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# ARBITRAL DECISION
The Arbitrators José Pedro Carvalho (President Arbitrator), A. Sérgio de Matos and Alexandre Andrade, appointed by the Deontological Board of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:
ARBITRAL DECISION (consult full version in PDF)
I – REPORT
1. On 18 May 2018, A..., S.A., Tax ID No. ..., with registered office at Rua ..., ...(...), ...-... .., filed a request for constitution of an arbitral tribunal, under the combined provisions of Articles 2º and 10º of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228º of Law No. 66-B/2012, of 31 December (hereinafter, briefly referred to as LFATM), seeking the declaration of illegality of the act of additional assessment of Value Added Tax No. 2018..., in the amount of €543,931.45 and the assessment of compensatory interest No. 2018..., in the amount of €41,905.07 and respective account adjustments, relating to the period 201511.
2. To support its request, the Claimant alleges, in summary, error in the factual and legal premises, on the grounds that it should be recognized the possibility of applying the reverse charge mechanism regime, under Article 2º, No. 1, paragraph j) of the VAT Code.
3. On 21-05-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.
4. The Claimant did not proceed with the appointment of an arbitrator, whereby, under the provisions of paragraph a) of No. 2 of Article 6º and paragraph a) of No. 1 of Article 11º of the LFATM, the President of the Deontological Board of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time period.
5. On 10-07-2018, the parties were notified of these appointments and did not express any intention to challenge any of them.
6. In accordance with the provision in paragraph c) of No. 1 of Article 11º of the LFATM, the collective Arbitral Tribunal was constituted on 30-07-2018.
7. On 01-10-2018, the Respondent, duly notified for this purpose, filed its response defending itself by impugnation.
8. On 13-12-2018, the hearing referred to in Article 18º of the LFATM took place, at which the witness presented by the Claimant was examined.
9. The time period referred to in Article 21º/1 of the LFATM was also extended.
10. Having been granted a time period for the presentation of written pleadings, these were presented by the parties, ruling on the evidence produced and reiterating and developing their respective legal positions.
11. It was indicated that the final decision would be notified by the end of the time period set in Article 21º/1, as extended.
12. The Arbitral Tribunal is materially competent and is duly constituted, under Articles 2º, No. 1, 5º and 6º, No. 2/a), of the LFATM.
The parties have legal personality and capacity, are legitimate and are legally represented, under Articles 4º and 10º of the LFATM and Article 1º of Ordinance No. 112-A/2011, of 22 March.
The proceedings do not suffer from any nullities.
Thus, there is no obstacle to the examination of the case.
Having examined all matters, it is necessary to deliver
II. DECISION
A. MATTER OF FACT
A.1. Facts established as proved
1- The Claimant is a commercial company which, in the context of its activities, is owner of a mini hydroelectric plant, called "...", located in the municipality of..., through which it carries out its activity of production and sale of electricity.
2- The Claimant commenced its activities on 02-01-2008, having been classified under CAE – 35111 – production of electricity from hydraulic sources.
3- The Claimant is, and was in 2015, classified, for VAT purposes, under the normal regime with monthly periodicity.
4- The Claimant decided to make an investment to increase its electricity production capacity, which fact was accomplished through the acquisition of the quotas of B..., Unipessoal Lda. (hereinafter, B...), which, at the time of acquisition, held an approved project for the construction of a Photovoltaic Park.
5- The Building Permit issued by the Municipality of ... to B..., through which the construction of the Park was licensed, had two amendments and in its second amendment of 28-05-2014, the time period of validity of the license for said construction was determined as 18 months, commencing on 28-05-2014 and ending on 19-11-2015.
6- B... was classified as a taxable person carrying out operations conferring the right to deduction.
7- The construction of a solar park involves operations that include earthwork, ditch opening, placement of electrical cables, construction of concrete footings, installation of panels and solar trackers and their fixing to the ground, construction of control buildings, construction of technical buildings, and installation of fixed fencing to the ground.
8- During the initial negotiations, B... was a company devoid of any relevant assets, which is why it could not obtain financing and the approval of necessary bank guarantees.
9- The Claimant, as holder of 100% of the quotas of B... and having financial availability and the necessary characteristics to request financing from banks and provide the necessary guarantees, decided to contract the construction of the photovoltaic park directly with its suppliers, whereby it was subcontracted by B... for the provision of the service of construction of the Photovoltaic Park.
10- The Claimant entered into a service provision contract with B... for the construction of the park, under which it had the obligation to coordinate with different suppliers in order to proceed with the construction of the photovoltaic park.
11- In a first phase, it was the understanding of both companies that the construction of the park would pass exclusively through the supplies of a single entity, C..., S.A. (hereinafter, C...).
12- On 18-03-2014, the Claimant entered into an EPC (Engineering, Procurement, Construction) contract with C... .
13- This type of contract is known as turn-key, which means that the contractor must deliver the work fully completed (turnkey).
14- The said contract contains the following:
1. "The first party (Claimant) intends to install a high concentration photovoltaic power plant in the region of ..., Portugal and whose location, characteristics and access conditions have been duly communicated to the Second Party who declares to have knowledge thereof;
2. The Second Party is a company that engages in the development, manufacture, installation, operation and maintenance of High Concentration Photovoltaic Systems, commonly known as CPV, using proprietary technology called MagSun;
3. The First Party intends to award the Second Party a contract in the "Turnkey" (turn key) modality, including the supply of the power-generating equipment as well as all other work and supplies necessary for the complete operation of the High Concentration Photovoltaic Power Plant".
15- This contract comprises a Provisional Acceptance Certificate, that is, designates the document to be issued by the Developer, or by the Developer's Representative, and delivered to the supplier, certifying that the CPV Power Plant was commissioned and operated normally for a period of 15 days (trial period).
16- The contractual obligation to deliver a photovoltaic park that was already operating was not exclusively of the Claimant, but also of its subcontractor through the EPC contract.
17- In the course of the construction of the park, C... began to present various liquidity problems and payment failures to its respective suppliers.
18- The Claimant found itself obliged to purchase some goods directly from C...'s own suppliers.
19- In this way, the Claimant ensured that the payments made were channeled towards the delivery of goods necessary for the completion of the park construction and not to other debts of C... .
20- All costs with the infrastructure necessary for the development of the Solar Park, as well as the related services, were supported directly by the Claimant, and invoices were issued and paid issued by the following companies:
• C…, Lda. – Tax ID: …
• D..., Lda. – Tax ID: ...
• E..., Lda. – Tax ID: ...
• F…, Lda – Tax ID: …
• G..., S.A. – Tax ID: ...
• H..., Lda. – Tax ID: ...
• I..., S.A. – Tax ID: ...
21- J..., S.A. – Tax ID: ...
22- Despite the EPC contract with C... being €2,715,000.00, C... ended up invoicing only €2,174,000.00.
23- Due to breach of the EPC contract, the Claimant applied contractual penalties to C..., in the amount of €543,000.00, of which it only managed to receive €230,000.00.
24- Prior to delivery to B..., the park underwent verification tests for commissioning and delivery purposes, in order to certify that the work to be performed was in accordance with the specifications.
25- The Claimant did not sell any electricity produced by the park.
26- On 27-11-2015, after the work was completed, invoice No. 2/2015 was issued by the Claimant.
27- B... proceeded with the self-assessment of the tax due for the service acquired.
28- The Claimant was the subject of an external inspection procedure, credentialed by service orders No. OI2017... and OI2017... .
29- The Claimant was notified under Articles 60º of the General Tax Code and Tax Inspection Procedural Rules, through office No. ..., dated 16-11-2017, and did not exercise the right to hearing.
30- From the Final Inspection Report, the following was stated:
31- Following the said inspection, the Claimant was notified of the additional VAT assessment No. 2018..., the assessment of compensatory interest No. 2018... and respective account adjustments.
A.2. Facts established as not proved
With relevance to the decision, there are no facts that should be considered as not proved.
A.3. Reasoning for the factual matter proved and not proved
With regard to the factual matter, the Tribunal does not have to rule on everything that was alleged by the parties, but rather it has the duty to select the facts that matter for the decision and to discriminate between proved and not proved matters (cfr. Article 123º, No. 2, of the Tax Procedural Code and Article 607º, No. 3 of the Civil Procedure Code, applicable ex vi Article 29º, No. 1, paragraphs a) and e), of the LFATM).
In this way, the facts relevant to the judgment of the case are chosen and determined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of Law (cfr. former Article 511º, No. 1, of the Civil Procedure Code, corresponding to current Article 596º, applicable ex vi Article 29º, No. 1, paragraph e), of the LFATM).
Thus, taking into account the positions assumed by the parties, in light of Article 110º/7 of the Tax Procedural Code, the documentary and testimonial evidence, and the file attached to the case, the facts listed above were considered proved, with relevance to the decision, bearing in mind that, as written in the Judgment of the Court of Appeal-South of 26-06-2014, delivered in case 07148/13, "the evidentiary value of the tax inspection report (...) may have probative force if the assertions contained therein are not impugned".
No weight was given to allegations made by the parties, and presented as facts, consisting of strictly conclusive affirmations, incapable of proof, and whose truthfulness must be assessed in relation to the concrete factual matter consolidated above.
B. ON THE LAW
The issue in the present case concerns whether the Claimant provided a service that can be qualified as Civil Construction to B... the Unipessoal, Lda, for purposes of the reverse charge mechanism regime in VAT, or whether, as the Respondent maintains, it sold the Solar Park after it was constructed and ready to produce.
The matter in question, as regards civil construction services, is provided for in the applicable VAT Code (2015 version), namely, in paragraph j) of No. 1 of Article 2º of the VAT Code, which provides that:
"1 - Taxable persons include: (...)
j) Natural or legal persons referred to in paragraph a) who have a place of business, permanent establishment or domicile in national territory and who carry out operations conferring the right to full or partial deduction of tax, when they are acquirers of civil construction services, including the remodeling, repair, maintenance, conservation and demolition of immovable property, under a contract for work or subcontract.".
What is at issue, therefore, is to verify whether the operation in question in the present arbitral proceedings falls under the provision of civil construction services, under the terms of the transcribed rule, or whether, rather, it was a transfer of goods, as provided for in Article 3º/1 of the same Code, which states that:
"A transfer of goods generally means the onerous transfer of tangible goods in a manner consistent with the exercise of the right of ownership.".
Let us examine this, then.
*
The matter in question has already been the subject of several Circular Guidance Letters from the Tax Authority, notably the Circular Guidance Letter No. 30101, of 2007-05-24, in which, among other things, it can be read that:
"1.3. Notion of civil construction services
The rule in question is comprehensive, in that it includes all civil construction services, regardless of whether they form part of the concept of contracts for work or subcontracts referred to in Articles 1207º and 1213º of the Civil Code.
The reference in the provision to services in "contract for work or subcontract" mode is merely indicative and not restrictive.
Civil construction services are considered to be all those which have as their object the execution of a work, encompassing the entire set of acts necessary for its completion.
On the other hand, the term "work" should be understood as any work of construction, reconstruction, extension, alteration, repair, conservation, rehabilitation, cleaning, restoration and demolition of immovable property, as well as any other work that involves a construction process, whether of a public or private nature.".
Further on, in the same letter, it can also be read that:
"Whenever, in the context of a work, the service provider invoices civil construction services proper or any others related to it and necessary for its execution, (e.g. rental or placement of scaffolding, rental of cranes and other goods, cleaning services, signaling, supervision, removal of debris, services of architects or planners, etc), as well as materials or other goods, it is understood that the overall invoice value, regardless of whether or not there is discrimination of the various items and whether invoicing is joint or separate, is covered by the reverse charge rule."
In light of these criteria, it is not possible to conclude otherwise than that the case concerns the provision of contract for work services on immovable property.
Indeed, what the Claimant was contractually obliged to do, and what it provided and invoiced, was the construction of a photovoltaic park, which, as results from the facts established as proved, and is supported by the invoicing gathered and examined in the inspection procedure, includes various civil construction services, such as earthwork, ditch opening, placement of electrical cables, construction of concrete footings, installation of panels and solar trackers and their fixing to the ground, construction of control buildings, construction of technical buildings, and installation of fixed fencing to the ground.
And, although it was necessary to carry out other services, as well as to acquire materials or other goods, nothing emerges to suggest that they were not all or partly related to or necessary for the execution of the work to which the Claimant was obliged.
Therefore, in compliance with the doctrine established by itself, the Tax Authority should have qualified the operation in question as the provision of civil construction services, for purposes of reverse charge mechanism in VAT.
It is further noted that the Tax Authority's understanding, according to which a transfer of goods had been verified, as defined in the VAT Code, consisting of the sale of a photovoltaic park, is considered to be without any foundation.
In fact, and as has been seen, a transfer of goods, in the sense referred to, implies the "onerous transfer of tangible goods in a manner consistent with the exercise of the right of ownership.".
Now, in the case at hand and first of all, the tangible good would always have to be considered an immovable property, given that a photovoltaic park does not, as such, have a separate existence from the immovable property into which it is integrated, and it is not found that such immovable property was the property of the Claimant; on the contrary, it is established that the building permit was issued in the name of B... and that no public deed or any other act capable of transferring the ownership of an immovable property from the Claimant to B... was executed.
There is also no doubt that we are faced with a contract for work.
In fact, as has been consistently established by doctrine and case law, "What individualizes contracts for work from the broader scope of service provision contracts is that the result to which the contractor is obliged is the execution of a work – Article 1207º of the Civil Code –, which must translate into a physical alteration of a tangible thing.".
Thus:
"II - Although the typical nuclear element of the contract for work consists in the execution of a work (Article 1207º), whereas the essential object of a sale and purchase resides in the transfer of a right, of ownership or otherwise, the emphasis of the distinction between the two species, especially in cases where materials are supplied by the contractor - the "Werklieferungsverträge" distinguished in German jurisprudence -, is synthesized by comparative doctrine and case law in the following topics:
a) prevalence of the obligation to give (dare), or the obligation to do (facere), the former being the case of sale and purchase and the latter of a contract for work;
b) in a contract for work, as opposed to a sale, the supply of materials constitutes a mere means for the production of the work, and the work is the essential purpose of the transaction;
c) furthermore, in a contract for work, the good produced represents a new thing (quid novi) compared to the contractor's original production, implying the introduction of substantial modifications concerning the form, size, or quality of the object supplied;
III - Above any objective factor, however, the preponderant element of distinction is always constituted by the will of the parties, with the legal categorization of the transaction having to result, to a large extent, from what was intended by the parties, who would not have failed to configure in their minds one of the contracts in question and its regime.".
Thus, and in light of such criteria, the operation carried out by the Claimant and in question in the case cannot be qualified otherwise.
In a contract for work executed on immovable property, the transfer of ownership of the materials and other components that comprise it is transferred to the owner of the immovable property as soon as they are incorporated in it, as follows from Article 1212º/2 of the Civil Code, which provides that "In the case of a contract for construction of immovable property, if the land or surface is owned by the owner of the work, the thing is the property of the latter, even if it is the contractor who supplies the materials; these are considered to be acquired by the owner of the work as they are incorporated in the land".
According to the foregoing, "When a work is executed on an immovable property and the land or surface is owned by the owner of the work, under Article 1212º No. 2 of the Civil Code, the materials supplied and incorporated therein are considered to be acquired by the owner of the work.".
Therefore, it is not possible to state that only at the end of the work did a transfer, as a block and as a finished thing, of the photovoltaic park from the Claimant to B... occur, since the material result of the services incorporated in the immovable property was being acquired by the latter, as it was being incorporated in the land, and not, as assumed by the Tax Authority, only at the end.
Moreover, in several analogous situations, in which the purpose of the contract is to obtain a completed installation ready to function, it has been considered that the nature of the contract for work is maintained, and one is not faced with a sale and purchase.
In this sense, for example, one may see the Judgment of the Court of Appeal of Guimarães of 15-02-2018, delivered in case 989/15.5T8PTL.G1 (central heating, cooling and air conditioning system called 'HVAC'), or the Judgment of the Court of Appeal of Coimbra of 05-07-2000, delivered in case 1546/2000 (fuel station on land owned by the owner of the work).
The Tax Authority, in the binding ruling issued from case No. 14000, also considered that the execution of an artesian borehole for water collection falls within the reverse charge mechanism regime in VAT, when the acquisition of the corresponding services is not directly related to the non-taxed activity.
At the level of tax arbitration case law, reference may be made to the decision delivered in arbitral case No. 457/2017T, of CAAD, where the Tax Authority argued, and was upheld, that the acquisition and installation of "an air extraction system for an area of approximately 2,550 m2, composed of 6 extraction units each sized for a maximum air flow of 47,520m3/h, which was accompanied by the supply and installation of spiral ducts of various sizes for extraction ducts, as well as anodized aluminum grilles, in a total of 60 grilles.", qualified as the acquisition of civil construction services, for purposes of reverse charge mechanism in VAT, considering that a system of this size could "not be qualified as mobile and easily movable, it being sufficient to note that the intervention of two technicians was necessary for 20 days for its installation", reasoning which, a fortiori, is transposable to the present case.
The circumstances pointed out in the Final Inspection Report that the invoice was issued after completion of the work and that intervention by several companies was necessary do not hinder the conclusions drawn, both of which are normal circumstances in contracts for work, where there is subcontracting.
Likewise, the circumstance that, at the time of invoicing, the photovoltaic park was constructed and ready to produce does not change the nature of the contract in question, first of all because that was precisely the purpose of the contract, as is normal and happens, for example, in the situations mentioned above of installation of HVAC systems, a fuel station, an artesian borehole, or an air extraction system, where it is not proven, as has also been stated, that the photovoltaic park in question was not constructed on immovable property whose ownership or surface rights belonged to B... .
Moreover, in this regard, the at least apparent contradiction of the Respondent's argument cannot be overlooked, in that while it affirms that one is faced with an "isolated alienation of a tangible fixed asset, ready and in operation", it equally affirms that "the transaction in question also does not constitute a transfer of a ready operating unit".
It should be finally stated that the Respondent's allegation, raised in the arbitration, that it was a sale of "the tangible fixed asset, consisting of the 'Solar Park...', located in the municipality of...", has no support, first of all because such reasoning does not appear in the Final Inspection Report, and furthermore because there is no element of evidence in the case demonstrating that the park in question was integrated into the tangible fixed assets of the Claimant.
Thus, and for all that has been set forth, it must be concluded that the VAT assessment act that is the subject of the present arbitral action is vitiated by error in the factual premises, and consequent error of law, and must therefore be annulled, and consequently the assessment of the corresponding compensatory interest must be annulled, and the arbitral request formulated by the Claimant is therefore warranted.
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C. DECISION
For these reasons, this Arbitral Tribunal decides to judge the arbitral request filed entirely well-founded and, in consequence:
a) Annul the act of additional assessment of Value Added Tax No. 2018..., in the amount of €543,931.45 and the assessment of compensatory interest No. 2018..., in the amount of €41,905.07 and respective account adjustments, relating to the period 201511.
b) Condemn the Respondent to pay the costs of the proceedings, in the amount set out below.
D. Value of the case
The value of the case is set at € 585,836.52, under Article 97º-A, No. 1, a), of the Tax Procedural Code, applicable by virtue of paragraphs a) and b) of No. 1 of Article 29º of the LFATM and No. 3 of Article 3º of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The value of the arbitration fee is set at € 8,874.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely well-founded, under Articles 12º, No. 2, and 22º, No. 4, both of the LFATM, and Article 4º, No. 5, of the aforesaid Regulation.
Let notice be given.
Lisbon, 13 March 2019
The President Arbitrator
(José Pedro Carvalho)
The Arbitrator Member
(Sérgio de Matos)
The Arbitrator Member
(Alexandre Andrade)
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