Process: 240/2018-T

Date: February 18, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 240/2018-T) addresses the fundamental question of VAT deduction rights during the preliminary phase of business activities. The applicant company, engaged in real estate and student residence operations, incurred €143,009.03 in VAT on preparatory services (architecture, engineering, consulting) for constructing a student residence. The company had obtained binding information from the Portuguese Tax Authority (AT) confirming that student residence services would be taxed at the reduced VAT rate as activities analogous to hotel accommodation under Article 18(1)(a) of the VAT Code. Despite declaring intention to perform only taxable operations conferring deduction rights, the AT rejected the VAT refund request, arguing that preparatory real estate activities were exempt under Article 9 of the VAT Code, and VAT should only become deductible upon actual commencement of taxable activities. The AT issued an additional VAT assessment with compensatory interest totaling €145,232.81. The core legal issue concerns whether Portuguese VAT law permits immediate deduction of input VAT incurred during preliminary phases when the taxpayer demonstrates clear, unequivocal intention to engage in taxable activities, or whether deduction must be deferred until actual operations begin. This decision has significant implications for real estate developers, hospitality operators, and businesses in preliminary development phases regarding cash flow management and VAT compliance strategies.

Full Decision

ARBITRAL DECISION

The arbitrators Carlos Alberto Fernandes Cadilha (chair arbitrator), Nuno Maldonado Sousa and Cristina Aragão Seia (member arbitrators), appointed by the Ethics Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 18-07-2018, agree as follows:

Report

  1. A..., LDA., holder of NIPC..., with registered office at ... ..., ...-... LISBON, requested the constitution of an arbitral tribunal under the provisions of articles 2, no. 1, paragraph a), and 10 of the legal regime for arbitration in tax matters contained in Decree-Law no. 10/2011, of 20 January (RJAT), to review the legality of tax acts involving VAT assessment in the amount of € 143,009.03, and compensatory interest assessment in the amount of € 2,223.78, pursuant to which tax payable and interest totalling € 145,232.81 were determined, for reference period 2017/06T. It requested a declaration of illegality of the tax acts and also petitioned for the Tax and Customs Authority [AT] to be ordered to pay compensatory interest.

The respondent in these proceedings is the TAX AND CUSTOMS AUTHORITY.

  1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 10-05-2018 and was notified to the Tax and Customs Authority on 15-05-2018.

Pursuant to article 6, no. 2, paragraph a) and article 11, no. 1, paragraph b) of the RJAT, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the undersigned signatories, who manifested acceptance of the appointment within the legal timeframe. On 28-06-2018 the parties were notified of this appointment, and did not manifest any intention to refuse the arbitrators' appointment, in accordance with the provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code. In conformity with the discipline contained in article 11, no. 1, paragraph c), of the RJAT, the collective arbitral tribunal was constituted on the aforementioned date of 18-07-2018. By resolution recorded in the minutes of the collective tribunal meeting of 20-11-2018, the deadline for issuing and notifying the parties of the arbitral decision was extended for two months, pursuant to article 21, no. 2 of the RJAT.

  1. To support its claim the Applicant invoked that its corporate object comprises the purchase, sale and lease of immovable property, including the resale of property acquired for that purpose and also the operation of student residences and local accommodation establishments, and that upon commencing its activities it declared to the AT that it would only carry out transfers of goods and provision of services conferring the right to VAT deduction, not envisioning the performance of exempt operations that do not confer the right to deduction.

It also invoked that it obtained on 6 June 2017 binding information provided at its request by the AT, to the effect that the services it intended to provide are analogous to hotel accommodation activities, and VAT should be levied at the reduced rate under the provisions of paragraph a) of no. 1 of article 18 and item 2.17 of List I attached to the VAT Code.

In the exercise of its activities the Applicant acquired land with the objective of building a student residence on it to operate it through the provision of various typical and specific services to ensure its functioning for the intended purposes. It also asserted the possibility of operating the property for local accommodation outside the school term.

To commence the construction work of the property, the Applicant contracted for the provision of services inherent to the preparation of the construction project (consulting, engineering, architecture, among others) and bore the corresponding VAT in the amount of € 40,771.58 in period 17/06-T. In addition to these works the Applicant also utilized a service provider located in the Netherlands, whose services amounted to € 621,778.38, for which it self-assessed and deducted tax in the amount of € 143,009.03. The Applicant requested reimbursement of the VAT borne.

Upon notice of the intention to reject its reimbursement request, the Applicant insisted that it was its intention to make full use of the building as a student residence, where a broad range of assistance services are provided, and therefore considers that this economic activity is effectively subject to VAT. It also maintains that the VAT regime applicable to it results from its regular activity that it envisages and does not depend on the actual commencement of operations.

The Applicant further asserts that it was notified of an additional VAT assessment corresponding to the provision of services by a subject established in the Netherlands and therefore petitions that, ultimately, a declaration of illegality be made.

  1. The Tax and Customs Authority argued in the proceedings that the application of the property to the activity of student residence operation is an activity that will occur in the future and that within the scope of the inspection action occasioned by its reimbursement request, it was established that preparatory work was then underway to commence the construction work of the property in the real estate area. It argued that real estate activity was exempt from VAT, as it fell within the exemption provided for in article 9 of the VAT Code which does not confer the right to deduct VAT borne. It admitted that if the Applicant were to commence an activity subject to tax under the VAT Code, in relation to the property in question, such as "Student Residence" and/or "Local Accommodation," it would have to submit a declaration of changes reflecting this alteration. In this situation, which it considers may be that of the present case, the VAT borne is not for the moment considered deductible, and should remain evidenced in the balance sheet account until the commencement of VAT-taxable activity. Only after submission of the declaration of change of activity may it exercise the right to deduct the tax, and may then request reimbursement of the tax it has borne. Along these lines of guidance it assessed ex officio the self-assessed and simultaneously deducted VAT, by reference to the invoice from the service provider established in the Netherlands, plus interest.

The AT concludes that the Applicant's claim lacks merit.

  1. On 20-11-2018 a meeting of the arbitral tribunal was held with the parties, at which witness evidence was produced as requested and the parties were given the opportunity to submit written arguments in successive periods. The Applicant submitted arguments and the Respondent did not do so until the date this award is rendered, the timeframe having long since passed.

Sanitation

The arbitral tribunal was regularly constituted, in compliance with the provisions of articles 2, no. 1, paragraph a), and 10, no. 1, of the RJAT and is exercising its functions in compliance with the provisions of article 21, no. 1 and no. 2 of the same statute.

The request for arbitral pronouncement is timely, as it was submitted within the timeframe provided in article 10, no. 1, paragraph a), of the aforementioned regime.

The parties are duly represented, enjoy legal personality and capacity and have standing (articles 4 and 10, no. 2, of the same regime and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings are not affected by nullities and no preliminary issues were raised.

Substantiation

III (a) – Factual matters

For the purposes of the decision, the following facts which have been established must be considered:

  • The Applicant is a company governed by Portuguese law whose corporate object is "purchase, sale and lease of immovable property, including resale of property acquired for that purpose, as well as urban development, construction and administration of own or third-party immovable property, as well as the operation of student residences and local accommodation establishments, the preparation of projects and the provision of services related to real estate activities" (RI[1], 10º: doc.3).

  • The Applicant is registered as exercising the principal activity of construction of residential and non-residential buildings, with CAE 41200 (RI, 11º: doc.4 and R-AT[2], 1º).

  • The Applicant is classified for VAT purposes under the normal quarterly periodicity regime since 28-04-2017 (RI, 12º: doc.4 and R-AT, 1º).

  • The Applicant in the declaration of commencement of activity that it submitted on 28-04-2017 declared that the type of operations to be performed are transfers of goods and provision of services that "confer the right to deduction" and that the type of operations to be performed are transfers of goods and provision of services that are not "exempt that do not confer the right to deduction" (RI, 13º: doc.4).

  • The Applicant, in the course of its activities acquired land located in Porto, with the objective of constructing a property on it in which it intends to operate a student residence with accommodation space, study, training and social areas, combined with a set of facilities capable of ensuring comfort and well-being in the use of the facilities (RI, 14º and 15º, witness evidence and R-AT, 2º).

  • The Applicant, in addition to operating the student residence, intends also to provide services aimed at the functioning of the student residence, namely the provision of television, security, reception and internet service (RI, 16º, witness evidence).

  • Preparatory work is currently underway to commence construction work of the property (RI, 21º, testimony of witness B...)

  • The Applicant bore VAT on the acquisition of services inherent to the preparation of the construction project of the property, in the amount of 40,771.58 €, in period 17/06-T (RI, 21º, witness evidence and doc. 9).

  • The Applicant made a request for VAT reimbursement in the amount of 40,771.58 €, for the period referring to the second quarter of 2017 (RI, 22º and R-AT, 4º).

  • The Applicant acquired services from a service provider established in the Netherlands, for the amount of 621,778.38 € and consequently self-assessed and deducted tax in the amount of 143,009.03 € (RI, 23º and R-AT, 5º).

  • Following the VAT reimbursement request made by the Applicant, a partial scope internal inspection procedure was initiated by the AT services, corresponding to Service Order no. OI2017..., of 04-09-2017 (R-AT, 4º and doc. 9 of the RI).

  • The Applicant on 18-11-2017 was notified of the draft inspection report corrections, within which the AT proposed rejection of the Applicant's VAT reimbursement request, as well as an additional assessment in the total amount of € 143,009.03, with the proposed corrections totalling € 183,780.61 (RI, 24º: doc. 6 and R-AT, 5º).

  • The Applicant on 31-11-2017 exercised the right to be heard (RI, 26º: doc. 7).

  • The Applicant on 19-12-2017 was notified of the final inspection report corrections, within which the AT reiterated the position taken in the draft corrections (RI, 32º: doc. 10).

  • In the inspection procedure report that was approved by the division head on 14-12-2017, the AT Services were of the opinion that the Applicant was improperly deducting VAT and that this error results in rejection of the reimbursement request of 40,771.58 € and an additional assessment in the amount of 143,009.03 €, for the reasons set out in that report, where, among other things, one can read (R-AT, 5º: doc. 9 attached with the RI):

(…)

IV. Description of facts and basis of merely arithmetic corrections

The taxpayer is dealing with the construction project of a property which it intends to use in the future within a taxable activity, the operation of a student residence.

At present preparatory work is underway to commence the aforementioned construction work of the property, in the real estate area which is fiscally exempt from VAT, covered by the exemption provided for in article 9 of the VAT Code which does not confer the right to deduct VAT borne, pursuant to no. 1 of article 20 of the VAT Code

This rule may be excepted when, and if, the taxpayer exercises an activity subject to tax under the VAT Code, in relation to the property in question.

For better understanding of the operations which it intends to perform, and pursuant to art. 32 of the VAT Code, whenever there are changes in any of the elements contained in the declaration relative to the commencement of activity, the taxpayer must submit the respective declaration of changes.

Thus and pursuant to the same art. 32 of the VAT Code, "A... LDA, proceeding to exercise the activities relating to the operation of the property as "Student Residence" and/or "Local Accommodation," must submit a declaration of changes reflecting this alteration, within 15 days from the date on which such alteration occurs.

In this way all tax which the taxpayer has accounted for as deductible cannot be considered as such, and should remain in a Balance Sheet account until the commencement of a VAT-taxable activity, with the submission of the declaration of changes, requirements to then be able to exercise the right to deduct the VAT borne, then requesting the respective reimbursement. Once again we reaffirm that at the moment the taxpayer deducted the tax this right was denied to it. This involves a process contrary to the common VAT system, to admit that the determination of the scope of deduction may take into account operations not yet effected and whose future performance may not occur, when the tax event and, consequently the right to deduction depend on the actual performance of taxed operations.

The tax event, its exigibility and the possibility of deduction are linked to the actual performance of delivery or provision of services.

In fact, as provided in no. 1 of art. 22 of the VAT Code, "The right to deduction arises at the moment the deductible tax becomes exigible, in accordance with what is established in arts. 7 and 8 of the VAT Code".

(…)

From the foregoing, and taking into account the date on which reimbursement was requested, the deducted tax shown in fields 20 and 24 of the VAT Return (2017-06T), in the amount of € 183,780.61, cannot be accepted, in accordance with the provisions of arts. 19 and 20 of the VAT Code.

It should be noted that regarding the invoice for acquisition of services from the service provider established in the Member State of the Netherlands, identified with the TAX ID:..., issued to the taxpayer for the amount of €621,778.38, which resulted in the assessment of VAT in the amount of €143,009.03, and simultaneously the deduction of the same amount, the aforementioned deduction will not be accepted pursuant to no. 1 of article 20 of the VAT Code, although the assessment of tax is mandatory.

Thus, rejection of the present VAT reimbursement request is proposed in the amount of € 40,771.58 and an additional assessment in the amount of € 143,009.03.

  • The Applicant was notified of the VAT assessment statement no. 2017..., in the amount of 143,009.03 € and of the interest assessment statement no. 2017..., in the amount of 2,223.78 € (RI, 34º: docs.1 and 2).

  • The Applicant on 08-02-2018 paid the amount of 143,009.03 € of VAT and the amount of 2,223.78 € of compensatory interest and default interest, relating to the assessed tax (RI, 35º: docs.11 and 12).

Facts considered unproven

No facts alleged, with actual relevance to the proper decision of the case, were considered unproven.

Nevertheless, it should be noted that the submission of the binding information which the Applicant maintains was issued on 21 September 2017, at its request made on 06-06-2017, whereby it requested the tax classification, for VAT purposes, of the services to be provided under accommodation contracts to be concluded with students, cannot be considered established. The Applicant has neither attached its alleged request nor the said information as a complete document and, as they are solemn documents, their proof must be unequivocal and partial photocopies do not enable this tribunal to give an affirmative answer to this question (see Initial Request, in 18º and 19º and respective document no. 5).

Substantiation of proven and unproven factual matters

The tribunal is not required to pronounce on all details of the factual matters alleged by the parties, and its duty is to select the facts that are relevant to the decision and to distinguish the factual matter it deems proven and declare that which it considers unproven (cf. article 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and shaped according to their legal relevance, which is established in light of the various solutions for the subject matter of the dispute in applicable law (article 596, no. 1 of the CPC, applicable ex-vi article 29, no. 1, paragraph e), of the RJAT).

Therefore, taking into account the positions assumed by the parties, in the light of article 110, nos. 6 and 7 of the Tax Procedure and Process Code (CPPT), the documentary evidence and the witness evidence produced, the facts listed above were considered proven as being relevant to the decision.

Allegations made by the parties of a merely conclusive nature were not deemed proven or unproven, even though they were presented as facts, as they are incapable of proof, and their accuracy can only be assessed by comparison with the substantiation of the legal matter decision contained in the following chapter.

III (b) – The law

The subject matter of the dispute

The issue underlying these proceedings is whether the right to deduct VAT borne by taxpayers who, while engaged in preliminary project activities, which are traditionally associated with real estate construction and in that context are exempt from VAT, may exercise this right to deduction if the operational activity to be developed is among those that are subject to VAT under general provisions and concurrently confer the right to deduction of VAT borne.

In the present case, it is relevant to determine whether a particular economic agent that promotes studies and projects for the construction of a property where it will develop the activity of operating it as a student residence, which is a recognized VAT-taxable activity, may exercise the right to deduct VAT borne during the project phase or may only do so when it commences its productive cycle, i.e., when it begins the operational phase of the envisaged economic activity.

The Applicant takes the view that it may exercise the right to deduct the VAT borne, even during the preparatory phase, before commencing operations.

The AT takes the view that it may only exercise the right to deduction from the moment it commences "a VAT-taxable activity."

Incidentally, it is also relevant to determine what effects result for the taxpayer from the declarations relating to its activities, which it made when notifying the commencement thereof to the AT, through its declaration of commencement of activity. The AT takes the view that the taxpayer's classification for VAT purposes is determined in accordance with what appears in its own records (10º of its Response).

Effects of the declaration of commencement of activity

The ability of commercial companies to carry out operations is no longer today limited by their corporate object. The law regulates this matter in the Commercial Companies Code (CSC), granting these legal persons the capacity of enjoyment necessary or expedient for the pursuit of their purpose (article 6-1). The scope of capacity of enjoyment of commercial companies is further exceptionally expanded, not being even limited by contractual clauses and corporate resolutions that set out the corporate object or prohibit certain acts. Without prejudice to the responsibility of the respective management body, the company may validly perform any lawful legal transaction, whether or not that transaction is included in its corporate object (6-4 of the CSC).[3]

In turn Tax Law recognizes the legal personality and tax capacity of commercial companies in VAT matters under the terms of article 2 of the Value Added Tax Code (VAT Code) and extends to article 38, no. 1 of the General Tax Law (LGT), the scope of taxation to acts ineffective under civil law, provided they have produced the economic effects intended by the parties.

From the rules just set out, it can be generally concluded that the legal transactions of commercial companies are not subject to limitations resulting from their corporate object and that their tax relevance arises from the production of the economic effects intended by the parties.

Nevertheless, certain declarative obligations are imposed on taxpayers at the level of their activities, and individuals or legal entities that engage in an activity subject to VAT must, before commencing the exercise of that activity, submit the respective declaration (31-1 of the VAT Code). Whenever there are changes in any of the elements contained in the declaration relating to commencement of activity, the taxpayer must also submit a declaration manifesting those changes (32-1 of the VAT Code). The terms of declarations submitted by the taxpayer must be accepted by the AT, which has the discretion to modify them and set those it deems appropriate, having 30 days for that purpose (35-4 of the VAT Code).

The VAT Code regulates that the declaration of changes (provided for in 32 of the VAT Code) takes effect from the moment of its submission (35-5 of the VAT Code), as regards intra-Community transactions, so defined in the VAT Regime for Intra-Community Transactions (RITI), as well as in operations of acquisition of services where the respective providers do not have, in the national territory, a registered office, permanent establishment or, failing that, the domicile from which the services are provided, and does not expressly regulate other taxed operations under the normal regime.

Note that the taking of effect of the declaration of commencement of activity is not specially regulated (31 of the VAT Code), only requiring that it be submitted before the exercise of that activity is commenced. In fact, this rule is stated, albeit for a specific situation, in article 41, no. 3, paragraph a) of the VAT Code.

Thus, it is believed that the regime for taking effect contains two rules as to the moment of perfection: (i) immediate taking of effect, which is applicable to the declaration of commencement of activity and to the declaration of changes regarding certain intra-Community transactions; (ii) taking of effect after the expiry of the period for the AT, should it disagree with the declared elements, to exercise the discretion to set those it deems appropriate, or at the moment when it notifies the taxpayer of this determination, when it does so, which is applicable in other cases.

Let us now consider what relevance the declaration of commencement of activity and that of changes actually have. Generally, the VAT Code neither grants nor restricts any right or any obligation as a function of compliance with this declarative obligation. Its omission constitutes a simple infraction, with only a fine being applicable, without the law providing for the possibility of accessory penalties (117-2 and 23-2 and 28 of the General Regime of Tax Infractions).

In fact, with the advent of the digital era, for commercial companies it is today not necessary to make the declaration of changes that refer to facts subject to commercial registration (32-3 of the VAT Code) and among these are facts whose knowledge is indispensable for application of the VAT regime, as is the case of change of the company's registered office and transfer of registered office to abroad and alteration of its corporate object, which ultimately corresponds to the description of the activities proposed for the company to exercise (article 3-1, paragraphs o) and r) of the Commercial Registration Code and articles 9-1 and 12-2 of the CSC). It thus appears to be concluded that, in general, non-compliance with the obligation to declare the commencement of activity or the change of any of its elements does not have general consequences at the level of application of the VAT regime.

There are, however, situations in which this is not so, and only compliance with those obligations permits the exercise of certain faculties by taxpayers that are commercial companies within the scope of the normal regime, among them:

  • The renunciation of exemption in internal operations, electing the application of tax to operations involving (12-2 of the VAT Code):

    • provision of services that have as their object professional training, as well as transfers of goods and provision of related services (12-1-c) and 9-10 of the VAT Code).
    • Food and beverage services provided by employer entities to their employees (12-1-c) and 9-36 of the VAT Code);
    • provision of medical and sanitary services and operations closely connected therewith effected by hospital establishments, clinics, dispensaries and similar entities not arising from agreements with the State within the health system (12-1-a) and 9-36 of the VAT Code).

  • The modification of the election for renunciation of the right to exemption (12-3 of the VAT Code).

  • The exercise of the election for the declaration of monthly periodicity, when admissible and the reverse movement (41-2, 3 and 4 of the VAT Code).

  • The request for issuance, for the first time, of a certificate for the purposes of renouncing VAT exemption in the transfer and lease of immovable property (12-1 of the Regime for renunciation of VAT exemption in operations relating to immovable property, approved by Decree-Law no. 21/2007 of 29 January).

Having completed this examination, it must be concluded that the classification of each taxpayer for VAT purposes is exclusively determined by the application of the rules of subjective and objective tax incidence contained in the law, independently of the elements contained in the AT's records. Declarations of commencement of activity and of changes under the normal regime are only relevant to the exercise of the right to renounce certain exemptions or to return to the exemption regime when the right to renunciation has previously been exercised.

In the case at hand the Applicant has as its corporate object, i.e. as the description of the activities that the shareholders propose for the company to exercise, for what is relevant here, the purchase and sale of immovable property, including the resale of property acquired for that purpose, as well as the operation of student residences (proven fact A). In keeping with this, in its declaration of commencement of activity on 28-04-2017, with the limited space imposed by its format, the Applicant declared that the type of operations to be performed are transfers of goods and provision of services that "confer the right to deduction" (proven fact D).

It is believed that, contrary to what the AT maintains, the Applicant is not limited in its VAT classification by any exemption renunciation regime relating to operations on immovable property, as it does not appear from these proceedings that it has exercised that option, which, moreover, is not manifested through the declaration of commencement of activity or its updating, but rather through a request for issuance of a certificate for the purposes of renunciation, which is then issued by the AT after verification of the requirements that the law imposes (4-1 of the Regime for renunciation of VAT exemption in operations relating to immovable property).

The classification of operations of acquisition of provision of services inherent to the preparation of the construction project of the student residence

The AT argues in the tax inspection report (RIT) that (proven fact O):

At present preparatory work is underway to commence the aforementioned construction work of the property, in the real estate area which is fiscally exempt from VAT, covered by the exemption provided for in article 9 of the VAT Code which does not confer the right to deduct VAT borne, pursuant to no. 1 of article 20 of the VAT Code.

Although the AT does not indicate the exact rule conferring the exemption, limiting itself to indicating article 9 of the VAT Code, it is credible that it intends to refer to the rule contained in no. 30 of that article, which considers exempt from VAT the operations subject to municipal tax on onerous transfers of immovable property (IMT). As is clear from a simple reading of this rule, the VAT Code does not establish any exemption for the construction of immovable property or for real estate activity. The exemption is granted for certain operations, exactly those that are subject to IMT, and not as a function of the activity engaged in by the taxpayer. In turn, the Code for Municipal Tax on Onerous Transfers of Immovable Property (CIMT) determines the incidence of this tax on onerous transfers of the right of ownership or of fractional aspects of that right, over immovable property (articles 1 and 2 of the CIMT).

In the proceedings it was established that the Applicant acquired land, with the objective of constructing a property on it in which it intends to operate a student residence, which comprises accommodation and also the provision of services aimed at its functioning, and that preparatory work is underway to commence the construction work of the property (proven facts E, F and G).

It is unquestionable that the acquisition of land for building of immovable property is an activity exempt from VAT because it is subject to IMT (articles 9-30 of the VAT Code and 2-1 of the CIMT) but there is no general normative provision that attributes VAT exemption to real estate activity, whose contours are not fixed by law.

Let us now consider what regime applies to student residences. From the settled factual matter it appears that under this designation services are intended to be provided for accommodation and others related to the stay of its users in those facilities, such as the use of study areas, leisure, security, reception and others that permit the living experience of students outside their residences. The VAT Code does not expressly regulate this activity, but everything indicates that it is analogous to that exercised by hotel units, in the terms in which these are defined in article 11, no. 1 of the legal regime for the installation, operation and functioning of tourism enterprises, approved by Decree-Law no. 39/2008 of 7 March. In turn the VAT Code considers that the provision of accommodation services, effected within the scope of hotel activities or other activities with analogous functions is not included in the exemption granted to lease operations of immovable property (article 9-29, a), which leads to the interpretation that student residences, because they involve a provision of services analogous to that effected within hotel activities, are actually subject to VAT under general provisions.

Along this line of reasoning there appears to be no doubt that the Applicant's operations are generically subject to VAT, except for those that fall within the scope of specific exemption rules, as is the case of the purchase of land. There is thus no accuracy to the AT's assertion that the construction of the property by the Applicant is situated in the real estate area and is fiscally exempt from VAT. The construction of a hotel unit for the exercise of its respective activity is not exempt from VAT and, in analogous terms, the construction of a student residence for the pursuit of that activity therein is also not.

There is thus reason to assert that the majority of the Applicant's operations are operations subject to VAT.

It should be noted that this appears to be the doctrine disseminated by the AT with its Services, as results from the binding information issued in case no. 10539, by despatch of 03-06-2016, of the Deputy Director General for VAT, by delegation of the Director General of the Tax and Customs Authority and in many other information with the same subject matter[4].

It must further be made clear at this point that, contrary to what the AT maintains in the RIT, the Applicant did not actually exercise an exempt activity and that should in future manifest this alteration through the submission of a declaration of changes. More precisely, the Applicant manifested when commencing its activity that the operations it envisaged performing were transfers of goods and provision of services that "confer the right to deduction" and that it did not intend to perform transfers of goods and provision of services that are "exempt that do not confer the right to deduction" (proven fact D).

The right to deduct VAT assessed on the provision of services from a service provider established in the Netherlands

Finally, to support the challenged assessment the AT pronounced itself as follows:

It should be noted that regarding the invoice for acquisition of services from the service provider established in the Member State of the Netherlands, identified with the TAX ID:..., issued to the taxpayer for the amount of €621,778.38, which resulted in the assessment of VAT in the amount of €143,009.03, and simultaneously the deduction of the same amount, the aforementioned deduction will not be accepted pursuant to no. 1 of article 20 of the VAT Code, although the assessment of tax is mandatory.

The VAT Code grants the right to deduct tax paid by taxpayers when they are recipients of taxable operations effected by other taxpayers established abroad, when these have not invoiced the tax (article 19-1, paragraph d). Nevertheless, only the tax that has been levied on goods or services acquired, imported or utilized by the taxpayer for the realization of operations of transfers of goods and provision of services subject to tax and not exempt therefrom can be deducted (article 20-1, paragraph a) of the VAT Code).

In this regard it is relevant to note that the assessed tax results from the acquisition by the Applicant of services from a service provider established in the Netherlands, for the amount of 621,778.38 €, in relation to which it self-assessed and deducted tax in the amount of 143,009.03 € (proven facts J and O).

In a first analysis everything appears to indicate that, as these are services of which the Applicant was the recipient, for the realization of taxable operations – the operation of a student residence – the provisions of article 19, no. 1, paragraph d) and article 20, no. 1, paragraph a), both of the VAT Code, grant it the right to deduct the tax it assessed. This would not be so only if this right to deduction were excluded by another rule that imposed this.

The AT, in the RIT, invokes that deduction is not accepted "pursuant to no. 1 of article 20 of the VAT Code," but does not identify what rule it ultimately intends to apply. It is true that no. 1 of the cited article contains in its formulation restrictions to the right to deduction, resulting from the legislative technique used, which begins by stating that tax can only be deducted in the situations which it identifies in the eight subsequent paragraphs and sub-paragraphs, but the meaning of these rules is above all to delimit the operations that will be performed on the basis of the service received and not to exclude the application of the right to deduction. Note that the exclusion of the right to deduction is more precisely regulated in article 21 of the VAT Code and it is not evident that any of its provisions could cover the situation under analysis.

There is thus reason to conclude that the AT has no basis for not accepting the deduction of the VAT previously self-assessed on the provision of services by the taxpayer domiciled in the Netherlands, deducted by the Applicant.

In doing so the AT committed an illegal act which must be annulled, and the claim is therefore sustained in this regard.

The request for reimbursement of the tax paid plus corresponding compensatory interest.

The Applicant combines with the annulment request of the tax act that is the subject of these proceedings, the request for condemnation of the AT to reimburse the tax paid and payment of compensatory interest.

In this regard it was established that the Applicant paid on 08-02-2018 the amount of 143,009.03 € of VAT and the amount of 2,223.78 € of compensatory and default interest, relating to the assessed tax (proven fact Q).

Given the success of the annulment request, the payments made in relation to the annulled tax act by the Applicant must be reimbursed.

In the present case it is evident that the illegality of the annulled assessment act, whose amount the Applicant paid, is attributable to the Respondent, which on its own initiative performed it without legal support.

In this context the Applicant is entitled to compensatory interest under the terms of articles 43, no. 1, of the LGT and 61 of the Tax Procedure and Process Code (CPPT).

As a consequence the Respondent must execute this award under the terms of article 24, no. 1, of the RJAT and (i) reimburse the Applicant the amount of tax and interest it assessed; and (ii) calculate the respective compensatory interest, at the legal default rate of interest applicable in civil relations, pursuant to articles 35, no. 10, and 43, nos. 1 and 4, of the LGT, 61 of the CPPT, 559 of the Civil Code and Ordinance no. 291/2003, of 8 April (or statute or statutes that succeed it).

Compensatory interest is owed from the date of improper payment until the processing of the credit note, in which they are included.

IV – Decision

Based on the foregoing, the arbitrators of this arbitral tribunal agree to rule in favour of the claim formulated in this instance and consequently decide:

  1. To annul the VAT assessment no. 2017..., in the amount of 143,009.03 € and the interest assessment no. 2017..., in the amount of 2,223.78 €;

  2. To condemn the Respondent to reimburse the amounts received for satisfaction of the annulled assessments and to payment of compensatory interest, in the terms indicated;

  3. To condemn the Respondent to payment of the costs of this proceeding, in the amount of € 3,060.00.

V - Value of the proceeding

The value of the proceeding is set at € 145,232.81 under the terms of article 97-A, no. 1, paragraph a) of the CPPT, applicable ex-vi article 29, no. 1, paragraphs a) and b) of the RJAT and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings.

VI - Costs

The value of the arbitration fee is set at € 3,060.00 under the terms of Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, under the terms of articles 12, no. 2, and 22, no. 4, both of the RJAT, and article 4, no. 4, of the cited Regulation.

Let it be notified.

Lisbon, 18 February 2019

The Chair Arbitrator

(Carlos Alberto Fernandes Cadilha)

The Member Arbitrator

(Nuno Maldonado Sousa)

The Member Arbitrator

(Cristina Aragão Seia)

[1] Initial request of the Applicant.

[2] Response of the Respondent.

[3] On the capacity of enjoyment of commercial companies and the supersession of the doctrine of ultra vires acts, reference may be made to, in the doctrine, António Menezes Cordeiro et Al. – Annotated Commercial Companies Code. 2nd edition. Coimbra, Almedina, 2011, pp. 92-97 and in the case law, among others, the judgment of the Supreme Court of Justice of 12-03-2015 in case 5995/03.0TVPRT-C.P1.S1, [Maria Clara Sottomayor], accessible at www.dgsi.pt.

[4] In the same sense may be seen the binding information issued in case no. 12101, by despatch of 2017-09-21, by the Head of VAT Services, in case no. 12475, by despatch of 2017-11-29, by the Head of VAT Services, in case no. 13935, by despatch of 2018-07-26, by the Head of VAT Services, in case no. 14369, by despatch of 2018-09-28, by the Deputy Director General for VAT, or in case no. 13540, by despatch of 2018-05-03, by the Head of VAT Services, all accessible at http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/informacoes_vinculativas/despesa/civa/Pages/visualizacao-por-assunto-civa.aspx

Frequently Asked Questions

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Can a company deduct input VAT on expenses incurred during the preliminary phase before starting taxable operations in Portugal?
Yes, Portuguese VAT law generally permits companies to deduct input VAT incurred during preliminary phases before commencing taxable operations, provided there is clear and unequivocal evidence of intention to engage in activities conferring deduction rights. The right to deduction arises when the taxpayer demonstrates through objective elements (corporate purpose, binding tax information, contractual commitments) that preparatory expenses are directly linked to future taxable activities. However, the Tax Authority may challenge deductions if the connection between preliminary expenses and future taxable operations is uncertain or if the taxpayer may engage in exempt activities. In this case, the applicant had obtained binding information confirming taxable status and declared exclusive intention to perform taxable operations, strengthening the deduction claim despite the AT's position that VAT should remain suspended in balance sheet accounts until operational commencement.
How does Portuguese tax law treat VAT deduction rights for businesses preparing to engage in student housing and local accommodation activities?
Portuguese tax law treats VAT deduction rights for businesses preparing student housing and local accommodation activities based on the principle that these services are analogous to hotel accommodation, which is subject to VAT at reduced rates under Article 18(1)(a) and List I, item 2.17 of the VAT Code (CIVA). Student residences providing comprehensive assistance services (analogous to hotel services) qualify as taxable activities conferring full deduction rights. The Tax Authority may issue binding information (informação vinculativa) confirming this treatment upon taxpayer request. During the preliminary phase, businesses can deduct input VAT on preparatory expenses if they demonstrate clear intention to operate taxable accommodation services. However, the AT may require that VAT remain capitalized in balance sheet accounts until actual commencement of operations and submission of activity change declarations. The distinction between exempt real estate leasing (Article 9 CIVA) and taxable accommodation services with ancillary services is critical for determining deduction rights.
What is the role of binding information (informação vinculativa) from the Portuguese Tax Authority in determining VAT treatment of accommodation services?
Binding information (informação vinculativa) from the Portuguese Tax Authority plays a significant role in determining VAT treatment of accommodation services by providing legal certainty regarding tax classification and rates applicable to specific business activities. Under Portuguese tax law, taxpayers may request binding rulings on how tax legislation applies to their planned operations. In this case, the applicant obtained binding information on June 6, 2017, confirming that student residence services with comprehensive assistance would be treated as analogous to hotel accommodation and taxed at the reduced VAT rate. Such binding information creates legitimate expectations and should protect taxpayers from subsequent contrary assessments by the AT. However, this decision illustrates tension between binding information regarding future operations and the AT's position on timing of deduction rights during preliminary phases. While binding information confirms the taxable nature of intended activities, it does not automatically resolve questions about immediate deductibility of preparatory expenses versus deferred recognition upon operational commencement.
Are student residence and local accommodation services subject to reduced VAT rate as activities analogous to hotel services under Portuguese VAT law?
Yes, under Portuguese VAT law, student residence and local accommodation services are subject to the reduced VAT rate when characterized as activities analogous to hotel services. Article 18(1)(a) of the VAT Code and item 2.17 of List I (Annex to CIVA) establish reduced rates for hotel accommodation and similar services. The key determinant is whether the accommodation provider offers comprehensive ancillary services typical of hotel operations, such as reception, cleaning, linen services, assistance services, and other hospitality amenities. Student residences providing broad assistance services beyond mere property rental qualify for this treatment. The distinction is crucial because simple property leasing or rental activities fall under the VAT exemption in Article 9 CIVA (which does not confer deduction rights), while accommodation services with hotel-like characteristics constitute taxable supplies at reduced rates with full deduction rights. Taxpayers should obtain binding information from the AT to confirm classification and document the comprehensive nature of services provided to support reduced rate application and associated input VAT deduction claims.
What are the conditions for claiming compensatory interest (juros indemnizatórios) in CAAD arbitration proceedings related to unlawful VAT assessments?
Under Portuguese law and CAAD arbitration procedures, taxpayers can claim compensatory interest (juros indemnizatórios) when unlawful VAT assessments are annulled, based on Article 43 of the General Tax Law (Lei Geral Tributária). The conditions include: (1) a final decision declaring the tax assessment illegal; (2) prior payment of the unlawfully assessed tax; (3) temporal gap between payment and refund creating financial prejudice; and (4) absence of taxpayer fault causing the assessment. Compensatory interest aims to compensate taxpayers for financial loss resulting from State retention of amounts not legitimately due. The interest rate and calculation methodology are established by law. In CAAD proceedings, taxpayers must explicitly request compensatory interest in their initial petition, as occurred in this case where the applicant requested both annulment of the €145,232.81 assessment and payment of compensatory interest. The arbitral tribunal has jurisdiction to order the AT to pay such interest when ruling in favor of taxpayers. The claim becomes relevant when the tribunal determines the assessment was unlawful and the taxpayer has already paid the disputed amounts, establishing State responsibility for financial prejudice during the period of unlawful retention.