CAAD 232/2018-T: VAT Exemption for Elderly Care Home Social Utility Ruling

ARBITRAL DECISION

The Arbitrators José Poças Falcão (President Arbitrator), Nina Aguiar and António Carlos dos Santos, designated by the Ethics Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby agree as follows:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

A..., Lda., NIPC..., with registered office at Rua..., n.º..., ...-... ..., filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), having as its subject the rejection of the gracious complaint No. ...2017..., which upheld the acts of additional VAT assessment for the years 2012, 2013 and 2015 (documented in the records), arising from purely arithmetical corrections made by the tax inspection of the Finance Department of ..., pursuant to service orders OI2016..., OI2016... and OI2016..., which resulted in total tax to be paid, including compensatory interest, in the amounts of € 65,582.78, € 66,867.09 and € 46,244.49.

1. To substantiate its request, the Claimant alleges, in summary form:

i. error in the factual and legal assumptions, reflected in non-compliance with European Union law and erroneous interpretation of paragraph 7 of article 9 of the VAT Code;

ii. violation of the principles of equality, neutrality, prevalence of substance over form and good faith.

1. The request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

2. The Claimant proceeded to appoint an arbitrator, having appointed the Honorable Prof. Dr. António Carlos dos Santos, pursuant to article 11/2 of the LRAT and, pursuant to paragraph 3 of the same article, the Respondent appointed as arbitrator the Honorable Prof. Dr. Nina Aguiar.

3. The arbitrators appointed by the parties were appointed and accepted their respective duties.

4. Following the request presented by the arbitrators appointed by the parties, the signatory president arbitrator was appointed by the Ethics Council of the CAAD pursuant to regulatory procedures.

5. The parties were notified of such appointments and did not, pursuant to regulatory procedures, manifest any intention to refuse any of them.

6. In accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 18-7-2018.

7. The Respondent, duly notified for this purpose, filed its reply within the legal deadline, defending itself solely by impugning.

8. The meeting referred to in article 18 of the LRAT was dispensed with, without opposition from the parties, by order of 10-10-2018.

9. Witnesses were listed by the claimant but their examination was deemed unnecessary in these proceedings, with the statements that had been given and recorded in the context of CAAD process No. 608/2017-T being admitted as evidence, pursuant to article 421 of the Code of Civil Procedure, by order of 8-11-2018.

10. The claimant attached to the records the arbitral decision handed down in process CAAD No. 608/2017-T, conducted between the same parties and with discussion of the same factual and legal matters, with this document being admitted by order of 29-11-2018.

11. Final written submissions on facts and law were presented, with the parties reiterating in them, in essence, the positions previously set out in their respective pleadings.

12. By order of 8-11-2018, the deadline for rendering and notifying the final decision was extended, pursuant to article 21-2 of the LRAT (by a further two months).

13. The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, paragraph 1, subparagraph a), 5 and 6, paragraph 1, of the LRAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the LRAT and article 1 of Administrative Rule No. 112-A/2011, of 22 March.

The proceedings do not contain any nullities.

Thus, there is no obstacle to consideration of the merits of the case.

Everything considered, it is necessary to decide on the merits of the request.

II. REASONING

A. FACTUAL MATTERS

A.1. Facts established as proven

1. The Claimant is a limited partnership company that exercises the main activity of social support for elderly persons, with accommodation (CAE 87301) and the secondary activity of beauty institutes (CAE 96022).

2. The Claimant makes VAT deduction according to the method of actual allocation of all goods and services, considering as exempt activity under paragraph 7 of article 9 of the VAT Code all activity of social support for elderly persons with accommodation.

3. The Claimant carries out its elderly care home activity in two establishments:

• an establishment located in urban property ..., on Rua de ..., locality of ..., parish of ... and municipality of ..., ...-... ..., with operating license No. .../2011, issued on 23-02-2011 by Social Security in the name of the Claimant for the exercise of the elderly care home activity at that location (hereinafter, "B..."); and

• an establishment located in the autonomous unit designated by the letter "B" of the urban property matrix No. ..., corresponding to the Ground Floor left, of the property located on Rua ..., ..., parish of ..., municipality of ... (hereinafter "C...").

1. Before the Claimant engaged in its activity at C..., the same was already dedicated to elderly care home activity by the previous owner, D... .

2. The previous owner had in her possession the respective opening and operating license of the establishment, issued in her name (License No. ...- LR/2004).

3. The building had a use license, as evidenced by the use license No. .../04, of 7 April 2004.

4. In September 2008, the Claimant leased the autonomous unit designated by the letter "B" of the urban property matrix No. ..., corresponding to the Ground Floor left, of the property located on Rua ..., ..., parish of ..., municipality of ..., to exercise the activity of support for elderly persons with accommodation.

5. On 23-09-2008, the Claimant submitted the Declaration of Change of Activity to the Tax Authority (AT) of ..., for the aforementioned CAE 87301, with VAT exemption, for which purpose it presented the License ...-LR/2004.

6. This declaration of change was accepted by the AT.

7. On 18-11-2008, the then owners of the care home (D... and her husband, E...) entered into a purchase promise contract with the Claimant, whereby they promised to sell and the Claimant promised to purchase the autonomous unit designated by the letter "B", corresponding to the building at C... .

8. The promised contract was executed on 19-05-2009.

9. The property was not acquired directly by the Claimant, but rather by F..., S.A. at the suggestion of the Claimant.

10. The property was sold to the financial institution for the price of €400,000.00.

11. On 19-05-2009, for the execution of the deed, the originals of the Use License and the opening and operating license of C... were presented to the notary.

12. F..., S.A. declared, in the deed, that the acquired property was intended to be let on financial lease to the Claimant.

13. On the same date, the respective financial lease agreement was concluded between the Claimant, as lessee, and F..., S.A., as lessor, having C... as its subject.

14. On 09-06-2009, the Claimant notified Social Security of the acquisition of the C... property, requesting the scheduling of a meeting in order to fulfill legal formalities.

15. In May 2009, the Claimant entered into a lease agreement for B..., in which it appears as lessee, in order to exercise its activity of social support for elderly persons with accommodation also at this establishment.

16. On 30-06-2009, the Claimant notified Social Security of the lease of B... .

17. On 28-07-2009, Social Security of ... responded and sent an Official Letter with the form and documentation necessary for the replacement of the operating license/License.

18. On 24-08-2009, the Claimant submitted a request and documentation for the replacement of the License of C... to Social Security of ... .

19. On the same date, the Claimant submitted a request and documentation for the replacement of the License of B... to Social Security of ... .

20. On 09-09-2009, the Claimant also submitted the remaining documentation for the replacement of the License of C... .

21. On the same date, the Claimant submitted the remaining documentation for the replacement of the License of B... .

22. On 23-02-2011, Social Security of ... issued the operating license relating to B..., in the name of the Claimant.

23. Social Security did not issue, until the date of submission of the arbitral request, any decision concerning the request for replacement of the operating license of C... .

24. When the Claimant was already engaged in activity at B..., the previous owners filed a precautionary measure in the Court of ... (process .../10...T...), in which they alleged that the kitchen attached to the care home of unit "B" belonged, before, to unit "A" where they resided and of which they were owners, petitioning that the immediate delivery of that kitchen be ordered.

25. Before the existence of these two units, there was a single property, and only in March 2018 did the owners opt to establish the building in horizontal property, after which the units "A" and "B" came into existence.

26. In the context of the aforementioned precautionary measure, the Court of ... ordered that the Claimant deliver the kitchen of C... to the previous owners.

27. On 30-04-2010, the Claimant proceeded to effectively deliver the care home kitchen and proceeded to seal off the location, with the construction of a masonry wall of blocks and cement.

28. This construction also sealed off access to other areas attached to the care home, such as bathroom, connection hall to the dining room, access to the exterior, gas access and access to water distribution.

29. The Court of Appeal of Coimbra, of 05-04-2011 ordered "the reconstitution of the previous situation with the delivery/restitution of the kitchen to the respondent/appellant".

30. The previous owners of C..., to whom the kitchen was delivered, while that part of the property was in their possession, transformed it.

31. On 23-03-2013, in order to restore the divisions and area as it was when the precautionary measure was decreed, the Claimant filed an action against the previous owners of C... (process .../13...T...) petitioning that they be condemned to restore all elements and divisions in the exact terms in which they were conceived in the approved project for the implementation of the care home.

32. The Claimant ascertained that the owners of C... at the time of sale omitted other divisions that were located near the kitchen and also in the part of unit "B" that is below unit "A".

33. These divisions were associated in all documents, plans and use licenses issued by the Municipality of ..., and License ...-LR/2004, issued by the District Center of Social Security of ..., as belonging to the Care Home.

34. On 31-12-2010, the Claimant filed an action petitioning the restitution of the omitted divisions (process .../10...T...).

35. In 2011, a monitoring/evaluation action by the Social Security of ... was carried out at the care home by Technician Dr. G... .

36. On 06-03-2012, C... was the subject of a new monitoring/evaluation action by Social Security.

37. In this monitoring/evaluation action, Social Security concluded that "In the context of the aforementioned action it was possible to ascertain that the social response is operating adequately".

38. Social Security identified some irregularities in that action, among which it identified the following: "the establishment A..., Lda. is not licensed".

39. On 03-05-2012, the Claimant responded to the notification of the result of the aforementioned monitoring action and clarified that it acquired C... on 19-05-2009 and that it notified such acquisition on that date to Social Security – District Center of ..., having sent the respective documentation for license replacement by means of two registered letters with proof of receipt, dated 24-08-2009 and 09-09-2009.

40. The Claimant further alleged that, at the time of the monitoring visit, Social Security indicated to it that it should await the delivery of the aforementioned divisions and subsequently the operating license would be dealt with.

41. In April and December 2012, C... was the subject of new inspections by the Inspection Unit of the District Center of Social Security of ... .

42. In the context of those inspections, all documentation and functional area of C... were inspected, except the omitted divisions that were the subject of the action filed by the Claimant in 2010.

43. Following the inspection of April 2012, Social Security notified the Claimant to submit documents.

44. The Claimant proceeded to send the requested documentation.

45. Following the inspection of December 2012, a notification for the submission of documents was also issued.

46. The Claimant requested, via email, a new inspection, which would include the areas that were subject to court disputes.

47. In response, the Claimant received an email from Social Security nullifying the notification for submission of documents made following the December 2012 inspection.

48. The Claimant received a letter from the Inspection Unit of the Social Security Center, dated 07-08-2013, requesting that, upon the conclusion of the court proceedings, a copy of the decision of the Judicial Court of ... be sent and further requesting the submission of the financial lease agreement concluded upon the acquisition of the establishment.

49. In July 2012, the Claimant was notified that the previous owners of the care home filed a new action in Court (process .../12...T...) petitioning the annulment of the purchase and sale transaction concluded concerning the acquisition of the C... property, invoking error, alleging that they had not sold the "omitted" divisions, "although planned, they never went beyond the drawing board", an action that was later dismissed as time-barred and whose sentence established as proven, among other things, that:

a. "The divisions claimed in the action [...] never formed part of the Care Home because although planned they never went beyond the drawing board";

b. "Of the divisions planned for the Care Home, discussed in the two actions, in fact, only the kitchen was built, which resulted from the transformation of one of the rooms that already existed on the ground floor of the authors' residence";

c. "The remaining part of the ground floor [...] even after the construction of the Care Home, was always used by the authors as a residence".

1. In the context of this process, the Claimant, by letter of 22-03-2013, requested clarifications from Social Security asking which divisions and since when they had not been used in service of the care home.

2. Social Security elaborated, in this context, a report and subsequent clarifications, where it stated, among other things, that "although the current situation of the establishment is not regular, this residential structure for elderly persons has been evaluated by this service, which has concluded «as to the existence of adequate functioning»".

3. On 14-09-2014, the Claimant sent a new communication to Social Security, forwarding to it the sentence handed down in process .../12...T... and requesting that the same pronounce itself on whether the aforementioned divisions "went or did not go beyond the drawing board and, in case they were built, since there are also monitoring reports, since when these ceased to be used for care home activity and began to be used for residential purposes", in order to inform the other processes still pending that had as their subject those same divisions.

4. In the fiscal years of 2012, 2013, 2014 and 2015, the Claimant considered the activity developed at C... as being VAT exempt, under paragraph 7 of article 9 of the VAT Code, understanding that the acquired unit was already intended as a care home, and that the process of license replacement had not yet been completed due to various legal impossibilities, all beyond its control, by which the license issued by Social Security under No. .../RL2004 would remain valid and effective, thereby fulfilling the recognition of public utility for purposes of exemption.

5. During the inspection procedure, the Claimant was requested to provide proof of the social utility recognized by the competent authorities with respect to the establishment of C... .

6. The Claimant exhibited an official letter that was sent to it by Social Security, which informs that the process of replacing the license No. ...-RL/2004, issued for the exercise of the care home activity in that unit, "was not completed due to various legal impossibilities, namely, due to the existence of court disputes over the building, between A... and the previous owner".

7. The AT found, by analyzing the accounts, that the invoices for services from the "care home" activity are all recorded in the same account "72114 – Service A – exempt", with no element distinguishing the invoices for services provided in one establishment from the invoices for services provided in the other establishment.

8. The Claimant was notified of the tax inspection report through Official Letter No. ..., of 20/10/1016, which made VAT corrections in the total amount previously mentioned of €178,694.36.

9. The AT, as a consequence of the aforementioned corrections, issued the following additional VAT assessments and interest:

[TABLE OF ASSESSMENTS]

1. In November 2016, the Claimant filed gracious complaint No. ...2016... of the additional VAT assessments and respective interest.

2. On 16-06-2017, the Claimant exercised its right to a hearing on the draft decision of the gracious complaint.

3. On 23-08-2017, the Claimant was notified of the decision rejecting the gracious complaint.

4. The Claimant filed hierarchical appeal No. ...2017... which had as its subject the decision rejecting the gracious complaint.

5. On 29-06-2018, Social Security issued the following information:

[INFORMATION]

1. On 17-08-2018, Social Security issued the following addendum to the information referred to in the previous point:

[ADDENDUM]

A.2. Facts established as not proven

With relevance for the decision, there are no facts that should be considered as not proven.

A.3. Reasoning for the factual matters proven and not proven

With respect to the factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from not proven matters (cf. article 123, paragraph 2, of the Tax Code of Procedure and article 607, paragraph 3 of the Code of Civil Procedure, applicable pursuant to article 29, paragraph 1, subparagraphs a) and e), of the LRAT).

Thus, the facts relevant for judgment of the case are chosen and delimited according to their legal relevance, which is established having regard to the various plausible solutions of the legal question or questions (cf. former article 511, paragraph 1, of the Code of Civil Procedure, corresponding to current article 596, applicable pursuant to article 29, paragraph 1, subparagraph e), of the LRAT).

Thus, having regard to the positions assumed by the parties, in light of article 110/7 of the Tax Code of Procedure, the documentary evidence and the administrative proceedings joined to the records, as well as the testimonial evidence produced in CAAD process No. 608/2017-T, analogous to this one, used for these proceedings pursuant to the order handed down on 8-11-2018, the following facts were established as proven, with relevance for the decision, taking into account that, as was written in the Court of Appeal Decision of the Court of Appeal South of 26-06-2014, handed down in process 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned".

Allegations made by the parties and presented as facts were obviously not established as proven or not proven, consisting of strictly conclusive affirmations, incapable of proof and whose truthfulness must be assessed in relation to the concrete factual matters consolidated above.

B. ON THE LAW

It should be noted that the essential question or questions that are the object of the dispute are exclusively or, at least, essentially matters of law.

In fact, everything comes down to ascertaining whether or not there occurred error in the factual and legal assumptions, this reflected in non-compliance with European Union law and erroneous interpretation of paragraph 7 of article 9 of the VAT Code (emphasis ours) or, more specifically, whether the activity developed by the claimant in its establishment located in the locality of ..., ..., parish of ..., municipality of ... (activity of social support for elderly persons with accommodation), is or is not able to be classified, for VAT purposes, as an exempt activity in light of the provision of article 9-7 of the VAT Code (as the Claimant alleges) or, on the contrary, whether the prerequisites for such exemption are not met (as the AT claims).

It may be said in advance that the question has contours very similar to that which was the subject of the aforementioned arbitral process of the CAAD No. 608/2017-T, with the difference between this and the present process being based solely on the years of the assessments: the latter has as its subject VAT assessments of 2014 and in the present records VAT assessments of the years 2012, 2013 and 2015 are in question.

As the Respondent itself alleges, the Claimant considered the activity developed in its establishment as "being exempt from VAT, under paragraph 7 of article 9 of the VAT Code, understanding that the acquired unit was already intended as a care home, and that the process of license replacement had not yet been completed due to various legal impossibilities, all beyond its control, by which the license issued by Social Security under No. .../RL 2004 would remain valid and fully effective, thereby fulfilling the recognition of public utility for purposes of the disputed exemption".

In fact, the AT understands that "(...) the Claimant does not have an operating license for the activity it exercises in that establishment, from which it is necessary to conclude that it has not proven, with respect to this activity, its social utility in order to be able to benefit from the exemption provided for in paragraph 7 of article 9 of the VAT Code."

This is, therefore, the core of the dispute to be resolved and which this Tribunal must consider.

It may be said, in advance and to abbreviate the reasoning, that this arbitral panel sees no reasons or grounds to reverse or alter the sense of the decision handed down in process No. 608/2017-T, by a Collective Tribunal composed, moreover, of two of the arbitrators who also make up this Tribunal.

Let us then examine the question following very closely the decision handed down in that other process.

The classification for VAT purposes is being discussed of the activity of social support for elderly persons with accommodation (care home), developed by the Claimant in the years 2012, 2013 and 2015, in its establishment located in the locality of..., in the parish of ..., municipality of ... .

The tax provision whose application to the concrete case is being discussed is, as was seen, paragraph 7) of article 9 of the VAT Code, which prescribes:

"Services rendered and goods transferred that are closely connected thereto, supplied in the course of the normal exercise of the business by creches, nursery schools, activity centers for leisure time, establishments for children and young persons lacking normal family support, residential homes, workshops, establishments for children and young persons with disabilities, centers for rehabilitation of invalids, care homes for the elderly, (...) or other social facilities which belong to legal persons under public law or private solidarity institutions or whose social utility is, in any case, recognized by the competent authorities, even if the services are supplied outside their premises;"

Thus, and in summary, an entity will benefit from the exemption established in paragraph 7) of article 9 of the VAT Code if it:

a. Operates an establishment that can be qualified as a care home; and

b. Has the status of social utility recognized by the competent authorities.

As results from the factual matters, the Claimant operated, in the years in question, an establishment qualified as a "care home" for purposes of article 9 of the VAT Code, which, moreover, is not even disputed.

It thus fulfilled the first of the aforementioned requirements.

On the status of "social utility", article 23 of Decree-Law No. 64/2007 of 14 March applied and applies, which "defines the licensing and inspection regime for the provision of services and establishments of social support, in which activities and services within the scope of social security relative to children, young persons, elderly persons or persons with disabilities are exercised, as well as those aimed at the prevention and remediation of situations of hardship, dysfunction and social marginalization."

The aforementioned article 23 further provides that:

"Establishments that are licensed under the terms of this chapter are considered to be of social utility."

Examining the normative texts invoked, there is, from the outset, a discrepancy of detail between paragraph 7) of article 9 of the VAT Code and article 23 of Decree-Law No. 64/2007, inasmuch as the former speaks of "social utility" referred to the person operating the care home, while the latter provision speaks of "social utility" referred to the establishment.

Taking into account the systematic element of interpretation, and specifically the duty of interpretation in conformity with EU law, it is considered that the noted discrepancy should be resolved in the sense that, if an establishment has social utility in the context of Decree-Law No. 64/2007, the entity operating it should be able to benefit from the exemption of paragraph 7) of article 9 of the VAT Code, because otherwise it would have to be concluded that the Portuguese legislator would have rendered impossible the application of paragraph 7) of article 9 of the VAT Code insofar as it is relevant here.

In light of the foregoing and pursuant to article 23 of Decree-Law No. 64/2007, a "care home" establishment will have the status of social utility provided that it is licensed under the terms of the same Decree-Law No. 64/2007, this being the only condition for the acquisition, ipso jure, or in a manner, so to speak, automatic, of that status.

Moreover, in VAT, the exemptions provided for in article 9 of the VAT Code are not subjective exemptions, but rather exemptions destined for the exercise of certain activities: in this case an activity of a social nature, with the purpose, not of benefiting the service provider, but those to whom the service is provided (purpose-related exemption).

In other words: this is here an activity of provision of services to elderly persons crystallized in an establishment, an organism of a social character, designated as a Care Home, whether publicly or privately owned and managed and whether or not with profit-making intent. In fact, the latter hypothesis tends to gain relevance inasmuch as EU Law, following Anglo-Saxon law, has extended the provision of public services to private entities, and has even begun to speak of (economic) services of general interest.

The VAT Code, for reasons of assessing the suitability of the service provider and prevention of risks in the exercise of the activity, requires that the establishment, in order to function, be recognized as of social utility by means of a license issued by Social Security. A formal system of a priori control was thus opted for (through an operating license), allowed by the VAT Directive. This choice, which may not be unrelated to the creation of a licensing fee aimed at removing a legal obstacle to the exercise of an activity, is, however, accompanied by forms of a posteriori control, intended to verify whether the conditions for issuance of the license have changed or not.

Thus, what must be ascertained is whether the establishment in question – the care home operating, in the years 2012, 2013 and 2015, in unit B of the property located on Rua ..., ..., ...– operated then by the Claimant, had the status of "social utility".

For this purpose, it will be necessary only to ascertain whether it was "licensed under the terms of Decree-Law No. 64/2007".

As results from the factual matters established as proven, the Claimant became the holder of the establishment in question by means of an "establishment lease" agreement concluded in 2008 with the original holder thereof.

The establishment that was the subject of such contract, as also results from the factual matters ascertained, was licensed by license No. ...-LR/2004.

Being the operating license of the establishment in question from 2004, it can only be concluded that the same was in force at the date of entry into force of Decree-Law No. 64/2007, with nothing in the records showing otherwise.

Article 42 of Decree-Law No. 64/2007 required that "Establishments in operation at the date of entry into force of this decree-law, which are not licensed, must adapt to the rules established in this decree-law and regulatory measures referred to in article 5, with the necessary adaptations to each type of establishment, under the conditions and within the timeframes set therein."

In the same Decree-Law, no obligation of adaptation was imposed on establishments that were operating with licensing, from which it must be concluded that licenses granted under previous legislation remained valid.

In this context, it is therefore necessary to determine whether, between the date when the Claimant became the holder of the operation of the establishment and the dates (2012, 2013 and 2015) of the tax facts under analysis, any circumstance occurred that caused the aforementioned license No. ...-LR/2004 to cease to be valid or to produce effects.

It should be noted in this regard that from Decree-Law No. 64/2007 it is clear that the transfer of property or operation of the licensed establishment does not cause the expiry of the respective license.

In fact, from the combination of paragraph 1 of article 22 with subparagraph c) of paragraph 2 of article 18 of the aforementioned provision, it is concluded that the change of the management entity of the establishment determines, for the holder, the necessity or burden of requesting not a new license but the replacement of the license.

As, moreover, results from the factual matters established as proven, such request was submitted by the Claimant on 24-08-2009.

The Ministry responsible for Social Security (Decree-Law No. 64/2007 does not specify which entity is competent for licensing or replacement of licenses of establishments regulated therein), did not render a final decision on the request submitted by the Claimant, in the sense of replacement of the holder of license No. ...-LR/2004.

The question then arises of the consequence of this omission of decision by the competent organ.

The Tax Authority considered, as results from the factual matters, that the lack of decision on this request is equivalent to lack of a license.

Nevertheless, it is the Ministry itself responsible for the supervision of Social Security that, through the Social Security Institute IP, says, in a report dated 07-01-2013:

"The license issued by Social Security for the establishment being analyzed has not expired nor is suspended. This establishment is not operating illegally".

It is considered, in this respect, that the interpretation of law conveyed by Social Security in the aforementioned communication is the only correct one.

In fact, as the law provides the mechanism for replacement of the license – a mechanism of license replacement that is not the same as a request for a new license, and without which the possibility of transfer of establishments would be seriously compromised – having been given to the competent authorities the elements requested for decision-making, i.e., the administered taxpayer having done what was required of it to make possible the replacement of the license, it is not defensible that the consequence of the lack of decision by the competent authorities should have the scope of imposing on the same administered taxpayer the necessity to close the establishment, when, from the outset, such consequence is not expressly provided for by law.

And such consequence not being expressly provided for by law, the application of the law to the concrete case must always take into account the principle of proportionality of action by the public administration, enshrined in article 266, paragraph 2 of the Constitution.

It should also be noted, as a not insignificant fact, that on 03-02-2016, in response to the Claimant's request regarding the decision on its request for license replacement, the Social Security Institute IP sent it the following communication:

"For the pertinent purposes, it is hereby informed that for the address Rua ... No. ..., ..., ...-... ..., ..., License No. ...-LR/2004 was issued, for the exercise of the elderly care home activity.

It is further informed that the establishment was acquired in 2009 by the company A... Lda., and the latter submitted a replacement request to this District Center on 27/08/2009.

The aforementioned license replacement process was not completed due to various legal impossibilities, namely due to the existence of court disputes over the building, between A... and the previous owner."

This communication can have no other meaning, on the part of the Social Security Institute IP, than the admission that it is unable to apply the law to the Claimant's situation and therefore is unable to render a decision on the request.

In fact, there cannot, by definition, exist legal impossibilities that justify the absence of decision on a licensing request and, all the more, on a license replacement request, when the entity has a power-duty to decide. Either the establishment meets the conditions to operate or it does not meet them, and the verification of one or the other of these hypotheses will be all that is required of the decision. Legal impossibility would be the law not establishing the conditions for license replacement, which, in this case, does not occur.

Being clear that the Social Security Institute IP chose not to decide, which constitutes a, at least, apparent violation of the law, since it is bound by a duty to decide, from its "anomalous" communication it is clearly deduced that the same entity considers that the license remained then in force, which it had already affirmed in its 2013 communication/report (Cf. report attached to the records by the claimant with its request of 15-10-2018).

Furthermore, article 31 of the same Decree-Law provides that the Social Security Institute, I.P. may evaluate the operation of the establishment, namely to "Evaluate the quality and verify the regularity of the services provided to users, in particular, with respect to installation and accommodation conditions, adequacy of equipment, feeding and hygienic-sanitary conditions."

Such inspections, moreover, to evaluate the conditions of the establishment, are mandatory, at minimum, biannually.

Pursuant to article 34, also of Decree-Law No. 64/2007, "The results of the evaluation and inspection actions referred to in articles 31 and 32 must be communicated to the management entity of the establishment within 30 days after the conclusion of the actions."

Being that, in cases in which the establishment presents serious deficiencies in installation, safety, operation, salubrity, hygiene and comfort conditions, which jeopardize the rights of users or their quality of life, "the immediate closure of the facilities may be ordered, pursuant to article 35", which did not occur by 2016, inclusive.

Everything considered and summarizing, the Claimant, in its capacity as management entity of the establishment, had the right to an express decision on its request for license replacement, a decision that was not (or had not been by then) rendered.

Not having occurred such communication, the consequence cannot be, in any case, the expiry of the license, without any express communication to that effect, and furthermore, because such consequence is not provided for in the law, and secondly because the same could not be deduced by way of interpretation of the law, in view of the principle of proportionality of action by public administrative entities.

As a consequence of the foregoing and summarizing, it must be concluded that the operating license that the Claimant's establishment had when it was acquired by it remained in force in the years of the assessments in question herein, whereby the activity exercised there had the conditions to benefit from the exemption of paragraph 7) of article 9 of the VAT Code.

That is: the establishment in question enjoyed an operating license, with there having occurred a change of the person or entity managing the establishment, which entails that a replacement license be requested, a request that can only be rejected if the alterations verified do not respect the legally established installation and operating conditions. While such request is not being reviewed, the existing operating license is considered valid and, in the absence of a legal provision to that effect, does not expire automatically. Naturally, any subsequent rejection of the claim made in the request has only legal consequences from that point forward.

In view of the foregoing, the assessed additional amounts are illegal due to error in the factual assumptions and consequent error of law, and should, therefore, be annulled, with the legal consequences flowing therefrom.

The Claimant raises still, as principal and subsidiary grounds, other questions that the decision in the sense indicated leaves prejudiced.

III. DECISION

For the foregoing reasons, the arbitrators making up this Collective Arbitral Tribunal agree:

a) To judge the request for pronouncement formulated by the Claimant to be entirely well-founded;

b) To annul, as a consequence, the acts of additional VAT assessment identified above in point 61 of the list of proven facts; and

c) To annul the act of rejection of the gracious complaint mentioned and which had the aforementioned acts of assessment as its subject; and

d) To judge prejudiced by what has been decided the consideration of the remaining questions raised in the proceedings by the claimant.

Process Value

In accordance with the provision of article 306, paragraph 2, of the Code of Civil Procedure and 97-A, paragraph 1, subparagraph a), of the Tax Code of Procedure and 3, paragraph 2, of the Regulation on Costs in Tax Arbitration Proceedings, the process value is set at € 199,110.30

Costs

As the Tribunal was not constituted under the terms provided for in paragraph 1 and subparagraph a) of paragraph 2 of article 6 of the LRAT, there is no place for the fixing of the amount of costs and its distribution among the parties (Cf. article 22-4 of the LRAT).

• Notify accordingly.

Lisbon (CAAD), 29 January 2019

The Collective Arbitral Tribunal,

José Poças Falcão

(President)

António Carlos dos Santos

Nina Aguiar