

In the event that the aforementioned direct relationship between inputs and taxed outputs does not exist, it is still necessary to verify whether the right to deduct VAT should be recognized whenever the expenses incurred with the acquisition of goods and services qualify as general expenses of the activity and form part of the constituent elements of the price of the operations realized by the taxable person that confer the right to deduction.

The CJEU pronounced itself on this question, specifically regarding services acquired by a holding company (audit services of companies, intervention in the framework of negotiating the price of acquisition of shares and setting up of the takeover of companies in legal and tax matters), in the Cibo Participations SA judgment (delivered on September 27, 2001, in Case C-16/00), in which it was considered that even though there is no direct and immediate relationship between the various services acquired by a holding in the context of taking a participation in a subsidiary and one or more downstream operations that confer the right to deduction, the costs of the services acquired fall within the general expenses of the taxable person and are, as such, constituent elements of the price of the products of an enterprise; to that extent, concludes the judgment, those services have a direct and immediate relationship with the set of the taxable person's activity[10].

In this respect, as emphasizes Mariana Gouveia de Oliveira, the verification of this criterion "should imply a double analysis: on the one hand the analysis of a functional relationship, i.e., the existence of a functional/causal link between the input and the taxable activity of the taxable person and, on the other, an economic relationship, i.e., a reflection at the level of the price of the outputs", aiming with that simultaneously functional and economic analysis to ascertain "whether the inputs relate to the 'maintenance of the source producing' the taxable activity, similarly to the criterion used for purposes of ascertaining deductible expenses for purposes of IRC and whether those costs are capable of being reflected in the formation of the prices of the taxable outputs (even if in the concrete case, by external vicissitudes, they end up not actually being reflected)."[11]

Sérgio Vasques refers that the "CJEU hesitates between a functional criterion, which looks to the reason for being of the costs, and an economic criterion, which attends to the impact of the costs on the prices that the taxable person practices. The decisions of the CJEU regarding equity participations show, however, that an economic criterion proves largely inoperative, as it is generally impossible to prove the integration of a cost in the price of goods and services transacted by economic operators, dependent on a very varied set of circumstances. The impact of the cost on the prices could, at most, be presumed. And therefore recourse to a functional criterion ends up proving to be always determinant in fixing the nexus with a given passive operation or with the set of taxable activities."[12]

In concluding synthesis, we have, therefore, that a SGPS that dedicates itself to the active management of its subsidiaries is an economic operator and a VAT taxable person.

In the development of its taxable activity, the SGPS may incur VAT on inputs directly connected with its activity of managing the subsidiaries, as well as with general operating costs.

With respect to the first, given the taxable nature of the output, there is no doubt as to the existence of the right to deduction. As for expenses that are not in a direct and immediate relationship with the taxed outputs, constituting, however, general expenses of the SGPS's activity, the right to deduct VAT should also be recognized.

Given the foregoing and without need for further considerations, contrary to what is advocated by the Respondent, it is evidenced that nothing prevents the deduction of VAT borne by the Claimant with the acquisitions of services documented by the invoices contained in the listing that constitutes Annex no. 1.

As a consequence, the acts of additional VAT assessments in dispute are affected by the vice of violation of law, for error in the presuppositions of fact and law, rooted in the erroneous interpretation and application of the provisions of articles 19, paragraph 1, subparagraph a) and 20, paragraph 1, subparagraph a), of the VAT Code, which means their annulment.

§3. REIMBURSEMENT OF AMOUNTS PAID AND PAYMENT OF INDEMNIFICATORY INTEREST

The Claimant further petitions the condemnation of the AT to reimburse the improperly paid tax, increased by the respective indemnificatory interest.

Article 24, paragraph 1, subparagraph b), of the RJAT provides that the arbitral decision on the merits of the claim that is not subject to appeal or challenge binds the tax administration from the end of the deadline provided for the appeal or challenge, with the latter, in the exact terms of the merits of the arbitral decision in favor of the taxpayer and until the end of the deadline provided for the spontaneous execution of the judgments of the tax courts, having to restore the situation that would have existed by adopting the acts and operations necessary for that purpose, which should be understood, in conformity with the provision of article 100 of the LGT, applicable ex vi subparagraph a) of paragraph 1 of article 29 of the RJAT, as encompassing the payment of indemnificatory interest, in consonance, moreover, with the provision in paragraph 5 of the same article 24 of the RJAT.

Article 43, paragraph 1, of the LGT determines that "indemnificatory interest is due when it is determined, in administrative review or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount greater than legally due", with paragraph 5 of article 61 of the CPPT providing that "interest is counted from the date of the improper payment of the tax until the date of processing of the respective tax credit note, in which they are included".

In the concrete case, as follows from the foregoing and without need for further considerations, it is verified that the illegality of the assessments in dispute, for error in the presuppositions of fact and law, is entirely imputable to the AT, therefore the Claimant has the right, in conformity with the provision of article 24, paragraph 1, subparagraph b), of the RJAT and article 100 of the LGT, to the reimbursement of the improperly paid tax and to indemnificatory interest, in accordance with the provision in articles 43, paragraph 1, of the LGT and 61 of the CPPT, calculated from the dates of the payments, at the rate resulting from paragraph 4 of article 43 of the LGT, until the date of processing of the respective tax credit note, in which they are included.

IV. DECISION

For the foregoing reasons, this Arbitral Tribunal decides:

a) To find the exception of incompetence of the Arbitral Tribunal ratione materiae to lack merit;

b) To find the request for arbitral pronouncement wholly well-founded and, consequently, for the vice of violation of law, for error in the presuppositions of fact and law, consisting in the erroneous interpretation and application of the provisions of articles 19, paragraph 1, subparagraph a) and 20, paragraph 1, subparagraph a), of the VAT Code, to declare unlawful and annul:

• the additional assessment no.…, with the correction value of € 476.17, relating to the tax period 1212T;

• the additional assessment no.…, with the correction value of € 36,753.93, relating to the tax period 1303T;

• the additional assessment no.…, with the correction value of € 16,514.00, relating to the tax period 1306T;

• the additional assessment no.…, with the correction value of € 233.29, relating to the tax period 1309T;

• the additional assessment no.…, with the correction value of € 8,517.82, relating to the tax period 1312T;

• the additional assessment no.…, with the correction value of € 1,419.43, relating to the tax period 1403T;

• the additional assessment no.…, with the correction value of € 1,995.25, relating to the tax period 1406T;

• the additional assessment no.…, with the correction value of € 276.00, relating to the tax period 1409T;

• the additional assessment no.…, with the correction value of € 3,400.32, relating to the tax period 1412T; and

• the additional assessment no. 2015…, with the correction value to be paid of € 172.50, relating to the tax period 1503T.

c) To find the request for condemnation of the Tax and Customs Authority to reimburse to the Claimant the improperly paid tax, increased by indemnificatory interest calculated at the legal rate, from the dates of the payments until the date of processing of the respective tax credit note, in which they are included, to be well-founded;

d) To condemn the Tax and Customs Authority to payment of the costs of the proceedings.

VALUE OF THE PROCEEDINGS

In conformity with the provision of articles 306, paragraph 2, of the CPC, 97-A, paragraph 1, subparagraph a), of the CPPT and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings is assigned the value of € 69,936.21 (sixty-nine thousand nine hundred thirty-six euros and twenty-one cents).

COSTS

In accordance with the provision of articles 12, paragraph 2, and 22, paragraph 4, of the RJAT and article 4, paragraph 4, and Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 2,448.00 (two thousand four hundred forty-eight euros), in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Lisbon, October 31, 2016.

The Arbitrators,

(José Poças Falcão)

(Ricardo Rodrigues Pereira)

(Luís Janeiro)

[1] Vasques, Sérgio, Value Added Tax, Coimbra, Almedina, 2015, p. 333.

[2] Vasques, Sérgio, ibid., p. 338.

[3] In this sense, the SKF judgments (delivered on October 29, 2009, in Case C-29/08) and Midland Bank (delivered on June 8, 2000, in Case C-98/98).

[4] In this sense, the Cibo judgments (delivered on September 27, 2001, in Case C-16/00) and PPG Holdings (delivered on July 18, 2013, in Case C-26/12) of the CJEU.

[5] Judgment delivered on October 22, 2015, in Case C-126/14.

[6] In this sense, the Ampafrance and Sanofi judgments (delivered on September 19, 2000, in Cases C-177/99 and C-181/99), PARAT (delivered on April 23, 2009, in Case C-74/08) and Oasis East (delivered on September 30, 2010, in Case C-395/09).

[7] Vasques, Sérgio, ibid., pp. 129-130.

[8] Vasques, Sérgio, ibid., pp. 146-149, 155 and 156.

[9] Oliveira, Mariana Gouveia de, "SGPSs and the Right to Deduction under VAT", in Vasques, Sérgio (Coord.), VAT Records 2013, reprint of the March 2013 edition, Coimbra, Almedina, May 2014, p. 283.

[10] The question of the recognition of the right to deduct VAT when the costs incurred with services acquired form part of the general costs of the taxable person and, to that extent, are constituent elements of the prices of products, was equally addressed by the CJEU in the Midland Bank PLC judgments (already cited), Kretztechnik AG (delivered on May 26, 2005, in Case C-465/03), SKF (already cited) and Portugal Telecom (already cited).

[11] Oliveira, Mariana Gouveia de, loc. cit., pp. 285-286.

[12] Vasques, Sérgio, ibid., pp. 156-157.