Process: 258/2018-T

Date: November 27, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 258/2018-T) addresses the taxation of advertising services provided by a non-resident entity under Portuguese VAT rules. The claimant, a Portuguese real estate company, challenged an additional VAT assessment of €21,735.00 plus compensatory interest totaling €24,871.98 for 2014. The dispute centered on whether advertising services purchased from a Hong Kong-based company (B...) for promoting Portuguese properties in China should be subject to VAT in Portugal. The claimant argued that Article 6(6)(a) and 6(8)(a) of the Portuguese VAT Code (CIVA) exempted such advertising services from VAT, relying on EU VAT Directive 2006/112/EC and Implementation Regulation 1042/2013. The Portuguese Tax Authority (AT) contended that services acquired from a non-resident supplier without a Portuguese establishment triggered reverse-charge VAT obligations on the Portuguese recipient under Article 2(1)(e) and (g) and Article 2(5) CIVA. AT further argued that even if classified as advertising services, the location rules required VAT taxation in Portugal, and cited Article 31-A of Implementation Regulation 282/2011, noting the services related to a specific property intended for sale. The tribunal dispensed with witness testimony, finding no factual dispute but only legal interpretation issues. The case illustrates critical VAT localization principles for cross-border service supplies, particularly the reverse-charge mechanism when non-resident suppliers lack Portuguese establishment, and the application of EU directives to advertising services connected to immovable property transactions.

Full Decision

ARBITRAL DECISION

I – REPORT

1 – A... Ltd., TIN[1] ..., with registered office at ... nº ... – ...-... – Cascais, within the jurisdiction of the Cascais tax office, pursuant to the provisions of paragraph (a) of no. 1 of Article 2, paragraph (a) of no. 2 of Article 5 and no. 1 of Article 6, all of the RJAT[2], submitted a request for arbitral decision, with a view to reviewing the legality of the additional VAT[3] assessment relating to the year 2014 in the amount of € 21,735.00 and compensatory interest in the amount of € 3,136.98, totaling € 24,871.98, as identified in the petition and which are hereby fully reproduced for all legal purposes.

2 – The request for constitution of the arbitral tribunal was made without exercising the option to designate an arbitrator, and was accepted by His Excellency the President of CAAD[4] and automatically notified to ATA[5] on 22/05/2018.

3 – Pursuant to no. 2 of Article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council, duly communicated to the parties within legally applicable periods, on 12/07/2018, Arlindo José Francisco was appointed as arbitrator, who communicated to the Council for Administrative Arbitration his acceptance of the appointment within the legally stipulated period.

4 – The Tribunal was constituted on 01/08/2018 in accordance with the provisions contained in paragraph (c) of no. 1 of Article 11 of the RJAT, as amended by Article 228 of Law nº 66-B/2012, of 31 December.

5 – By means of its request, the claimant seeks the declaration of illegality of the VAT assessments and compensatory interest already referred to, since, in its view, these are illegal as they violate the Law, namely paragraph (a) of no. 6 and paragraph (a) of no. 8 of Article 6 of the CIVA[6].

6 – It supports its point of view, in summary, on the erroneous qualification made by ATA of the taxable event and on errors in the factual and legal assumptions.

7 – In fact, ATA considers that the invoice issued by the B... company, recorded by the claimant as being a mediation commission, whereas this represents nothing more than a merely accounting circumstance, but which the claimant does not consider relevant for the correct qualification of the taxable event.

8 – It considers that the legislation applicable to the case (Articles 4 and 6 of the CIVA combined with Article 47 of the VAT Directive 2006/112/EC of 28 November – and Articles 13-B, 31-A and 31-B of EU Implementation Regulation nº 1042/2013 of the Council) expressly excludes VAT taxation on the provision of advertising services, as is the case herein.

9 – Finally, it argues that none of the provisions already cited supports the basis invoked by the inspection services "invoice recording" for ATA to proceed with the VAT assessment in question, and the same should be annulled as illegal.

10 – In turn, ATA, in its reply, considers that its procedure does not suffer from any error in the qualification of the taxable event nor from errors in the factual and legal assumptions.

11 – It states that the VAT assessment here challenged results from inspection verification of the respective accounting, concluding that the services acquired in national territory from a supplier that has no establishment here, the taxpayer is the resident entity, in this case the claimant, as per paragraphs (e) and (g) of no. 1 and no. 5 of Article 2 of the CIVA, such operations being taxable at the standard rate, as per paragraph (a) of no. 6 and paragraph (a) of no. 8 of Article 6 of the CIVA.

11 – Despite noting the inconsistency between the service described in the invoice "marketing expenses associated with the promotion of properties in China" and the fact that it was recorded by the claimant as a commission for real estate mediation of its property, which justifies ATA's procedure of VAT assessment in accordance with the legal terms already referred to.

12 – But even if the services had been advertising services, nothing would alter the VAT treatment, since we are dealing with an operation located in national territory provided by a non-resident entity, without a permanent establishment or representative, whereby the responsibility for the assessment would always fall to the claimant.

13 – Since the operation is related to a specific property and given that it is intended to result in a legal alteration thereof (alteration of ownership), it will always be subject to VAT, also in accordance with no. 1 of Article 31-A of Implementation Regulation (EU) nº 282/2011, not applying its no. 3, since what is at issue is its sale.

14 – Concluding that the qualification of the taxable event carried out by the inspection services of the defendant, which gave rise to the VAT assessment here challenged, was correct, the same should be maintained in the legal order.

II – CASE MANAGEMENT

The tribunal was regularly constituted and is competent ratione materiae, in accordance with Article 2 of the RJAT.

The parties have legal personality and capacity, show themselves to be parties to the dispute and are regularly represented in accordance with Articles 4 and 10, no. 2 of the RJAT and Article 1 of Ordinance nº 112-A/2011, of 22 March.

In response to the defendant's reply, the tribunal issued the following order on 01/10/2018: "There are no exceptions to be considered and although witness testimony was requested, the Tribunal considers it unnecessary given that there is no dispute concerning the facts, but only concerning their legal treatment.

Thus, pursuant to the principles of autonomy of the Arbitral Tribunal in conducting proceedings, expedition, simplification and informality of proceedings (Articles 19, no. 2, and 29, no. 2, of the RJAT), the examination of the witnesses listed is dispensed with and also the hearing referred to in Article 18 of the RJAT, determining that the proceedings continue with optional written submissions for a period of 10 days, beginning with notification of this order, the period for submissions by the Claimant shall begin, which should also, within the same period, clarify the inclusion of two response acts in the SGP, although the Tribunal considered the second inclusion to be a mistake. With notification of the Claimant's submissions, the 10-day period for the Defendant's submissions shall begin.

27-11-2018 is set as the date for issuance of the arbitral decision. By that date, the Claimant must provide proof to CAAD of payment of the subsequent court fees".

The parties made no observations regarding the determined procedure and submitted the submissions they considered pertinent, within the granted periods, with the essential maintenance of their respective positions.

The proceeding does not suffer from any defects and there are no issues that prevent consideration of the merits of the case, conditions being met for issuance of a final decision.

III – REASONING

1 – Issues to be decided:

Whether the VAT assessment and compensatory interest, in the total amount of € 24,871.98, should be annulled as, in the claimant's view, it suffers from illegality, with the consequent restitution accompanied by indemnity interest, or whether, as the defendant contends, it should be maintained in the legal order, declaring the arbitral request to be unfounded.

2 – Factual Matters:

The factual matters considered relevant and proven on the basis of the documents attached to the file are as follows:

- The claimant's main activity is the Construction of buildings (residential and non-residential) and secondary activities are the purchase and sale of real estate, combined agriculture and animal production, and the leasing of real property, for which it is registered with the Cascais tax office.

- The claimant made payment of an invoice on 11 March 2014, in the amount of € 94,500.00 for marketing expenses associated with the advertising of properties, issued by company B..., based in Hong Kong, without a permanent establishment, domicile in national territory, or representative as per Article 30 of the CIVA.

- This payment resulted from a contract with its real estate agent, company C... Ltd., with registered office at ...-..., which in turn contracted the real estate advertising services of B..., with a view to the sale of the claimant's properties, specifically the houses ... of lot ..., with it being agreed that the claimant would pay for such services.

- The invoice was accompanied by certified copies and residence confirmation from the Hong Kong tax authorities in accordance with arrangements agreed between them and Portugal, as well as the respective Form 21 – RFI from the General Tax Office.

- In Form 21-RFI, the claimant is identified as the acquiring entity, with the nature of services provided identified as "other", specifying that it is "Marketing consulting, translations".

- The claimant recorded the invoice in the amount of € 94,500.00, corresponding to 15% of the value of the sale of the property in question, as a mediation commission, entered in account 62252 – Commissions – Real Estate, with the service provider based in Hong Kong.

- The amount of VAT € 21,735.00 and compensatory interest of € 3,136.98, totaling € 24,871.98, as identified in the petition and hereby reproduced for legal purposes, were based on findings by the inspection services of the defendant in an external inspection action, supported by the appropriate service order.

- The inspection action aimed at tax control resulting from the "Golden Visas" for the years 2013 and 2014, with the inspection services concluding that, given the recording made by the claimant of the said invoice, the claimant itself was the taxpayer (as per paragraphs (e) and (g) of no. 1 and no. 5 of Article 2 of the CIVA) for acquisition of services in national territory and the service provider has no establishment here.

- The amounts of VAT and compensatory interest were paid by the claimant on 19 February 2018, in the total amount of € 24,871.98.

The facts described are proven by documents or appear in the administrative file or were alleged without contestation by the parties and are those considered relevant for the decision of the case.

3 – Legal Matters

The issue to be decided is whether the VAT assessment in question and the consequent compensatory interest suffer from illegality and, therefore, should be annulled, or whether, on the contrary, they are not affected by any illegality and should be maintained in the legal order.

We are faced with a situation of "location of operations" as referred to in Article 6 of the CIVA, specifically the provision of services, as per paragraph (a) of no. 6 and paragraph (a) of no. 8 of this article, with the taxpayers being those referred to in no. 1, paragraphs (e) and (g) and no. 5 of Article 2 of the CIVA.

The claimant considers that the combined interpretation of these provisions with Article 47 of the VAT Directive and Article 31-A of Implementation Regulation (EU) nº 1042/2013 of 07 October, the advertising services provided in China by "B..." would fall outside the scope of the provisions contained in no. 1 of Article 31-A of the Implementation Regulation, by virtue of its no. 3, paragraph (c), which expressly excludes such services and the fact that they were recorded as a mediation commission does not permit their taxation in the manner sought by ATA.

In turn, the defendant considers that the said provisions have applicability to the concrete situation, particularly since it is the claimant itself that records them as a mediation commission, while at the same time the operation in question is related to a specific property and was intended to result in an alteration of its ownership, which is in harmony with the provisions of Article 31-A of the Implementation Regulation, with its no. 3 not applying to the concrete case, as this refers to advertising services involving a property and not to advertising services intended for its sale.

Having summarized the positions of the parties, it is necessary to decide.

The claimant paid for the advertising services provided by company "B..." contracted through its real estate agent C..., as agreed between them. The service provider was based in Hong Kong, without a permanent establishment, domicile in national territory, or representative as per Article 30 of the CIVA, whereby the claimant, in these circumstances, is a VAT taxpayer pursuant to no. 1, paragraphs (e) and (g) and no. 5 of Article 2 of the CIVA, and in accordance with the provisions contained in paragraphs (a) of nos. 6 and 8 of Article 6 of the same statute, such provision of services is subject to VAT, at the charge of the respective taxpayer, in this case the claimant.

The claimant argues that the combination of these provisions with Article 47 of the VAT Directive and Article 31-A of Implementation Regulation (EU) nº 1042/2013 of 07 October would result in the advertising services provided in China by "B..." falling outside the scope of the provisions contained in no. 1 of Article 31-A of the Implementation Regulation, by virtue of its no. 3, paragraph (c), which expressly excludes such services.

The Tribunal considers that such combination leads precisely to taxation, inasmuch as the operation in question is related to a specific property and was intended to result in a legal alteration of its ownership, as provided in no. 1, in its paragraphs (a) and (b), of Article 31-A of the Implementation Regulation already referred to. In fact, the services provided have a direct relationship with a specific property, this being the constitutive, central and essential element of the service provided, while at the same time it was intended for a legal alteration of its ownership. The invocation of no. 3 of the aforementioned Article 31-A to exclude the fulfillment of the localization requirements, in the Tribunal's view, would only apply if the advertising services were not intended for the sale of a specific property, which is not the case.

On the other hand, it is the claimant that records the invoice in the amount of € 94,500.00, corresponding to 15% of the value of the sale of the property in question, as a mediation commission and that, despite the description of the same referring to advertising services, nonetheless recorded it as a mediation commission, not merely as a "merely accounting circumstance" but also by virtue of the mediation contract it had with its agent C....

The CIVA imposes on taxpayers, in addition to other obligations, the requirement to maintain accounting that permits the determination and verification of the tax (paragraph (g) of no. 1 of Article 29), a provision which the claimant complies with, having regard to the determination which permitted the defendant's inspection services to conduct their audit.

Given the foregoing, it is the Tribunal's conviction that the services provided by "B...", whether they were commissions, as they were recorded and the inspection services accepted them as such, or whether they were advertising services as the claimant claims, their location will always be in national territory and the claimant the respective taxpayer who bore the obligation of assessing the tax due.

Even if they were advertising services, their direct relationship with the specific property (house ... of ... located in national territory) whose purpose was a legal alteration of its ownership, there would always be grounds for the legal-tax treatment carried out by the defendant's inspection services, with the consequent taxation, given the location of its provision and the relationship with property located here, as per paragraphs (a) of nos. 6 and 8 of Article 6 of the CIVA and which no. 1 and its paragraphs (a) and (b) of Article 31-A of Implementation Regulation EU already referred to also admits, with its no. 3 having no applicability to the concrete case, given the direct relationship of the advertising services with the sale of a specific property as already seen.

What is decisive is the location of the services in national territory and the fact that its provider does not have an establishment, permanent establishment, or representative located here, and in these circumstances it was incumbent on the claimant to self-assess the tax.

In this perspective, the tribunal considers that the assessment here challenged should be maintained in the legal order, declaring the arbitral request to be unfounded.

3 – Right to Indemnity Interest

Given the conclusion reached above, it becomes unnecessary to consider this matter.

IV – DECISION

Given the foregoing, the tribunal declares:

- The arbitral request is wholly unfounded and consequently the VAT assessment and compensatory interest here challenged are maintained in the legal order, absolving the defendant of the claim.

- The value of the case is fixed at € 24,871.98, considering the provisions contained in Article 299, no. 1 of the CPC[7], Article 97-A of the CPPT[8] and Article 3, no. 2 of the RCPAT[9].

- The amount of costs is fixed, pursuant to no. 4 of Article 22 of the RJAT, at €1,530.00, in accordance with the table I referred to in Article 4 of the RCPAT, which shall be borne by the claimant.

Let it be notified,

Lisbon, 27 November 2018

The sole arbitrator,

Arlindo Francisco

[1] Acronym for Tax Identification Number of Legal Entities
[2] Acronym for Legal Framework for Arbitration in Tax Matters
[3] Acronym for Value Added Tax
[4] Acronym for Centre for Administrative Arbitration
[5] Acronym for Tax and Customs Authority
[6] Acronym for Value Added Tax Code
[7] Acronym for Civil Procedure Code
[8] Acronym for Code of Tax Procedure and Process
[9] Acronym for Rules on Costs in Tax Arbitration Proceedings

Frequently Asked Questions

Automatically Created

How are advertising services taxed under Portuguese VAT rules regarding the location of operations?
Under Portuguese VAT rules, advertising services provided by non-resident entities without a Portuguese establishment are generally subject to the reverse-charge mechanism. Article 6 CIVA establishes location rules based on where the recipient is established. When a Portuguese taxable person receives advertising services from a non-EU or non-established supplier, the Portuguese recipient becomes liable for VAT under Articles 2(1)(e) and (g) CIVA. However, specific rules apply when advertising relates to immovable property, potentially affecting the location determination under EU Implementation Regulation 282/2011.
What does Article 6 of the Portuguese VAT Code (CIVA) establish for the localization of cross-border service provisions?
Article 6 of the Portuguese VAT Code (CIVA) establishes the general rule that services are located where the service recipient is established for B2B transactions. Paragraph 6(a) provides that services to taxable persons are located at the recipient's establishment. Paragraph 8(a) reinforces this for cross-border services. However, Article 6 contains specific exceptions, including services related to immovable property (Article 6(9) CIVA), which are always located where the property is situated, regardless of the general B2B rule.
Can the Portuguese Tax Authority (AT) reclassify an invoice based on its accounting treatment to impose additional VAT?
Yes, the Portuguese Tax Authority can reclassify transactions based on substance over form principles. In this case, AT challenged the claimant's accounting treatment of an invoice described as 'marketing expenses associated with the promotion of properties in China' but recorded as a 'commission for real estate mediation.' The tax authority has the power to qualify taxable events according to their true legal and economic nature, regardless of how taxpayers classify or record them in their accounts. This requalification power is essential for correct VAT treatment and prevents tax avoidance through mischaracterization.
How does EU Directive 2006/112/EC and Implementing Regulation 1042/2013 affect VAT on advertising services provided by non-resident companies?
EU VAT Directive 2006/112/EC establishes the fundamental framework for VAT localization rules across member states, incorporated into Portuguese law through CIVA Article 6. Article 44 of the Directive provides the general B2B rule (services located where recipient is established), while Article 47 creates exceptions for services related to immovable property. Implementation Regulation 282/2011 (not 1042/2013 as initially referenced) provides detailed rules in Articles 31-A and 31-B. For advertising services provided by non-residents, Article 31-A(3) normally exempts general advertising from immovable property rules, but when advertising relates specifically to identified property intended for sale, it may be caught by the immovable property location exception.
What are the grounds for challenging an additional VAT assessment before the CAAD arbitral tribunal?
Grounds for challenging VAT assessments before CAAD include: (1) errors in legal qualification of the taxable event; (2) incorrect application of VAT localization rules under CIVA Articles 4 and 6; (3) misapplication of EU directives and regulations; (4) errors in factual or legal assumptions; (5) violation of the principle of legality in taxation; (6) incorrect determination of the taxable person or reverse-charge obligations; and (7) procedural irregularities in the assessment process. Taxpayers must file within legally prescribed deadlines under RJAT Articles 2 and 10, providing documentation supporting their claims of illegality in the contested assessment.