VAT Exemption Waiver and National Health System Integration – CAAD Case 227/2015-T

CAAD: Tax Arbitration

Proceeding No.: 227/2015-T

Subject: VAT - Waiver of exemption; Integration into the National Health System

Replaces the Arbitral Decision of 4 November 2015.

Arbitral Dispatch:

Following the reasoned Decision handed down by the Central Administrative Court South, on 19 September 2016, which has become final, declaring the nullity of the decision handed down in the present proceedings, a new arbitral decision must be issued.

To that end, a new arbitral decision is hereby issued:

Arbitral Decision

I. Report

1. A…, S.A., registered at the Commercial Registration Office of … under the single tax identification number and registration …, (hereinafter referred to as the Claimant or A…) filed a request for the constitution of a collective arbitral tribunal, in accordance with Articles 2, paragraph 1, and 10, paragraph 1, subparagraph a), of the Legal Regime for Tax Arbitration (Decree-Law No. 10/2011, of 20 January, hereinafter referred to as LRTA), in which the Tax and Customs Authority (TA) is the Defendant, with a view to annulling the following additional assessments of Value Added Tax (VAT) and compensatory interest:

a) VAT relating to the tax year 2013, identified with numbers 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, all of 25 October 2014;

b) VAT relating to the tax year 2012, identified with numbers 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, all of 25 October 2014;

c) VAT relating to the tax year 2011, identified with numbers 2014…, 2014…, both of 25 October 2014 and the additional VAT assessments numbered 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, all of 4 November 2014;

d) Compensatory interest identified with numbers 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014… and 2014…, by reference to the tax year 2013;

e) Compensatory interest identified with numbers 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014… and 2014…, by reference to the tax year 2012;

f) Compensatory interest identified with numbers 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014…, 2014… relating to the tax year 2011 (Documents 2 to 74, attached to the Petition).

1. The Claimant requests:

a) The annulment of the additional VAT assessments and compensatory interest;

b) The immediate extinction of the enforcement proceedings instituted for non-payment of the aforementioned debts;

c) The payment of compensation for the provision of undue security that may be provided to suspend the tax enforcement proceedings instituted for non-payment of the additional VAT assessments and compensatory interest identified above (attached under Documents 76 to 128 the citations received).

1. The request for the constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 01-04-2015.

In accordance with the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the LRTA, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the Deontological Council appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

On 26-05-2015 the parties were duly notified of this appointment, and did not manifest any will to refuse the appointment of the arbitrators, in accordance with Articles 11, paragraph 1, subparagraphs a) and b) of the LRTA and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of subparagraph c) of paragraph 1 of Article 11 of the LRTA, in the wording introduced by Article 228 of Law No. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 11-06-2015.

1. To support its claims, the Claimant alleges, in summary:

a) It is not integrated into the national health system;

b) Nor does it exercise its medical activity under social conditions analogous to those of a public body, which is why it can exercise its right to waive the VAT exemption, pursuant to subparagraph b) of paragraph 1 of Article 12 of the PITA, and for that reason it is unlawful, by violation of that norm and of subparagraph b) of paragraph 1 of Article 132 of the VAT Directive (Directive 2006/112/EC of the Council, of 28 November), the classification of the Claimant as a taxable person exempt with respect to the operations carried out within the scope of medical services, which taints with illegality the contested assessments, which must be annulled on this ground (Articles 47 and 75 of the petition);

c) The concept of public body implies a dependency on the State that does not occur in this case;

d) The concept of analogous social conditions necessarily implies reference to social conditions, that is, to the fact that the objectives pursued are eminently social (as is the case with public bodies), which is equally not the case with the Claimant;

e) The Community case law cited by the TA expressly permits the conclusion that the Claimant does not exercise its medical activity under social conditions analogous to any public body, not only because the percentage of costs supported by public health subsystems is merely indicative, but as "that percentage is minority (much less than 50%), which leads to the necessary conclusion that the said phrase of the Directive is not met and therefore the VAT exemption that it establishes does not apply" (Article 74 of the Arbitral Petition);

f) "Furthermore, and finally, one must also take into account the principle of neutrality that guides the entire functioning of this tax (VAT) and the exceptional character of the exemptions provided for, as well as must be taken into account the objectives sought to be pursued with the establishment of this exemption, from which to conclude whether in the specific case the non-application of the exemption contravenes such principles, concluding, as we shall see, to the negative (since not only what was intended to be safeguarded with the establishment of the exemption is maintained as, furthermore, taxation creates no distortions of competition)" (Article 74 of the Arbitral Petition).

The Claimant attaches, to support the arbitral petition, an Opinion, on the subject of waiver of VAT exemption, authored by Professor B….

1. The Tax and Customs Authority submitted a reply and attached the investigation file, invoking, in summary, the following:

A) As the primary argument

a) "(…) the question to be decided is, first of all, whether, by virtue of the contract concluded with the Regional Health Authority of …, I.P., and with ADSE (General Directorate for Social Protection of Civil Servants and Agents of the Public Administration), the Claimant should be considered as a private institution integrated into the "national health system", in the terms and for the purposes of Article 12, paragraph 1, subparagraph b) of the PITA";

b) However, and despite the relevant classification of the concept of the expressions "National Health Service", "health system" and "national health system", the fact is that, in reality, what is also at stake here, if we take into account its "right" or "non-right" to waive the exemption provided for in paragraph 2) of Article 9 of the VAT Code";

c) "It is a question of whether such completely subverts the rules of neutrality that govern any Value Added Tax system in force in the European Union, in the specific case, between health services provided by public entities or by private entities that provide services in "analogous social conditions"";

d) "(…) the Health Bases Law (Law No. 48/90, of 24 August), clarified the concept of "health system", contained in its Chapter II, Base XII, which states:

"1- The health system is constituted by the National Health Service and by all public entities that develop activities of promotion, prevention and treatment in the health area, as well as by all private entities and all freelance professionals who agree with the former to provide all or some of those activities";

e) "Thus, considering the legislative evolution regarding the national health system, it is legitimate to conclude that, even before the VAT Code came into force, and Portugal's accession to the European Economic Community, there was established the possibility for the State to enter into agreements with private institutions for the provision of medical services, namely those provided by private hospitals, which made up for the deficiencies in public services";

f) "Therefore, it is easy to conclude that, even before the Health Bases Law (of 1990) adopted the phrase "health system", enshrining it legally, the normal addressee of Article 12, paragraph 1, subparagraph b) of the PITA, a norm in force since 01/01/1986, but approved by a Decree-Law of 26 December 1984, understood its scope: private entities that enter into agreements with the Portuguese State for the provision of medical and health services listed in 2) of Article 9 of the PITA become part of the "national health system", which prevents the exercise of that waiver";

g) "(…) it is thought that the reference to "National Health Service" contained in item 2.7 of List I attached to the VAT Code reflects a terminological imprecision, which should be interpreted, taking into account the content of subparagraph b) of paragraph 1 of Article 12 of the VAT Code and the legal framework governing the health system, as referring to the "national health system", since, as we have seen, and the Claimant refers, there are no private institutions integrated into the National Health Service";

h) For the Defendant, the interpretation it defends is the most in line with Union Law [subparagraph b) of paragraph 1, part A, of Article 13 of the Sixth Directive].

B) As a subsidiary argument

The Defendant further alleges that, if this is not the case, the proceedings should be referred to the CJEU, pursuant to Article 267 of the TFEU, for the purposes of defining the scope of the waiver of the exemption regime pursuant to Article 12, paragraph 1, b) of the VAT Code.

5.1. Beyond these allegations, relating to the merits of the case, the Defendant, in its reply, defended itself by preliminary exception, having invoked the lack of material jurisdiction of this arbitral instance to rule on one of the claims formulated – that which underlies recognizing whether the Claimant has or does not have the right to waive the exemption provided for in Articles 9, paragraph 2, and 12, paragraph 1, b) of the VAT Code.

5.2. The Claimant, notified by dispatch of 23-07-2015, to exercise its right of reply regarding the matter of the exception raised, as well as regarding the referral request, submitted a reply in which it concludes for the dismissal of the exception of lack of material jurisdiction raised by the TA and, regarding the referral, argued and requested that only if it proves essential for the judgment of the case should the preliminary question be formulated to the CJEU.

1. Neither party requested witness testimony.

2. By dispatch of 12.09.2015, taking into account that the right of reply had already been exercised regarding the exceptions invoked by the parties, no hearing evidence had been requested and the possibility of the parties requesting oral arguments being preserved (which did not occur), the tribunal decided to waive the meeting provided for in Article 18 of the LRTA, in accordance with the principles of autonomy in the conduct of proceedings and in order to promote procedural speed, simplification and informality, in accordance with the provisions of Articles 19, paragraph 2, and 29, paragraph 2 of the LRTA.

7.1. In the same dispatch, given the circumstance that the parties had not raised the dilatory exception of absolute lack of jurisdiction ratione materiae with respect to the second claim formulated by the Claimant (that the immediate extinction of the enforcement proceedings instituted be ordered), the Tribunal expressed to the parties its intention to rule on that exception of its own motion, and, in accordance with the provisions of Article 3, paragraph 3 of the Code of Civil Procedure (CCP), applicable through Article 29, paragraph 1, subparagraph e) of the LRTA, invited them to exercise their right of reply regarding such matter.

7.2. Before new elements submitted by the Tax and Customs Authority, the right of reply was also granted in that dispatch to the Taxable Person.

By request of 30/9/2015, the Claimant came to withdraw from its claim for compensation for the provision of undue security, due to supervening futility thereof, since the condition upon which the success thereof depended was not verified.

1. The Parties submitted successive written arguments.

8.1. In its arguments, the TA newly raised that, insofar as "the decisions handed down by the arbitral tribunal are not subject to ordinary remedies, the preliminary referral proves to be mandatory in the concrete case" "(…)".

For the Defendant, "(…) the absence of a preliminary referral, in the concrete case, implies that an arbitral decision be handed down in a dispute where the interpretation of Community norms relating to the common system of value added tax is at issue, in contrast with the national norms contained in the PITA, without there being control, at a second degree of jurisdiction, of such decision (of the absence of referral)."

The Defendant argues that such circumstance entails a disproportionate violation of the constitutional principle of access to law provided for in Article 20 of the CRP and, as well, of the principle of equality provided for in Article 13 of the CRP.

1. A final decision was handed down on 4 November 2015 which, by a decision handed down by the Central Administrative Court South on 19 September 2016, which has become final, was declared null, for failure to pronounce on the alleged violation of the constitutional principles of access to law and the principle of equality by the decision refusing to refer the preliminary question relating to the interpretation of Article 132, paragraph 1, subparagraph b) of the VAT Directive, contained in the arbitral decision.

2. Following the annulment of the Arbitral Decision, this Tribunal provided the opportunity to exercise the right of reply regarding the question of unconstitutionality raised by the Defendant in successive final arguments. The Claimant came to argue that the prerequisites for the preliminary referral are not met and that the defects of "unconstitutionality" of the arbitral decision raised by the Defendant are manifestly unfounded.

II. Clarification

1. In its defense, the Defendant raised, as stated, the lack of material jurisdiction of the tribunal to determine whether the Claimant has or does not have the right to waive the exemption provided for in Articles 9, paragraph 2, and 12, paragraph 1, subparagraph b) of the PITA.

This must be examined and decided.

11.1. The Defendant invokes the tribunal's lack of jurisdiction ratione materiae by considering "that, prior to the examination of the legality or illegality of the contested assessments, there is another question to be decided […] the legality of the prerequisites of the right to waive the exemption that it exercised, in accordance with the provisions of subparagraph b) of paragraph 1 of Article 12 of the VAT Code", and that, for that reason, "[…] the first question to be decided relates to whether or not the right to waive the exemption is recognized on the part of the Claimant, given that the prerequisites for its recognition have been altered".

From the Defendant's perspective, we are thus facing a claim aimed at the recognition of rights in tax matters not contemplated in the LRTA.

The Defendant would be correct if this were the claim raised in proceedings by the Claimant, since, effectively, the LRTA does not provide for the jurisdiction of arbitral tribunals for actions for recognition of rights in tax matters.

Note, however, that, in the words of Jorge Lopes de Sousa, arbitral tribunals are only incompetent for "the recognition of rights and legitimate interests in tax matters", when such recognition is not "underlying the declaration of legality of acts or examination of questions indicated in paragraph 1 of Article 2 of the LRTA" (Comment on the Legal Regime for Tax Arbitration, Guide to Tax Arbitration, Coord. Nuno Villa-Lobos and Mónica Brito Vieira, Coimbra Almedina, 2013, p. 105).

In the case at hand, as emphasized in the reply to the exceptions, "it is clear" and "unequivocal" that the claim raised by the Claimant is the annulment of the additional VAT assessments because they are unlawful. "That is", as set forth in proceeding No. 278/2013-T, which dealt with an identical question, "the Claimant raises a claim typical of a constitutive action such as an action for annulment within the scope of arbitral proceedings and not a claim of a simple (positive) examination action characteristic of an action for the recognition of a right (cf. Article 1 of the Code of Civil Procedure (CCP) ex vi Article 29, paragraph 1, subparagraph e) of the LRTA)".

If it is true that to conclude the illegality of the tax acts in question it will be necessary to evaluate the underlying tax-legal relationship (verify whether the Claimant maintains the right to waive the VAT exemption and whether it should be classified under the normal VAT regime with the right to deduction), this reflects the cause of action (the ground) and not the claim (the assertion) raised in the dispute.

Given that there is no doubt that the main object of this proceeding relates to the additional VAT assessments whose legality is questioned, we cannot fail to conclude for the jurisdiction of this arbitral tribunal, pursuant to Article 2, paragraph 1, subparagraph a) of the LRTA.

On these grounds, the exception of lack of jurisdiction of this collective tribunal is judged dismissible with respect to the main claim.

11.2. It is also necessary to verify the assumption of the tribunal's material jurisdiction to order the extinction of the enforcement proceeding.

With the parties invited to rule on the absolute lack of material jurisdiction of the arbitral tribunal to order the extinction of the enforcement proceeding, raised ex officio by the Tribunal, the Taxable Person came, in exercise of its right of reply, to allege, in summary, that it did not intend to request such extinction, it being only one of the consequences of the annulment claim it formulated.

For its part, the Defendant, in exercise of its right of reply, argued for the acceptance of the exception sustaining the absolute lack of jurisdiction of the Tribunal.

It must be decided.

The Tribunal issues decisions based on the procedural statements made by the parties.

Notwithstanding the Taxable Person invoking that its statement does not coincide with the intent that presided over it, the truth is that the Claimant did not take care to ensure the coincidence between its intent and the statement it made, which it could have done by reducing the initial claim.

On these grounds, having the taxable person opted to maintain the formulation of the initially expressed claim, and the tribunal being able to rule only on the claim as it is verbalized in the petition, the Tribunal declares itself incompetent to rule on the claim insofar as the Claimant requests that the same order the extinction of the tax enforcement proceeding instituted for collection of the tax subject to the request for arbitral pronouncement.

In fact, given the provisions of subparagraph a) of paragraph 1 of Article 2 of the LRTA, the jurisdiction of arbitral tribunals is restricted to the "examination of the declaration of illegality of acts of tax assessment, self-assessment, retention at source and payment on account" (provision to be read in conjunction with the provisions of Article 4 of the LRTA and Ordinance No. 112-A/2011, of 22 March, which regulates the type and maximum value of disputes to which the Tax Administration is bound by the jurisdiction of arbitral tribunals).

In light of the foregoing, the examination of matters relating to the enforcement proceeding is not covered within the scope of the material jurisdiction of the Arbitral Tribunal.

Although the effects that an eventual decision of the Tribunal regarding the illegality of the assessment may have on the enforcement proceeding, from the reading of the mentioned norms it results thus that the matter related to the enforcement proceeding is excluded from the Tribunal's jurisdiction.

Indeed, one thing is the repercussions on the enforcement proceeding resulting from a possible favorable ruling on the Claimant's claim and consequent annulment of the assessment, another, quite different, is the jurisdiction of the Arbitral Tribunal to order the extinction of the enforcement proceeding instituted, as the Claimant requests.

On these grounds, the invoked exception of lack of material jurisdiction of the Arbitral Tribunal is judged acceptable.

11.3. In accordance with the foregoing, it is declared that the Arbitral Tribunal is properly constituted and materially competent to rule in this action, in a declarative capacity, regarding the "illegality of the additional VAT assessments and compensatory interest identified in point I.1 of the Report".

With respect to the second claim, initially requested (payment of compensation for the provision of undue security that may be presented to suspend the tax enforcement proceedings instituted), the Claimant came, as stated above, to withdraw from it.

Such request deserves acceptance. Having initially formulated various claims, the fact that the Claimant withdraws only from that which is now considered, represents, in truth, a reduction of the claim.

From the acceptance of the request for withdrawal regarding the claim under examination, as well as from the declaration of lack of jurisdiction in matters of enforcement, it results thus that the object of the Tribunal's pronouncement will be restricted to the constitutive claim (annulment of assessments) mentioned above.

11.4. The parties have legal personality and legal capacity, are legitimate and are duly represented (Articles 4 and 10, paragraph 2 of the same statute and Article 1 of Ordinance No. 112-A/2011, of 22 March).

11.5. The proceeding does not suffer from any nullities.

11.6. There are no other circumstances that prevent the examination of the merits of the case.

III. Merits

III.1. Factual Matter

1. Proven Facts

12.1. Based on the elements in the proceeding and in the administrative file attached to the record, the following facts are considered proven:

a) The Claimant is a stock company with private capital and profit-seeking purpose, having as its object the provision of medical-surgical services - cf. Permanent Certificate attached to the petition as Document No. 129, whose content is reproduced;

b) Such activity includes the provision of health care and medical services on an outpatient and/or inpatient basis, namely consultations and surgeries in various clinical areas;

c) The Claimant also provides food and beverage services (through the operation of a bar/restaurant in the facilities where it develops its activity), also providing services to accompanying persons of inpatients (namely accommodation services);

d) Such activities are developed at the E… ("E…"), installed in two contiguous urban properties with complementary operation of which the Claimant is the owner and which it identifies as follows: fractions A, B and C of the urban property located at Street … No. …, …, …-…, …, registered in the urban real estate register under matriculation number … of the parish of the Union of Parishes of … and …; and urban property described in the real estate register of the same parish under No. …;

e) Both properties were built from scratch, with the property comprising fractions A, B and C being constructed in two distinct phases, one in 1999 and another in 2007 (with fraction A corresponding to the building initially constructed and completed in 1999; whereas fractions B and C comprise the second construction phase, completed in 2007) - cf. Real estate deeds for fractions B and C, attached to the petition as Documents Nos. 130 and 131, whose contents are reproduced;

f) The Claimant is a commercial company that exercises, as its main activity, a commercial activity, being classified under the general regime for purposes of Corporate Income Tax (CIT);

g) On 6 December 1995, when registering the beginning of activity for tax purposes, the Claimant was classified under the VAT exemption regime, having as its main object the provision of "Activities of hospitalization health establishments", corresponding to CAE … - cf. Tax Inspection Report (RIT), attached to the petition as Document No. 132, whose content is reproduced;

h) On 29 June 1999, at the beginning of the E…'s activity, the now Claimant came to be classified for VAT purposes under the mixed regime with real allocation (given its activity of provision of medical services – exempt activity – and its activities of provision of food and beverage services and accommodation to accompanying persons of inpatients – subject activities) - cf. cit. RIT;

i) In January 2008, the Claimant waived the VAT exemption (presenting for that purpose a statement of changes in activity effective 1 January 2008), thus becoming subject to the normal VAT taxation regime with monthly periodicity (thus calculating VAT on the active operations undertaken, the tax mentioned in the invoices it issues, and therefore deducting the VAT supported in all passive operations) - cf. cit. RIT (Doc. No. 132) and Statement of Changes in Activity attached to the petition as Document No. 133, whose content is reproduced;

j) At no time between 2008 and 2014 (when the inspection procedure in question was conducted), did the Tax Administration challenge such waiver or compliance with the legal requirements for that purpose;

k) Acting, following such waiver, as a "normal" taxable person (not exempt from VAT), the Claimant from January 2008 to the present date, under the law, assessed VAT on active operations deducting the VAT supported on passive operations;

l) With respect to the second phase of construction of the E…, completed in 2007, the Claimant supported VAT in the amount of €1,534,906.72 – cf. Document No. 134, last page, whose content is reproduced;

m) The Claimant submitted the periodic VAT declaration relating to the period of February 2008, in which it included that amount of supported tax and requested the reimbursement of the tax credit to be recovered calculated in that period: €1,695,465.30 – cf. Document No. 135 attached to the petition, whose content is reproduced;

n) The TA conducted the corresponding inspection procedure, through which it analyzed and verified the validity and legal conformity of the deducted tax, partially accepting the refund request in question, in the amount of €1,610,943.47 – cf. Document No. 136 attached to the petition, whose content is reproduced;

o) By reference to the tax year 2011, the Claimant assessed VAT on active operations in the amount of €490,676.11, having deducted VAT supported on passive operations in the amount of €489,023.71 – cf. cit. RIT (Doc. No. 132) and Document No. 137, whose content is reproduced;

p) By reference to the tax year 2012, the Claimant assessed VAT on active operations in the amount of €527,304.69 having deducted VAT supported on passive operations in the amount of €528,287.89 - cf. cits. RIT (Doc. No. 132) and Document No. 137;

q) In the tax year 2013, the Claimant assessed VAT on active operations in the amount of €418,874.91 having deducted VAT supported on passive operations in the amount of €367,551.27 - cf. cit. RIT (Doc. No. 132) and Document No. 137;

r) On 14 July 2006, the now Claimant concluded an agreement with the Regional Health Authority of … ("RHA") – cf. Document No. 138 attached to the petition, whose content is reproduced;

s) On 18 March 2013, the Claimant concluded an agreement with the General Directorate for Social Protection of Civil Servants and Agents of the Public Administration ("ADSE") – cf. Document No. 139 attached to the petition, whose content is reproduced;

t) The agreements concluded with the RHA or ADSE are adhesion contracts in which the price of the services subject to the agreement is identical for all establishments adhering to the agreements;

u) Thus, and necessarily, the VAT assessed with respect to services rendered under such agreements is included by the Claimant in the final price (included in the price), not representing an increase in price (so that regardless of whether or not the VAT exemption regime applies, the practiced price is the same);

v) Under Clause 2 of the Agreement concluded between the now Claimant and the RHA for the purposes of implementing SIGIC: "The services to be contracted and their corresponding global amounts are those contained in Dispatch No. 24,036/2004, of 29/10.";

w) It is further provided in the same document, and regarding the price to be paid by the user for health care services he uses under the terms of said agreement, that "Access to health care provided for in this Agreement is subject to the payment of co-payments, in accordance with law" (cf. cit. Document No. 138, Clause 9), that is, the user pays for the service (regardless of whether the price includes VAT or not) the amount of the legally established co-payment;

x) The amounts to be invoiced by the E… to the RHA for services provided by the former to conventioned users "are those contained in the price table approved by Dispatch No. 24,036/2004" (cf. cit. Document No. 138, Clause 10);

y) In clause 5, paragraph 1 of the Agreement concluded with ADSE, contained in Doc. No. 139, it is established that: "The charges arising from the provision of health care services to beneficiaries are paid in accordance with the tables and rules in force";

z) The price of each treatment or examination is invoiced by the Claimant to the RHA or ADSE individually for each act or operation performed, according to its nature (accommodation, consumables, medicines, complementary diagnostic and therapeutic means) and in accordance with the previously established prices, regardless of whether the operation in question is or is not subject to VAT;

aa) The relative weight of invoicing issued with respect to services provided by the Claimant under the agreements with the RHA and ADSE, in the overall scope of its invoicing by reference to the tax years 2011, 2012 and 2013, is as contained in the following table:

• cf. Document No. 141 attached to the petition, whose content is reproduced, and as results from the RIT (cit. doc. No. 132);

bb) The Claimant was subject to an external tax inspection procedure initiated based on Service Order No. OI2014…, of 27 May 2014, issued by the Directorate of Finance of…, having as its object the tax years 2011, 2012 and 2013, with the purpose of verifying the classification of the Claimant for VAT purposes, in particular regarding the option to waive the exemption provided for in subparagraph b) of paragraph 1 of Article 12 of the PITA - cf. Document No. 142, attached to the petition, whose content is reproduced;

cc) At the conclusion of the inspection procedure, the SIT determined that "...considering the existence of 2 conventions/agreements above referred to, with the subsystems of health of the national health system (RHA and ADSE), which respectively represent 18, 23 and 27% of the total services provided in the years 2011, 2012 and 2013, it is the understanding of the Tax Administration, that in accordance with the terms of line b) of paragraph 1 of Article 12 of the VAT Code, conjugated with Base XII of Law No. 48/90 (Health Bases Law), A… could not benefit from the right of option, since, with the conclusion of the protocols with public institutions (RHA and ADSE) it became integrated into the national health system.»;

dd) It is further stated in the RIT: «It is thus proposed and as a consequence of this understanding the alteration of VAT classification, becoming a "mixed taxable person", since in addition to the provision of medical services and operations closely connected with them – subject to tax but exempt, A… also exercises, as referred to above, operations subject to tax and not exempt from it, such as those related to the operation of the Bar/Restaurant and charges debited to accompanying persons of inpatients. It is also proposed and as a consequence of the same understanding the necessary corrections to the assessed tax, especially the VAT deducted related to the provision of medical services in the periods under analysis (years 2011, 2012 and 2013).»;

ee) The same Report further proposes that VAT relating to real property be regularized, in accordance with paragraph 6 of Article 24 of the PITA, in the following terms:

«- Total amount of VAT deducted from the property with matriculation number …, fractions B and C: €1,534,906.72

• Deductible VAT resulting from the pro rata of 3% calculated above (year of 2011): €46,047.20(=0.03 x 1,534,906.72)

• Year of completion and beginning of use of the property: 2007

• Period not yet elapsed up to twenty years, having as reference/starting point the year 2007 and 2011 as the year of regularization for VAT purposes: 16

• VAT to be regularized in favor of the State in accordance with subparagraph b) of paragraph 6 of Article 24 of the PITA, last period of 2011: €1,191,087.61 [= 16/20 x (1,534,906.72 – 46,047.20)].» cf PA - fls. 35;

ff) On 20 October 2014, the now Claimant was notified of the RIT, in which the TA promotes two types of corrections resulting from the alteration of VAT classification of the Claimant, carried out by it ex officio: 1. Reposition of VAT deducted in the years 2011 to 2013 relating to passive operations, by becoming a "mixed taxable person" (cf. RIT – cit. Doc. No. 132, pg. 10); 2. Regularization of VAT deducted relating to real property;

gg) The corrections made, which relate to "tax considered to be improperly deducted in accordance with Articles 20 and 23 of the PITA, amount to €474,353.00 in 2011, €512,439.20 in 2012 and €356,524.73 in 2013" (cf. RIT – cit. Doc. No. 132, p. 14).

12.2. Facts Not Proven

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

12.3. Justification for the Determination of Factual Matter

The decision issued regarding factual matters is based on the positions assumed by the parties and not contested, the critical analysis of the documents attached to the record by the parties (among which the Tax Inspection Report) and not challenged by them, with no controversy about them.

III.2. Legal Matter

1. From the foregoing it results that in the controversial situation at issue is the question of whether hospital establishments, clinics, dispensaries and similar entities, which have opted for VAT taxation by considering themselves not integrated into the national health system, meeting therefore the conditions provided for in Article 12 of the PITA for the waiver of exemption, should or should not continue to be considered eligible for this purpose when they conclude protocols or agreements with public entities belonging to the National Health Service, in order to provide beneficiaries of those subsystems with health care provision covered by the exemption norm of paragraph 2) of Article 9 of the aforementioned Code.

More specifically, the TA seems to now intend, in contrast to what had been peacefully understood until at least 2008, that the mere conclusion, on the part of a private entity with activity in the health field, of a single health care provision protocol with a public entity, or public health subsystem - for example, ADSE or a regional health administration - implies that such entity cease to be subject to VAT, by waiver of exemption, automatically becoming an exempt taxable person, without the ability to exercise the right to waive, regardless of demonstrating that the majority of its activity continues to be the provision of health care under free market conditions, distinct from the conditions in which the same care is provided to citizens who benefit from the National Health Service.

1. Health Exemptions

14.1. Modalities of Exemptions

It was with the Sixth Directive that an effort was made to standardize exemptions in internal transactions that Member States might grant, since in the Second Directive this matter was left to the exclusive discretion of national legislator.

The main concern underlying the regime of exemptions provided for in the Sixth Directive was to establish a common list of exemptions so as to make possible, as results from its preamble, that own resources be collected uniformly in all Member States.

Exemptions, however, with the exception of those relating to foreign trade, constitute a significant obstacle to the neutral functioning of the tax, as is widely recognized. In fact, although, for reasons of an economic and social nature, or for reasons of a technical nature, the system must provide tax exonerations, it is desirable to strictly limit the cases of exemption and to proceed with the necessary reductions through the application of reduced rates, so as to permit, as a rule, the exercise of the right to deduction of the tax supported.

As is known, in VAT, there are two modalities of exemptions taking into account the possibility of exercising the right to deduction[1]. On the one hand, we have complete exemptions, total exemptions, or those that confer the exercise of the right to deduct the VAT supported.

In these exemptions, as the designation itself indicates, the beneficial taxable person does not assess tax on its active operations (supply of goods or provision of services provided) and has the right to deduct the VAT supported for their realization. If these exemptions are established in intermediate stages, there is no interruption of the deduction chain, there are no cumulative effects and the consequences on revenue are nil, since the intermediate rates are "immaterial". The final (non-zero) rate will be responsible for recovering the revenue — it is the known positive recovery effect. If they are established at the final stage, there will be a complete exemption of the tax content and the seller deducts the VAT that burdened the respective inputs, disappearing from the value of the good any tax content, manifest or hidden. Unlike simple exemptions, these exemptions do not alter the neutrality qualities of VAT and have the effect of completely protecting from tax the consumption of the good or service to which that complete exemption applies, so they appear as the indicated solution to pursue objectives of equity in the taxation of consumption, when such objectives require complete relief from tax burdens with respect to certain goods and services[2].

In the so-called incomplete exemptions, simple exemptions, partial exemptions, or that do not confer the exercise of the right to deduct the VAT supported, as is the case with the exemptions relating to health that occupy us here, the beneficial taxable person does not assess tax on its active operations, but does not have the right to deduct the VAT supported for their realization[3].

In incomplete exemptions, the operator is thus outside the tax mechanism, being treated as a final consumer, whereas in complete exemptions, or in zero-rate situations, the operator is an integral part of the tax mechanism, being able to deduct it in general terms. Thus, it is easy to conclude that simple exemption can be disadvantageous for productive operators and even harm their competitive capacity. The non-assessment of VAT on sales or provision of services provided by them may not compensate for the inability to obtain credit for the tax supported, especially that which falls on investment in durable goods.

That is, simple exemptions distort the neutrality properties of the tax. If attributed to "intermediate" operators in the economic circuit of goods and services, they originate cascading taxation, leaving the tax burden to fail to proportion exactly to the value of consumption. It is for this reason that, ideally, such exemptions should be provided with parsimony, are harmonized in the common European VAT system and the rules providing for them are interpreted restrictively.

For this reason, the Community legislator came to allow, in exceptional cases, that Member States grant taxable persons the right to waive certain exemptions, with taxable persons then applying the tax under general conditions, i.e., to assess and deduct the VAT supported, so as not to increase the price of their operations. Among these cases is found, precisely, the exemption provided for in subparagraph b) of paragraph 1 of Article 132 of the VAT Directive, which is transposed among us in paragraph 2 of Article 9 of the PITA.

In the selection of operations exempt from value added tax, the Community legislator was inspired, upon adoption of the Sixth Directive, on the one hand, by the exemptions already existing in the Member States, on the other hand, tried to limit the number of exemptions, given that the same embody an exception to the general principle that all provision of services and supply of goods provided for consideration by a taxable person are subject to VAT and put in question the principle of proportionality[4].

Thus, essentially for reasons of a social, cultural and political nature, the VAT Directive, in the wake of the Sixth Directive, provides for a series of exemptions, which, however, apply to a restricted set of services, given the broad base of incidence of VAT.

14.2. The Rules of the VAT Directive

In the VAT Directive the regulation of exemptions is systematized by distinguishing "exemptions for the benefit of certain activities of general interest", "exemptions for the benefit of other activities" (internal exemptions), "exemptions relating to intra-Community operations and exemptions on import", "exemptions on export", "exemptions applicable to international transport", "exemptions applicable to certain operations assimilated to exports", "exemptions applicable to provision of services provided by intermediaries" and "exemptions applicable to operations relating to international traffic in goods".

The provision of services in the health field, whether provided directly by health professionals (doctors, nurses, paramedics) or those relating to hospitalization and medical care provided by public law bodies or private entities working in analogous social conditions, are, in principle, exempt from tax. This is concluded from subparagraphs b) and c) of Article 132 of Directive 2006/112/EC of the Council of 28 November 2006, relating to the common system of value added tax.

The solution of exempting these[5] provision of services has its origin in the Sixth VAT Directive, predecessor of the currently applicable VAT Directive.

Within the scope of provision of health services, harmonization led to VAT exemption for "hospitalization and medical assistance, as well as operations closely related thereto, provided by public law bodies or, in social conditions analogous to those applicable to the latter, by hospital establishments, medical and diagnostic assistance centers and other establishments of a similar nature duly recognized" (subparagraph b) of Article 13 A, 1 of the Sixth Directive, which corresponds to Article 132, subparagraph b) of the VAT Directive) and also for "the provision of assistance services within the exercise of medical and paramedical professions, as defined by the Member State in question" (subparagraph c) of Article 13 A, of the Sixth Directive, which corresponds to Article 132, subparagraph c) of the VAT Directive).

However, the common system allows, in a transitional or derogatory regime, that Member States exempt hospital establishments, medical and diagnostic assistance centers and other establishments of a similar nature, even if they are not recognized as practicing social conditions analogous to those of public law bodies. This is what currently appears in point 7 of part B of Annex X to the VAT Directive ("Operations that Member States may continue to exempt") - Annex which corresponds to Annex F of the Sixth Directive, where the exemption we are dealing with was provided for in its respective No. 10.

The provisions of the VAT Directive are, in essence, identical to the corresponding provisions of the Sixth Directive.

The exemptions of general interest in the health area are contemplated in subparagraphs b) and c) of paragraph 1 of Article 132 of the VAT Directive. Besides its introductory sentence, the exemptions provided for in Article 132, paragraph 1, subparagraphs b) and c) of the VAT Directive are drafted identically to those of Article 13, A, paragraph 1, subparagraphs b) and c) of the Sixth Directive.

In subparagraph b), the VAT Directive determines that Member States must exempt "hospitalization and medical assistance, as well as operations closely related thereto, provided by public law bodies or, in social conditions analogous to those applicable to the latter, by hospital establishments, medical and diagnostic assistance centers and other establishments of a similar nature duly recognized."

For its part, subparagraph c) mandates the exemption from tax "the provision of assistance services within the exercise of medical and paramedical professions, as defined by the Member State concerned".

The objective underlying the grant of these exemptions is to not burden the provision of health care services, ensuring that the benefit of medical assistance does not become inaccessible due to the increased costs resulting from VAT taxation, i.e., to reduce the costs of medical care for users and promote health care[6]. In fact, these are exemptions for the benefit of certain activities of general interest, specific activities intended to pursue socially useful objectives, such as medical assistance. It is settled law that the common objective to both the exemptions provided for in subparagraph b) and those provided for in subparagraph c) is to reduce the cost of health care and make that care more accessible to individuals[7].

In order to determine which services are capable of benefiting from these exemptions, it is necessary to consider not only the literal content of the provisions, but also the reason for being of the VAT exemption regimes provided for here. The problem was the subject of various decisions of the CJEU, which are thus decisive for establishing the exact contours of the exemptions in the matter of health services.

The VAT Directive establishes the exemption regime (incomplete, without the right to deduction) as the rule-regime of the provision of hospitalization and medical assistance services when such services are provided by public law bodies. Additionally, the Directive exempts such services when provided by hospital establishments and medical and diagnostic assistance centers under social conditions analogous to those applicable to public bodies.

Thus Article 132, paragraph 1 of the VAT Directive determines the following:

"1. Member States shall exempt the following operations:

a) (…)

b) Hospitalization and medical assistance, as well as operations closely related thereto, provided by public law bodies or, in social conditions analogous to those applicable to the latter, by hospital establishments, medical and diagnostic assistance centers and other establishments of a similar nature duly recognized;

(…)"

What is the scope of this exemption? For its application it is necessary to verify the simultaneous fulfillment of objective requirements relating to the nature of the operations and subjective requirements relating to the quality of the entity that pursues them. As for the first, the services provided are: (i) hospitalization or medical assistance, or (ii) operations closely connected with hospitalization or with medical assistance. As for the latter: (iii) the service provider must be a public law body, or (iv) must provide the services in social conditions analogous to those applicable to public law bodies and, (v) must be a hospital establishment or a medical and diagnostic assistance center or other establishments of a similar nature duly recognized.

In view of subparagraph b) above, outside the situations where the providers are public bodies or that, not being so, provide medical services in conditions analogous to those of such bodies, the general discipline that results in first line from the VAT Directive is that of VAT taxation, at the normal rate, or at the reduced rate if Member States exercise the prerogative enshrined in Article 98 of the VAT Directive (in conjunction with Annex III).

It should also be noted that, as we will analyze below, the Community legislator allowed Member States to provide for the possibility of waiving exemption.

14.3. National Rules

The VAT exemptions in the matter of provision of services in the health area are contained in paragraphs 1, 2, 3, 4 and 5 of Article 9 of the PITA, which, for their part, reflect the corresponding provisions of the VAT Directive which are subparagraphs b), c), d), e) and p) of paragraph 1 of Article 132.

Paragraph 1 of Article 9 mandates the exemption of VAT "the provision of services in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions" and paragraph 2 "the provision of medical and health services and operations closely connected thereto provided by hospital establishments, clinics, dispensaries and similar".

The scope of some of these exemptions, and in particular, in the case that occupies us, those provided for in paragraphs 1 and 2 of the aforementioned Article 9, has raised doubts, not only among us, but in other jurisdictions, and some of these questions have been brought to the Court of Justice of the European Union (CJEU), both in preliminary reference proceedings and in proceedings for failure to fulfill obligations.

Among us, the problem of interpreting these norms has been especially raised to determine the legitimacy of the waiver of exemption by private entities with activity in the health area.

In the Treaty of Accession of Portugal and Spain to the European Communities, it can be read that the Portuguese Republic was authorized to exempt from VAT the operations of No. 10 of Annex F of the Sixth Directive.

It follows from the Sixth Directive, in its Article 28, 3, b), that Member States may grant, in a transitional regime, to taxable persons the possibility of choosing taxation under the conditions set out in Annex G, a possibility that the VAT Directive maintained in its respective Article 373[8].

The Portuguese legislator used both possibilities. Thus, in Article 9, paragraph 2 of the PITA, it adopted the exemption of "the provision of medical and health services and operations closely connected thereto provided by hospital establishments, clinics, dispensaries and similar"; and, in Article 12, granted to "hospital establishments, clinics, dispensaries and similar, not belonging to public law entities or to private institutions integrated into the national health system, that provide medical and health services and operations closely connected thereto" the possibility of "renouncing the exemption, choosing the application of tax to their operations".

Portugal, under a regime of exception contained in Article 377 of the VAT Directive, made use of the possibility of exempting also these hospital establishments, namely those that do not pursue their activity under social conditions analogous to public hospital establishments (cf. Article 377 of the VAT Directive).

Given what has been set forth, and using the terminology of the VAT Directive, for the purposes of this Article 12, paragraph 1, subparagraph b) of the VAT Code, only those private hospital establishments that do not pursue their activity under social conditions analogous to those applicable to public hospital establishments can be considered as "private institutions not integrated into the national health system" with the right to waive. That is, the Claimant is covered by the said option to waive exemption if it does not pursue its activity under social conditions analogous to those mentioned for public establishments.

Now, it happens precisely that doubts have recently arisen regarding the subjective scope of this waiver of exemption. Which are after all the hospital establishments, clinics, dispensaries and similar that may waive exemption? What does the formula of the law mean "not belonging to public law entities or to private institutions integrated into the national health system"?

1. Interpretation of Exemption Norms

15.1 General Aspects

The CJEU has developed, over these years, relevant case law on the matter of exemptions in general, namely on their respective characteristics and objectives, and, in particular, regarding the specific situations adopted in the VAT Directive. The Court's case law on exemptions has been based, essentially, on the general principles of interpretation that it has developed, in particular, the principle of strict interpretation, the principle of systematic interpretation and the principle of uniform interpretation, also noting, in particular, the need to respect the principle of neutrality.

But it is important to stress from the outset that we are dealing with norms of European Union Law and that, as such, as noted by the CJEU, "For the purposes of interpreting a provision of Community law, account must be taken of its terms, as well as its context and the objectives pursued by the regulation in which it is integrated".[9]

The principle of strict interpretation of exemptions is that which has most frequently been invoked by the CJEU. It is settled case law that, with some nuances, exemptions must be subject to strict interpretation, both with respect to service providers and the types of activities that should be exempt[10].

According to the CJEU, given that the Sixth Directive designed a very broad base of incidence of VAT, covering all economic activities of production, marketing or provision of services, it is possible to state the general principle according to which the tax on turnover is levied on any supply of goods or any provision of services provided for consideration by a taxable person[11]. In this context, given that exemptions constitute derogations from this principle, the terms used to designate the exemptions covered by Article 13 of the Sixth Directive should be interpreted strictly[12]. For this purpose, given that the provisions of that article have an exhaustive character[13], and should be expressed and precise[14], in their interpretation one should pay special attention to the criterion of literal interpretation[15]. As a consequence, resort should be avoided to extensive interpretations that broaden the scope of those provisions whose drafting is sufficiently precise, as this is incompatible with their objective which is to exempt only and solely the activities listed and described in them[16].

However, the interpretation of these terms must be made in accordance with the objectives pursued by the said exemptions and respect the requirements of the principle of fiscal neutrality inherent in the common VAT system. Thus, this rule of strict interpretation does not mean that the terms used to define the exemptions provided for in the said Article 132 should be interpreted in a way that deprives them of their effects[17].

In the same sense, the Advocate General F. G. Jacobs, distinguishing the notions of "strict" interpretation and "restrictive" interpretation, noted that "VAT exemptions must be strictly interpreted, but should not be minimized through interpretation. […] As a corollary, limitations of exemptions should not be interpreted restrictively, but neither should be analyzed in a way that goes beyond their terms. Both exemptions and their limitations should be interpreted in such a way that the exemption applies to what was intended to apply and not more."[18]

After the Stichting Decision[19], the CJEU repeatedly stated, in general, that "the terms used to designate the exemptions covered in Article 13 of the Sixth Directive should be interpreted restrictively given that they constitute derogations to the general principle according to which the tax on turnover is levied on any provision of services provided for consideration by a taxable person". On the other hand, it clarified that no extensive scope can be given to exemptions in the absence of "interpretative elements" that allow going beyond the letter of the provisions that provide for them[20].

In summary, it can be stated that the CJEU understands that in the interpretation of exemption norms one should pay special attention to the literal element, but that a strict interpretation can never deprive of useful effect the rules of the VAT Directive.

As for the systematic interpretation of exemptions, the CJEU has stated that the concepts used in the norms of exemptions are independent concepts of Community law that should be placed in the general context of the common VAT system[21]. In these terms, it has stressed that the content of exemptions cannot be freely altered by Member States, given that autonomous concepts of Community law are at stake, with the exception being the case where the Council permits it[22]. Thus, it is settled case law that the exemptions provided for in Article 13 of the Sixth Directive constitute autonomous concepts of Union Law that aim to prevent divergences in the application of the VAT regime from one Member State to another[23].

It is also customary, in this context, to state that exemptions in the area of VAT assume an objective nature, that is, for the purposes of their grant, the nature of the activity pursued is essential and not the legal nature of the entity that pursues the activity, although, in reality, this is not exactly the case with respect to the exemptions that interest us for the purposes of our analysis.

15.2 The Subjective Scope of the Waiver of Exemption in the Health Area

As we have seen, the objective of the exemption regime applicable to health care is to ensure that the benefit of medical assistance does not become inaccessible due to the increased costs resulting from VAT taxation and, consequently, to reduce the costs of medical care for users and in that measure promote health care.

Thus, the grant of the possibility of waiving exemption is a way of restoring the right to deduct the tax that is the cornerstone of the entire VAT system, eliminating "hidden" tax (the non-deducted VAT) that penalizes taxable persons, even if they are situated at the final stage of the production chain, in particular in phases of significant investment, characterized by substantial acquisitions, allowing them to be taxed under the normal regime (in this situation at the reduced rate contained in item 2.7 of List I attached to the VAT Code) and thus recover the VAT incurred.

We saw that subparagraph b) of paragraph 1 of Article 12, determines that:

"May waive the exemption, choosing the application of tax to their operations:

a) ........

b) Hospital establishments, clinics, dispensaries and similar, not belonging to public law entities or to private institutions integrated into the national health system, that provide medical and health services and operations closely connected thereto."

To waive exemption, the establishments in question cannot belong to public law entities nor to private institutions integrated into the national health system.

Thus, public hospitals, belonging to the State or to any public law entities, cannot waive exemption.

What is meant by establishments not belonging to private institutions integrated into the national health system is precisely what is at issue in the present proceeding.

With respect to establishments belonging to commercial companies, with profit-making purpose, the TA understood until recently that they would not be integrated into the national health system, and could, therefore, waive the VAT exemption, applying tax to their operations. And this without distinction between establishments of companies that concluded agreements with the Ministry of Health or with Regional Health Administrations or other public health subsystems and those that had not concluded similar agreements.

The change of understanding on the part of the TA is based on the concept of national health system, contained in the legal text, which determines the subjective scope of the right to exemption.

According to the understanding of the tax administration, for the correct interpretation of Article 12 the concept of national health system should be derived from the Health Bases Law (Law No. 48/90, of 24 August, with the amendments introduced by Law No. 27/2002, of 8 November). And, according to such understanding, the concept to be adapted in the interpretation of Article 12 would be that reflected in paragraph 1 of Base XII of the cited Health Bases Law:

"The health system is constituted by the National Health Service and by all public entities that develop activities of promotion, prevention and treatment in the health area, as well as by all private entities and all freelance professionals who agree with the former to provide all or some of those activities."

In accordance with the mentioned understanding, private entities that agree with the State to provide activities of promotion, prevention and treatment in the health area become part of the National Health System, which, in terms of VAT, translates to the fact that they cannot waive the exemption in question.

The Tax Administration further claims that this understanding derives from Community case law, especially the Decisions handed down in Proceedings 141/00 and 45/01, where it was discussed what should be understood for the purposes of the exemption provided for in the then Sixth Directive, by "organisms duly recognized by Member States".

Now, it does not seem to us that the correct definition of the subjective scope of the waiver of exemption can be determined by an alleged concept of National Health System contained in the Health Bases Law and that Community case law has that meaning that the TA now seeks to attribute.

In the first place, the Health Bases Law does not define National Health System. Base XII deals with "health system" and not National Health System.

The subjective scope of the exemption in question cannot be determined by simple reference to the Health Bases Law. There is no legal concept of national health system, inherent in the said Health Bases Law. When governing, in its Chapter II, the "providers of health care in general", the Law defines, at least, three sets: the health system (No. 1 of Base XXII), the National Health Service (No. 2) and the "national network for the provision of health care" (No. 4).

The National Health Service has a univocal definition, in Base XII, No. 2: it is constituted by State bodies operating in the health area. Its characteristics are listed in Base XXIV:

"The National Health Service is characterized by:

a) Being universal as to the population covered;

b) Providing integrated global care or ensuring its provision;

c) Being largely free for users, taking into account the economic and social conditions of citizens;

d) Ensuring equity in access of users, with the objective of mitigating the effects of economic, geographical and other inequalities in access to care;

e) Having regionalized organization and decentralized and participatory management."

It is known that the General Tax Law, in its Article 11, paragraph 2, determines that "whenever terms proper to other branches of law are used in tax norms, they must be interpreted in the same sense as that which they have there, unless otherwise directly results from the law." However, there are various elements that demonstrate, in this case, that the tax law did not use national health service in a technical sense, even ignoring that the expression "National Health Service" does not have exact correspondence in the Health Bases Law.

In the first place, the PITA is much earlier than the Health Bases Law, and Article 12 has not undergone any modification with respect to the use of that expression.

As noted by Professor Xavier de Basto in his Opinion attached[24], "The legislator of the PITA - I can state it with certainty - did not take as paradigm any concept of domestic law when designing the set of hospital establishments, clinics, dispensaries and similar to which it wanted to grant the right to waive the tax exemption. It used in this norm the notion of national health service with a meaning parallel to that in which, in the rule of VAT exemption for education services, it used the notion National Education Service. There as here, the reference law was not domestic law, but rather Community law.

It was a matter of legislating in respect of the Community directive. In the case of health, the reference norm, to be transposed into domestic tax law, was the provision of the then 6th VAT directive (today Directive 2006/112) that delimits the scope of the VAT exemption for establishments not belonging to public law bodies and, reflexively, as we have seen, also determines the subjective scope of exemption.

(…)

The national legislator used the expression "private institutions not integrated into the national health system" to cover, as results from Community law, private entities that work in the area of medical and health services and others connected with these under social conditions different from those practiced in public establishments. This is the correct interpretation, in our view, of Article 12 as to the subjective scope of the right to waiver."

And if we want still more assurance that this is so - and that the expression "not integrated into the national health system" should not be understood in the approximate sense that results from the Health Bases Law - it suffices to note that the legislator of the PITA itself was not univocal in the definition of what are the private entities that may waive exemption. In fact, when it came to, in "item" 2.7 of List I attached to the PITA, establishing the reduced rate applicable to the provision of medical services and related operations provided by hospital establishments, clinics, dispensaries and similar that, under the terms of Article 12 of the PITA, may waive exemption, the legislator used the expression "National Health Service" (with capital letters), and not the alternative national health system (with lowercase letters), which it had used in Article 12, paragraph 1. And the norm contained in that "item" was even introduced after the publication of the PITA, which initially did not provide for a reduced rate for those service provisions."

Thus, we conclude that tax law did not use these expressions in a technical sense in the sense that they have in the branch of law to which they belong.

With no express and case-by-case recognition of the establishments that practice the said "analogous social conditions" mentioned by the directive, the correct delimitation should attend to the purpose of the legal persons involved, and to the manner in which the services are provided. The national legislator, taking as paradigm the relevant norm of the Sixth Directive, only excluded from the waiver of exemption hospitals, clinics, dispensaries and similar belonging to public law entities and to private institutions that are part of the so-called "social economy". On these grounds, the norms of the PITA (paragraph 1 of Article 12 and item 2.7 of List 1) do not exclude from the right to waive commercial companies that have concluded with the National Health Service agreements for the provision of medical services. It is not the existence of such agreements that integrates, without more, such entities into the national health system, for VAT purposes, transforming them into operators of the social sector of the economy.

Furthermore, such understanding, contrary to what invoked by the TA, is not put in question by the case law of the CJEU on the matter, quite the contrary.

Although there are no jurisprudential decisions of the CJEU that specifically deal with the question of when a private hospital establishment provides services under social conditions analogous to those applicable to "public law bodies", the Court has ruled on various occasions on the requirements that must be verified for a private entity to be considered as "another establishment of the same nature [to hospital establishments, medical and diagnostic assistance centers] duly recognized" practicing conditions analogous to those imposed on public law entities, for the purposes of Article 132, paragraph 1, subparagraph b) of the VAT Directive, and consequent application of the exemption regime.

In this context, see the Dornier Decisions[25], the L.u.p Decision[26], and more recently, the Copy Gene Decision[27]. In all three cases, the question at issue was the concept of "organization duly recognized" by the Member State as practicing conditions analogous to those imposed by similar organizations of public law entities, even without express recognition, the Court provided criteria for determining under what conditions a private entity should be considered "another establishment of the same nature duly recognized", for the purposes of Article 132, paragraph 1, subparagraph b) of the VAT Directive. In the Copy Gene Case, the Court, recalling what it had already stated in previous cases, came to establish the following criteria for that purpose:

"In this regard, in order to determine the establishments that should be "recognized" within the meaning of that provision, it is for the national authorities, in accordance with Union law and subject to the review of the national courts, to take into account various elements, among which are the character of general interest of the activities of the taxable person in question, the fact that other taxable persons who have the same activities already benefit from similar recognition, as well as the fact that the costs of the services in question are possibly borne in large part by health insurance funds or by other social security bodies (see, in that sense, the aforementioned decisions, Kügler, nos. 57 and 58; Dornier, nos. 72 and 73; and L.u.P., no. 53)."[28]

One of the criteria pointed out is who bears the costs of the services. The Court admits that contracting with insurance funds or social security bodies - supposedly public bodies - is an indication to be taken into account for that the service provider has the qualification of a body recognized as practicing conditions analogous to those of public bodies - therefore exempt from VAT for the purposes of the Directive (and, consequently, unable to waive exemption). But it is clear that it only admits this if the costs of the services are "borne in large part by health insurance funds or by other social security bodies", since only thus may analogous social conditions be verified.

The Ines Zimmermann Decision goes even further in confirming that an activity that is approximately two-thirds borne by social security bodies constitutes "an element that may be taken into account to determine the bodies whose "social character", within the meaning of Article 13, A, paragraph 1, subparagraph g) of the Sixth Directive [now 132, paragraph 1, b) of the VAT Directive], should be recognized for the purposes of that provision"[29].

In the Draft Tax Inspection Report submitted to Intercir, the TA concluded that the fact of having agreements or protocols with public entities is, per se, sufficient, without further consideration, for those conditions to be fulfilled and, consequently, to prevent the waiver of exemption under Article 12, not even investigating whether the costs of the services are borne by the two public health subsystems that freely contracted with Intercir for the provision of medical services in a "small" or "large" part.

Now, the mere circumstance of concluding an agreement with public health subsystems cannot lead to the conclusion that a commercial company operating in the health field is qualified, for VAT purposes, as belonging to the national health system.

Note that this Tribunal has already pronounced itself in the same sense in an identical situation in Proceeding 278/2013-T which must be called to account and whose main conclusions we reproduce:

"The Portuguese legislator opted for the formulation of a negative requirement applicable to the 'private institutions integrated into the national health system' (those which cannot waive exemption). The meaning of this expression cannot but correspond to entities that provide services under social conditions analogous to those of public bodies, since that is the defining concept of the VAT Directive underlying the internal transposition norm as explained above.

(…)

This parallelism or adhesion to the Health Bases Law is not justified for multiple reasons.

First, the phrase 'national health system' does not appear in any of the concepts of the Health Bases Law.

In fact, there is no legal definition of 'national health system' in Portuguese legislation and from a linguistic point of view the expression contains two common words, both to 'health system', and to 'National Health Service', being that the latter concept excludes private establishments.

On the other hand, the Health Bases Law, which introduces the concept of health system is subsequent to the drafting of the VAT Code (it emerged in 1990 and the Code dates from 1984), so chronologically it could not refer to it and, with respect to the use of the expression used in Article 12, paragraph 1, subparagraph b) of the aforementioned Code, to date has not undergone any modification.

The concept of National Health Service, on the other hand, existed at the time of publication of the VAT Code, and had been in force since 1979, through Law No. 56/79, of 15 September, which created the National Health Service, which, it is noted, only covers the bodies and public services under the dependence of the Ministry of Health, thus excluding private establishments.

Thus, taking into account the historical and systematic elements, the only concept existing in Portuguese law to which the VAT Code could refer at the time of its publication was the concept of 'National Health Service' (and not the concept of health system whose contour emerges six years after the publication of the VAT Code).

Furthermore, the State Budget Law for 1999 (Law No. 87-B/98, of 31 December), which was enacted when both concepts of 'National Health Service' and 'health system' are already legally defined and settled, makes an explicit reference to the waiver of exemption provided for in Article 12, paragraph 1, subparagraph b) analyzed here, indicating that, with respect to this, private institutions integrated into the National Health Service are at stake.

This indication is contained in the new wording of item 2.7 of List I attached to the VAT Code, which comes to clarify the application of the reduced rate of tax to medical services provided by taxable persons who have opted for the waiver of exemption, and establishes an express connection between the waiver of exemption and the National Health Service (and not with the 'health system') as illustrated below:

(…)

It appears, however, that strictly speaking the VAT Code does not intend to make any reference or referral to a legal concept of domestic law.

It is true that the question at issue relates to the exercise of a discretionary power attributed to the national legislator: to exempt (or not) certain operations (of health care) and to grant (or not) the possibility of choosing taxation with respect to the same.

However, that margin of freedom of the legislator refers to an exemption regime delimited by autonomous concepts of Community law, among which stands out that of 'analogous social conditions' to those of public bodies.

(…)

However, from the moment the legislator decided to grant them (those entities) such a faculty (of taxation), the subjective scope of the waiver cannot be different from that which is subtracted from the mandatory exemption regime, under penalty of violation of the parameter of neutrality. There is a freedom of choice of regime (exemption with or without eventual waiver of exemption), but there is no freedom to shape the subjective scope of that choice.

With this we want to say that all entities that do not provide their services under social conditions analogous to those of public bodies, and that the Portuguese legislator opted to exempt (by the standard-regime of the VAT Directive would be taxed) should be able to benefit from the faculty of taxing their operations, if the legislator simultaneously decided to institute the faculty of waiving exemption (as happened in the Portuguese case).

According to the CJEU "in the framework of the exemption provided for in Article 13, A, paragraph 1, subparagraph g) of the Sixth Directive, as results from nos. 43 and 52 of the present decision, it is not with respect to public law bodies that the principle of fiscal neutrality demands equality of treatment in the matter of recognition of social character, but with respect to all other bodies [read, that are not public law bodies] among themselves" – cf. Decision of 15 November 2012, C-174/11, Ines Zimmermann, point 53.

It is therefore necessary to determine the meaning and scope of the expression 'analogous social conditions' to those applicable in the public sector, in order to derive 'by the negative' the field of application of the waiver of VAT exemption contemplated in Article 12, paragraph 1, subparagraph b) of the respective Code, which should cover all entities that fit therein.

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One of the principal criteria thus resides in determining who bears the cost of the services. To..."

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