Summary
Full Decision
ARBITRAL DECISION
The arbitrators designated to constitute the Arbitral Tribunal, constituted on 30 August 2016, Prof. Dr. Clotilde Celorico Palma (arbitrator-president), Dr. Alexandra Martins (designated by A…, S.A.) and Prof. Dr. António Carlos dos Santos (designated by AT), agree as follows:
REPORT
A…, S.A., with registered office at …, …, …-… Lisbon, with the unique registration and tax identification number …, within the territorial jurisdiction of the Lisbon Tax Office…, hereinafter "Applicant", requested the constitution of an Arbitral Tribunal, pursuant to the provisions of paragraphs a) and b) of Article 2(1), paragraph a) of Article 5(3), paragraph b) of Article 6(2), and Article 10(2), all of the Legal Regime for Tax Arbitration ("RJAT"), embodied in Decree-Law No. 10/2011, of 20 January.
The request for arbitral pronouncement was submitted following notification of additional assessments of Value Added Tax "VAT" and respective compensatory and default interest, in the total amount of EUR 1,375,954.71 (one million, three hundred and seventy-five thousand, nine hundred and fifty-four euros and seventy-one cents), detailed below, and has as its object the illegality, and consequent annulment, of the following tax acts relating to 2011, 2012, 2013, January, March and April of 2014:
VAT for the year 2011:
Assessment No. 2015…, in the amount of EUR 755,326.81, relating to VAT for the year 2011 additionally levied;
Assessment No. 2015…, in the amount of EUR 115,223.55, relating to compensatory interest, by reference to the year 2011;
Assessment No. 2015…, in the amount of EUR 49,127.75, relating to VAT for the year 2011 that allegedly was improperly carried forward to the following period;
Assessment No. 2015…, in the amount of EUR 11,081.73, relating to default interest, by reference to the year 2011.
VAT for the year 2012:
Assessment No. 2016…, in the amount of EUR 319,972.13, relating to VAT for the year 2012 additionally levied;
Assessment No. 2016…, in the amount of EUR 39,869.40, relating to compensatory interest, by reference to the year 2012.
VAT for the year 2013:
Assessment No. 2016…, relating to VAT for the year 2013, in which no additional tax was levied, having only corrected the amount to be carried forward to the following period (EUR 77,051.87).
VAT for the year 2014:
Assessment No. 2016…, in the amount of EUR 30,543.53, relating to VAT for the period of 2014/01;
Assessment No. 2016…, in the amount of EUR 3,493.31, relating to default interest, relating to the period of 2014/01;
Assessment No. 2016…, in the amount of EUR 31,832.93, relating to VAT for the period of 2014/03;
Assessment No. 2016…, in the amount of EUR 3,336.67, relating to default interest, relating to the period of 2014/03;
Assessment No. 2016…, in the amount of EUR 14,675.41, relating to VAT for the period of 2014/04;
Assessment No. 2016…, in the amount of EUR 1,471.49, relating to default interest, relating to the period of 2014/04.
The respondent is the Tax and Customs Authority (AT).
The Applicant chose to designate Dr. Alexandra Coelho Martins as Arbitrator, pursuant to the provisions of paragraph b) of Article 6(2) of the RJAT.
The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-05-2016.
Pursuant to the provisions of paragraph b) of Article 6(2) and Article 11(3) of the RJAT, and within the period provided in Article 13(1) of the RJAT, the highest ranking official of the Tax Administration service designated Prof. Dr. António Carlos dos Santos as Arbitrator.
On 03-08-2016, the arbitrators designated by the parties informed CAAD of the designation of Prof. Dr. Clotilde Celorico Palma as President Arbitrator.
Pursuant to the provisions and for the purposes of Article 11(7) of the RJAT, the President of CAAD informed the parties of this designation on 04-08-2016.
Thus, in accordance with the provisions of Article 11(7) of the RJAT, the period provided in Article 13(1) of the RJAT having elapsed without the parties having anything to say, the Collective Arbitral Tribunal was constituted on 30-08-2016.
The Applicant contends, in the request for constitution of the Arbitral Tribunal, the illegality of the assessments made by AT, alleging, on the one hand, that the tax relating to the VAT assessments and interest made by reference to 2011, and relating to autonomous units "C" to "H", refers to the wrong year and is time-barred, and on the other hand, that, regardless of time-bar, all corrections made in the context of tax inspection and, consequently, the contested assessments, are illegal, based on the arguments described below.
It concludes by requesting the merits of the application and the consequent annulment of the VAT assessments and respective compensatory and default interest, restitution of the amounts paid, as well as the right to default interest.
Alternatively, it requested, by way of precaution, the suspension of the proceedings and the corresponding preliminary reference to the Court of Justice of the European Union (CJEU), so that this court would rule on the compatibility of the interpretation proposed by AT with the principles and rules constituting the common VAT system.
It attached 53 documents to the petition, having listed 5 witnesses.
AT filed a Response, in which it disputed documents Nos. 39, 40, 41 and 43 submitted by the Applicant. It also disputed the content of Article 65 of the Request for Constitution of the Arbitral Tribunal, regarding the specific date of the end of the lease contracts relating to units "C" and "H" (Rua …), a date essential for determining the counting of the statute of limitations for the VAT assessment for 2011, on the grounds that the Applicant did not provide evidence that could unequivocally demonstrate the dates of the respective contractual terminations, in order to allow this Tribunal to, without resorting to undesirable presumptions, determine the specific date of the end of said contracts.
It further requested that the Tribunal order the translation of documents Nos. 20, 21, 22, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 42 submitted by the Applicant, since they are written in English, requesting their translation into Portuguese.
It also stated that the only admissible evidence in this case is documentary evidence, which it considers to be the only suitable means of proof to support the right claimed by the Applicant, thus requesting that the application for witness testimony be dismissed.
It concludes that the action should be judged unfounded, further requesting that if witness testimony production were not waived, the Applicant be notified to indicate which facts it wishes to have proven by witnesses and that citizen B…, as administrator of the Applicant, be rejected as a witness, since in his capacity as administrator of the Applicant, he is considered a party to the proceedings.
It attached to these files the administrative file, as well as 1 document, of which the Applicant was notified.
The Applicant came, pursuant to the provisions of Article 3(3) of the RJAT, to exercise the right of reply to the Response of the Respondent, maintaining that the documents disputed by AT should be kept in the files and freely analyzed by the Tribunal, pursuant to the principle of free assessment of evidence, to which Article 607(5) of the Code of Civil Procedure (CCP) alludes (ex vi paragraph e) of Article 29(1) of the RJAT).
As to the date on which the lease contracts relating to units "C" and "H" terminated, the Applicant, in the same Response, attached a document which, it alleges, demonstrates that said contracts actually terminated on 31 January 2008.
With regard to the request for translation into Portuguese of the documents, the Applicant stated that there are administrative guidelines applicable to the entire Tax Authority's handling of cases, to the effect that whenever documents prepared in English, French or German are presented, they do not need to be translated. Nevertheless, given the opposition by the AT's representatives to the validity of the content of the documents in view of their non-translation into Portuguese, and also to the express request for submission of the translation of the documents into Portuguese, pursuant to Article 134 of the CCP (paragraph e) of Article 29(1) of the RJAT), the Applicant took steps to proceed with its translation, which it subsequently filed, by Motion of 28-10-2016.
Finally, as to the opposition to the procedural step requested regarding the examination of witnesses listed by the Applicant, it understood that, in view of the disputed facts, this procedural step appears essential, both with regard to the examination of witnesses listed by it, and with respect to the statements of party B…, which was requested pursuant to Article 13 of the Code of Tax Procedure and Process (CPPT) (ex vi paragraph a) of Article 29(1) of the RJAT).
The Tribunal issued an Order of 17-10-2016 to provide for the scheduling of the first meeting, and the Respondent submitted, in this regard, a motion requesting that the first meeting be dispensed with, considering it to be a useless act.
By Order of 21-10-2016, the Tribunal decided in favor of maintaining the first meeting referred to in Article 18 of the RJAT, which took place on 31 October 2016, which was attended by the Honorable Arbitrators and the distinguished counsel for the Applicant, but the distinguished representatives of the Respondent did not attend, whereby the Tribunal ordered their notification to, within 10 days, state their position, if they wished, on the request for preliminary reference.
The Tribunal issued an Order of 08-11-2016, to the effect that the examination of the witnesses indicated by the Applicant should be conducted, further deciding that the examination of witness B… should be conducted through the procedural instrument of Party Statement, considering that such procedural steps appear useful for ascertaining the truth. It further ordered notification of the Applicant to indicate the facts on which the various testimonies will focus, which was done by the Applicant by Motion of 11-11-2016.
The Respondent stated that it had nothing to oppose to the request for preliminary reference.
On 18-11-2016, the examination of witnesses and the administrator of the Applicant was conducted by means of Party Statements.
A translator having been appointed by the Applicant to proceed with the translation of the testimony of witness C… from English to Portuguese, AT came to oppose such appointment, invoking the lack of impartiality and the consequent nullity of the appointment, pursuant to Articles 132, paragraph 2 and 195 of the CCP, ex vi Article 29 of the RJAT, and the Tribunal confirmed and proceeded with the appointment in accordance with the rules contained in paragraphs c), e) and f) of Article 19(1) of the RJAT, given the suitability and impartiality demonstrated by his/her curriculum.
On 16 December 2016, a decision on preliminary reference was issued to the Court of Justice ("CJEU"), as doubts were raised, with relevance to the decision on the merits, regarding the compliance of Articles 26 of the VAT Code and 10 of the Regime for Waiver of VAT Exemption in Operations relating to Real Estate, in the interpretation that AT makes of them, with Directive 2006/112/EC ("VAT Directive"), and consequently, arbitral proceedings were suspended.
The CJEU, on 28 February 2018, issued the Judgment relating to the preliminary reference proceedings in question, to which the number C-672/16 was assigned, and was notified to the Arbitral Tribunal on 5 March 2018, ceasing on that date the said suspension effect.
PRELIMINARY ASSESSMENT
The Tribunal was duly constituted and is competent ratione materiae, in accordance with Article 2 of the RJAT.
The parties have legal personality and capacity, are shown to be legitimate and are duly represented (cf. Articles 4 and 10(2) of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March).
FACTS
PROVEN FACTS
For the purposes of the decision, the following facts are considered to be proven:
The Applicant is a company whose corporate purpose is the purchase and sale, leasing and management of real estate (whether owned by the company or by third parties) intended for residential purposes, services (commerce and offices) and mixed uses, and may also acquire plots of land for the construction of buildings for the purposes previously mentioned.
The Applicant is the owner of the urban property in horizontal property regime located at Rua …, No. … and …, Rua … No. … and Rua Dr. …, No.…, … and …, in Algés, described in the … Property Registry Office of Oeiras under No. … and registered in the matrix with the article…, of the parish of Union of Parishes of…, … and … (corresponding to the former article …, of the parish of …).
The Applicant is also the owner of the urban property in horizontal property regime located at …, No. …, in …, described in the … Property Registry Office of Oeiras under No. … and registered in the matrix with article …, of the parish of Union of Parishes of …, … and … (corresponding to the former article …, of the parish of …).
Both properties described above are buildings for offices, commerce and public parking.
The Applicant promoted, by various means and on a continuous basis, during the periods under consideration (2011 to 2014), the commercial promotion of the said properties with a view to their leasing.
Prior to the execution of each lease contract, and by reference to the periods under consideration (2011 to 2014), the Applicant always waived the VAT exemption in said operations, in accordance with Article 12(4) of the VAT Code and the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
Autonomous units "C" to "H" of the property located at Rua …, No. … and …, Rua … No. … and Rua Dr. …, No.…, … and …, in Algés (hereinafter "autonomous units "C" to "H") remained vacant for a period of more than 2 years.
The lease contracts relating to those units terminated on 31 January 2008.
On 10 February 2011, the Applicant submitted a request addressed to the Head of the Lisbon Tax Office –…, whereby it reported that, in view of market circumstances, the said autonomous units "C" to "H" remained unlet, having stated that, nonetheless, there would be no need to make any adjustment to the VAT deducted by reason of such units remaining allocated to the taxable activity of the Applicant for VAT purposes, which continued to promote their leasing, as described in the same request.
On 13 February 2013, the Applicant submitted a new request, addressed to the Head of the Lisbon Tax Office –…, in the same terms as the previous request, this time by reference to autonomous units "W", "P", "Z", "AB", "L" and "Q" of the property located at …, No.…, in Algés.
On 17 September 2015, the Applicant was notified of the start of the inspection action carried out for the year 2011, in compliance with Service Order OI2014…, in the context of which arithmetic corrections (of tax shortfall) were made in the amount of EUR 804,454.52 based on the following grounds:
"Article 10 of the "Waiver Regime", in addition to transposing the adjustments to deductions relating to real estate, provided for in the VAT Code, contains as a condition for the maintenance of the option to waive the exemption, that real estate shall not be vacant or allocated to purposes other than the company's activity, in short, to non-taxed operations, for a period exceeding two years";
"(…) it appears that A…, having vacant units, in addition to not having proceeded with the adjustments required by paragraph b) of Article 10(1) of the Waiver Regime", did not make the annual adjustments provided for in Article 26(1) of the VAT Code, in each of the first two years in which the real estate remained vacant, in accordance with paragraph 3 of Article 10 of that regime";
"(…) A…, in relation to the vacant units, should have proceeded with the respective adjustments to tax in the 2011-12 period".
AT thus alleged that the Applicant should proceed with annual adjustment in some cases, and with final adjustment in others, of the deducted tax with respect to the following units and in the following terms:
[Table with detailed breakdown of fractions, dates, VAT deducted, and adjustment calculations - structure preserved but specific identifying information omitted as in original]
Following the corrections made to the year 2011, the Applicant was notified of VAT assessment No. 2015…, in the amount of EUR 755,326.81, compensatory interest assessment No. 2015…, in the amount of EUR 115,223.55, improperly carried forward VAT assessment No. 2015…, in the amount of EUR 49,127.75 and default interest assessment No. 2015…, in the amount of EUR 11,081.73, all by reference to the year 2011 and issued with the date of 15 December 2015, the voluntary payment period of which ended on 15 February 2016.
The Applicant proceeded to pay the assessments in the total amount of EUR 930,759.84.
On 11 April 2016, the Applicant was notified of the inspection action carried out for the years 2012 and 2013, in compliance with Service Orders OI2015… and OI2015…, in which arithmetic corrections (of tax shortfall) were made in the amount of EUR 319,972.13 (2012) and EUR 77,051.87 (2013), based on the same arguments that were the basis of the corrections made with respect to the year 2011.
AT thus alleged that the Applicant should proceed with annual adjustment in some cases, and with final adjustment in others, of the deducted tax with respect to the following units of the property located at …, No. … in Algés and in the following terms:
[Table with detailed breakdown for 2012-2013 corrections - structure preserved but specific identifying information omitted as in original]
Following the corrections made to the years 2012 and 2013 – the latter with repercussions on deducted tax already in the year 2014 (periods of 2014/01, 2014/03 and 2014/04) –, the Applicant was notified of the following assessments, the voluntary payment period of which ended on 9 June 2016:
VAT for the year 2012:
Assessment No. 2016…, in the amount of EUR 319,972.13, relating to VAT for the year 2012 additionally levied;
Assessment No. 2016…, in the amount of EUR 39,869.40, relating to compensatory interest, by reference to the year 2012.
VAT for the year 2013:
Assessment No. 2016…, relating to VAT for the year 2013, in which no additional tax was levied, having only corrected the amount to be carried forward to the following period (EUR 77,051.87).
VAT for the year 2014:
Assessment No. 2016…, in the amount of EUR 30,543.53, relating to VAT for the period of 2014/01;
Assessment No. 2016…, in the amount of EUR 3,493.31, relating to default interest, relating to the period of 2014/01;
Assessment No. 2016…, in the amount of EUR 31,832.93, relating to VAT for the period of 2014/03;
Assessment No. 2016…, in the amount of EUR 3,336.67, relating to default interest, relating to the period of 2014/03;
Assessment No. 2016…, in the amount of EUR 14,675.41, relating to VAT for the period of 2014/04;
Assessment No. 2016…, in the amount of EUR 1,471.49, relating to default interest, relating to the period of 2014/04.
Both properties, owned by the Applicant (more precisely, the autonomous units into which they are divided), are recorded in the Applicant's financial statements in account 42 – Investment Properties.
The Applicant promoted the offer of available spaces with a view to their inherent profitability through the execution of lease contracts, service provision contracts of the "office centre" type and the management of the public parking lot (included in Lot 5 of the development).
The Applicant proceeded to execute the following contracts with a view to promoting and offering spaces for offices, specifically with respect to the units that were unlet:
Contract executed on 1 February 2008, between the Applicant and D…, Lda. and E…, S.A., relating to autonomous units "C" to "I" of the property located at Rua …, No. …, Rua … No. … and Rua Dr. …, No. …, in Algés (article … at the time of the facts and current article …);
Contract executed in December 2009, between the Applicant and D…, Lda. and F…, Lda., relating to autonomous units "C" to "I" of the property located at Rua …, No.…, Rua … No. … and Rua …, No.…, in Algés (article … at the time of the facts and current article …);
Contract executed on 16 May 2011, between the Applicant and D…, Lda. and F…, Lda., relating to autonomous units "C" to "H" of the property located at Rua …, No. …, Rua … No.… and Rua …, No.…, in Algés (article … at the time of the facts and current article …);
Contract executed on 19 July 2011, between the Applicant and D…, Lda. and F…, Lda., relating to autonomous units "A" to "F", "R" and "S" of the property located at …, No.…, in Algés (article … at the time of the facts and current article…).
As a result of the execution of the above-mentioned contracts, the Applicant paid to each of the contracted companies the services owed for the commercial promotion of its buildings, as shown in the trial balances for the years 2011 to 2013.
In the course of its contractual duties to the Applicant, the said companies periodically presented the results of the activity and of the actions taken.
Duly advised by the aforementioned companies, the Applicant also developed various marketing activities in support of the commercialization of the properties, which include:
Creation of a brochure;
Creation of a mailing list;
Creation of a website;
Creation and dissemination of press releases of broad public distribution;
Placement of advertising panels on the properties.
These initiatives involved the expenditure of costs borne by the Applicant, as shown in the trial balances for the years 2011 to 2013.
The Applicant proceeded to adjust the offer through (i) the availability of leasehold spaces at more competitive prices (namely through the combined effect of the availability of more leasehold space at a lower price per m2), and (ii) the possibility of negotiating grace periods during the installation phase of each tenant.
In a first stage, the leasing of the units was promoted in their entirety, regardless of the area they presented.
The Applicant received expressions of interest.
The Applicant executed new lease contracts with the following tenants:
Lease contract executed on 14 July 2010, with company G…, S.A., relating to autonomous unit "I", of the property located at Rua …, No. …, Rua … No. … and Rua …, No. …, in Algés (article … at the time of the facts and current article …);
Lease contract executed on 27 November 2014, with company H…, Lda., relating to autonomous units "A", "B", "D", "E", "F" (and respective parking spaces) of the property located at …, No.…, in Algés (article … at the time of the facts and current article…).
The Applicant was unable to lease all spaces.
The Applicant opted to restructure its offer by adopting a new business model based on the integrated provision of spaces and services ("office centre").
The Applicant requested AT a binding ruling that validated the understanding that the "office centre" was subject to and not exempt from VAT.
From 2014 onwards, it proceeded to divide the spaces in some of the units, having executed the following contracts:
Contract executed on 18 June 2014, with company I…, Lda;
Contract executed on 13 August 2014, with company J…, S.A.;
Contract executed on 2 September 2014, with company K… – Branch in Portugal.
Contract executed on 15 June 2015, with company L…, S.A.
Contract executed on 14 August 2015, with company M…, Lda.
Contract executed on 24 September 2015, with company N…, Lda.;
Contract executed on 25 February 2016, with company O…, Lda.
From 2014 onwards, the Applicant proceeded to conduct its activity based on two distinct business models – the leasing of autonomous units, and the provision of integrated services according to the "office centre" model.
The costs associated with these initiatives are reflected in the Applicant's financial statements, in particular in the trial balances, taking into account the years 2011 to 2013.
UNPROVEN FACTS
No other facts with relevance to the decision of the case were proven.
REASONING FOR FACTUAL FINDINGS
The facts were proven based on documents submitted with the request for arbitral pronouncement, the administrative file and witness testimony and party statements.
The witnesses examined, as well as the administrator who was examined by means of party statements, appeared to testify with impartiality and with knowledge of the facts they mentioned.
LEGAL MATTERS
1. ISSUES TO BE DECIDED
With regard to VAT assessments relating to the year 2011 and autonomous units "C" to "H", it is necessary, first of all, to determine whether the tax relates or not to the wrong year and whether it is or is not time-barred, in accordance with national and community rules relating to the statute of limitations and the taxability of tax, in particular Articles 45(4) of the General Tax Law (LGT) and Articles 7 and 8 of the VAT Code, transposing Articles 62 and 63 of Directive 2006/112/EC.
Additionally, if the statute of limitations for the right to assess tax has not occurred with respect to the additional assessments attributed to 2011 and also with respect to the other assessment acts (attributed to the years 2012 to 2014), what is at issue is, above all, the interpretation of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, approved in the annex to Decree-Law No. 21/2007, of 29 January, in light of European Union Law, more specifically:
The question of whether the obligation to adjust at once the VAT deducted due to non-use of the real estate for a period of more than two years, provided for in paragraph b) of Article 10(1) of the said Regime for Waiver of VAT Exemption, is compatible with community rules and principles, in particular with the provisions of the VAT Directive;
The question of whether the combination of paragraph c) of Article 2(2) and paragraph b) of Article 10(1) of the aforementioned Regime for Waiver of VAT Exemption is in accordance with European Union Law, in particular with the provisions of the VAT Directive, insofar as its combined effect determines the impossibility of a VAT taxable person being able to waive VAT exemption in the execution of new lease contracts after a single adjustment of VAT occurs;
The interpretation of Article 26(1) of the VAT Code and paragraph b) of Article 10(1) of the said Regime for Waiver of VAT Exemption, in their previous versions, in light of the provisions of the VAT Directive, specifically the question of whether these provisions should be interpreted as not being applicable whenever, despite the real estate being vacant, it is the intention of its respective owner to lease it subject to VAT, and being in a position to prove that he has taken and is taking all necessary efforts to lease the real estate, with waiver of VAT exemption.
2. APPLICABLE LEGAL PROVISIONS
In accordance with the provisions of Article 12(4) of the VAT Code, "Taxable persons who lease urban real estate or autonomous units thereof to other taxable persons, who use them, wholly or predominantly, in activities that confer the right to deduction, may waive the exemption provided for in Article 9(29)".
The Regime for Waiver of VAT Exemption in operations relating to Real Estate was transposed to national law for Article 12(4) of the VAT Code, with Article 6 providing that it would be contained in special legislation.
The terms and conditions for the waiver of exemption were to be specifically established in Decree-Law No. 241/86, of 20 August, a regime which was subsequently reformulated by the aforementioned Decree-Law No. 21/2007, of 29 January.
The aforementioned provisions of the Regime for Waiver of VAT Exemption in operations relating to Real Estate, approved in the annex to Decree-Law No. 21/2007, provided the following at the time of the facts:
"Article 2
Objective Conditions for Waiver of Exemption
1 - Waiver of exemption is permitted in operations relating to real estate when the following conditions are satisfied:
a) The real estate is an urban property or an autonomous unit thereof or, in case of transfer, a plot of land for construction;
b) The real estate is registered in the land register in the name of its owner, or registration has been requested, and is not intended for housing;
c) The contract concerns the transfer of the right of ownership of the real estate or its leasing and relates to the entirety of the immovable property;
d) The real estate is allocated to activities that confer the right to deduct VAT supported on acquisitions;
e) In case of leasing, the value of the annual rent is equal to or greater than one-fifteenth of the value of acquisition or construction of the real estate.
2 - Provided that the conditions set out in the preceding paragraph are met, waiver is only permitted when the immovable property is in one of the following circumstances:
a) It is the first transfer or leasing of the real estate occurring after construction, when VAT supported thereon has been or it is still possible to deduct, in whole or in part;
b) It is the first transfer or leasing of the real estate after it has been subject to major works of transformation or renovation, which has resulted in an alteration of more than 50% of the tax-assessed value for the purposes of the municipal tax on real estate, when it is still possible to proceed with the deduction, in whole or in part, of VAT supported in those works;
c) In the transfer or leasing of the real estate subsequent to an operation carried out with waiver of exemption, when the regularization period provided for in Article 24(2) of the VAT Code is in progress with respect to tax supported in the costs of construction or acquisition of the real estate.
(…)"
"Article 10
Regularization of Deducted Tax
1 - Notwithstanding the provisions of Article 25(1) of the VAT Code, taxable persons who use real estate with respect to which there was a right to full or partial deduction of tax supporting its acquisition are obligated to adjust, at once, in accordance with Article 24(5) of the same Code, the deductions made, considering that the assets are allocated to a non-taxed activity, when:
a) The immovable property is allocated to purposes other than the activity exercised by the taxable person;
b) Although not allocated to purposes other than the activity exercised by the taxable person, the immovable property is not effectively used for business purposes for a period of more than two consecutive years. [currently five years]
2 - The amount of adjustments referred to in the preceding paragraph must be included in the tax declaration relating to the last period of the year in which the situation giving rise to them occurs.
3 - The provisions of paragraph b) of paragraph 1 do not prejudice the obligation to proceed with the annual adjustments provided for in Article 26(1) of the VAT Code until the expiration of the five-year period referred to in that paragraph."
Articles 24(5) and 24(6) of the VAT Code provide:
"Article 24
Adjustments of Deductions Relating to Fixed Assets
(…)
5 - In cases of transfers of fixed assets during the regularization period, this is carried out at once, for the period not yet elapsed, considering that such assets are allocated to a fully taxed activity in the year in which the transfer occurs and in the remainder until the expiration of the regularization period. If, however, the transfer is exempt from tax, under Articles 9(30) or 9(32), the assets are considered to be allocated to a non-taxed activity, and the respective adjustment must be made in the first case.
6 - The adjustment provided for in the preceding paragraph is also applicable, considering that the assets are allocated to a non-taxed activity, in the case of immovable property with respect to which there was initially full or partial deduction of the tax supporting its construction, acquisition or other investment expenses related to it, when:
a) The taxable person, due to a change in the activity exercised or by legal requirement, passes to carry out exclusively exempt operations without the right to deduction;
b) The taxable person passes to carry out exclusively exempt operations without the right to deduction, by virtue of the provisions of Article 12(3) or Articles 55(3) and 55(4);
c) The real estate is subject to an exempt lease under Article 9(29)
(…)."
Article 25 of the VAT Code provides the following:
"Article 25
Adjustments Relating to Fixed Assets due to Change of Activity or Legal Requirement
1 - If, due to a change of activity or by legal requirement, taxable persons pass to practice taxed operations that confer the right to deduction, they may still deduct the tax relating to fixed assets, as follows:
(…)
b) In the case of immovable property acquired or completed in the year of the change of taxation regime and in the 19 civil years prior, the deductible tax is proportional to the number of years remaining to complete the 20-year period from the year of occupation of the assets;
4 - The adjustment provided for in paragraph b) of paragraph 1 is also applicable when, after an exempt lease covered by paragraph c) of Article 24(6), the immovable property is subject to use by the taxable person exclusively within the scope of operations that confer the right to deduction."
On the other hand, Article 26(1) of the VAT Code provides as follows: "Non-use for business purposes of immovable property with respect to which there was deduction of tax during 1 or more complete civil years after the start of the 19-year period referred to in Article 24(2) gives rise to annual adjustment of 1/20 of the deduction made, which must be included in the declaration of the last period of the year to which it relates."
3. APPLICANT'S POSITION
3.1. Statute of Limitations for the Right to Assess VAT (Year 2011)
The Applicant first contends the statute of limitations for the right to assess VAT for the year 2011 and consequent illegality of the assessments made by AT, alleging, on the one hand, that the tax relating to VAT assessments and interest made by reference to 2011, and relating to autonomous units "C" to "H", relates to the wrong year and that it is time-barred, based on the following arguments:
It follows from Article 45(4) of the General Tax Law (LGT) that the statute of limitations period, in the case of VAT, must be counted from the first day of the year following the year in which the tax became due.
The rules on taxability are provided for in Article 7 of the VAT Code when transfers of assets, provision of services or imports are in question.
In the present case, insofar as the allegedly owed tax does not result from any operation, but rather from an adjustment which, when owed, is an act that must be performed by the taxable person itself in its periodic declaration for the last period of the year in which the fact occurs, the aforementioned rules do not apply.
Article 8 of the same Code provides, in a supplementary manner, the situations in which tax becomes due whenever the transfer of assets or the provision of services gives rise to the obligation to issue an invoice.
However, the alleged need to proceed with the adjustment of VAT in the case at hand does not give rise to the issuance of an invoice, under paragraph a) of Article 29(1) and Article 36 of the VAT Code, so the rules of Article 8 of the same Code are, likewise, not applicable to the case in question.
In turn, it follows from Article 62 of the VAT Directive that the moment at which tax becomes due corresponds to the moment when the right to receive tax is born in the sphere of the State, a moment that should not be confused with that from which the State, through the action of its tax administration, can proceed to collect that same tax.
Article 63 of the same Directive (and which was transposed by Article 7 of the VAT Code) provides that, by reference to taxable operations, it is the occurrence of the taxable fact that gives rise to the taxability of tax, while being the right of the tax administration to receive the VAT self-assessed by the taxable person.
That is, VAT becomes due at the moment the taxable fact occurs or on the date the corresponding invoice is issued, at which time the tax becomes quantifiable and, therefore, due by the tax administration from the taxable person who must self-assess it, a moment that should not be confused with that from which AT acquires the right to collect the tax, which only occurs after the deadline for submission of the periodic declaration and payment of the self-assessed tax.
From the facts described, it follows that the lease contracts relating to autonomous units "C" to "H" terminated, at the latest, in February 2008, so, under paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, it should be considered that the deducted tax should be adjusted from February 2010 onwards.
It should be inferred from these rules that the tax in favor of the State, resulting from this alleged adjustment, became due and taxable in the course of 2010, and not in 2011, this being the only interpretation in accordance with the requirement of European Union Law that taxability be considered to have occurred at the moment the right to the missing tax is born, that is, when the fact that obliges the adjustment of tax is verified.
For this reason, and although paragraph 2 of Article 10 of the Regime for Waiver of VAT Exemption provides that the adjustment be made in the periodic declaration of the last period of the year to which it relates (in this case, December 2010), the circumstance that the said periodic declaration is only submitted in the following year (February 2011) is not an argument to assume that the adjusted tax becomes due only at the end of the deadline for submission of that same declaration.
Consequently, not only are the additional assessments made incorrect, since they should relate to the year 2010, not to the year 2011, but also they were issued after the expiration of the applicable statute of limitations period, counted from 1 January 2011, and ending on 31 December 2014.
In fact, insofar as Article 45(4) of the LGT requires that the statute of limitations period, in the case of VAT, be counted from the first day of the year following the year in which the tax became due (equating VAT with periodic taxes for this purpose), it is necessary to conclude that the statute of limitations period, by reference to the assessments at issue, ended well before the date of issuance (and notification) of them, even if the possible suspension of such period by the effect of the investigative procedure is taken into account.
The Applicant thus concludes that the additional assessments made by reference to 2011, and relating to autonomous units "C" to "H", are manifestly illegal, inasmuch as not only do they relate to the wrong year (2011, instead of 2010), but they also do not respect the statute of limitations period provided for in Article 45(4) of the LGT.
3.2. Non-Conformity of the VAT Regularization Regime with EU Law and Incorrect Subsumption of the Case (Years 2011 to 2014)
On the other hand, the Applicant contends that the interpretation adopted by AT is manifestly abusive and illegal in light of the provisions of Council Directive 2006/112/EC, of 28 November 2006 (VAT Directive), and to the alleged subsumption of the facts under Article 26(1) of the VAT Code and paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, both in its original version and in the version of Law No. 66-B/2012, of 31 December.
Thus, the Applicant contends that all corrections made in the context of tax inspection and, consequently, the contested assessments, are illegal, based on the following arguments:
These corrections are based on the premise that the Applicant was obliged to proceed, in some cases, with annual adjustment, and, in others, with adjustment at once, of the deducted VAT, depending on whether the units were, respectively, vacant for a period exceeding one year (under Article 26(1) of the VAT Code) or for a period exceeding two years (under paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate).
The imposition of the obligation to proceed with the adjustment of the deducted VAT at once determines, in the sphere of the Applicant, the legal impossibility (except in cases of major works of transformation or renovation that result in an alteration of more than 30% of the tax-assessed value) of waiving VAT exemption in the execution of new lease contracts having as their object the units in question (cf. paragraphs b) and c) of Article 2(2) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate).
The understanding adopted by AT, and the assessments resulting from it, are manifestly illegal taking into account:
The non-conformity of paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate with EU law, in particular the provisions of Directives 2006/69/EC of the Council, of 24 July 2006 and 2006/112/EC;
The non-conformity of paragraph c) of Article 2(2) and paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate with EU law, in particular the provisions of the VAT Directive, insofar as its combined effect determines the impossibility of a VAT taxable person being able to waive VAT exemption in the execution of new lease contracts after a single adjustment of VAT occurs;
The incorrect subsumption of the case in question under the provisions of Article 26(1) of the VAT Code and paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
Specifying its understanding, the Applicant begins by conducting an analysis of the compatibility of national law provisions with EU law, alleging the following in this regard:
From the combination of Article 9(1) and Articles 167 and 168 of the VAT Directive, it follows that the status of a VAT taxable person, including the right to deduction, is acquired at the moment when the taxable person begins an economic activity, even if, for reasons beyond his control, he has never actually made use of such assets or services to carry out taxable operations, without prejudice to tax adjustments that may be due.
This interpretation is in accordance with settled case law of the CJEU, which has been advocating for the maintenance of the right to deduction by the taxable person, regardless of the result of the activity, and whether or not it generates income, except in cases of fraudulent or abusive situations.
Although Member States are authorized, under Article 137(2) of the VAT Directive, to regulate the conditions under which the waiver of VAT exemption is carried out, such a mandate does not confer on them an unrestricted latitude under which domestic legislation may derogate from or limit the right to deduct tax in contravention of the principles of neutrality, tax equality and proportionality on which the common VAT system is based.
As it follows from CJEU case law, the latitude conferred on Member States is limited, with respect to tax adjustments, to the provisions set out in Article 189 of the VAT Directive (former Article 20(4) of the Sixth Directive).
It is precisely the illegitimate restriction of the right to deduction that is at issue here, both from the rules of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, and from the restrictive interpretation that AT makes of them.
Indeed, Article 184 of the VAT Directive provides that "The initial deduction is subject to adjustment when it was greater or less than the deduction to which the taxable person was entitled".
Now, under the provisions of paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, the taxable person shall make an adjustment at once, in favor of the State, if the immovable property is not effectively used for business purposes for a period exceeding 2 consecutive years (currently 5 years).
That is, there is an adjustment when the value of the initially deducted VAT is greater than that to which the taxable person is entitled under this rule.
At this point, it is important to bring to light the evident systematic disharmony between the provisions of Article 25(4) of the VAT Code, and the effects associated with the adjustment of VAT at once, and which result from the application of paragraphs b) and c) of Article 2(2) and paragraph b) of Article 10(1), all of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
By expressly referring to the situation provided for in paragraph c) of Article 24(6) of the VAT Code, Article 25(4) of the same statute, appears only to permit the taxable person to deduct the VAT supported by the real estate in question (in the proportion of the years remaining until the end of the regularization period), when the allocation of the same to a taxed activity follows an exempt lease, and not already when it follows other situations that have determined the realization of adjustments of the deducted tax, such as those provided for in Article 10 of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
By barring the possibility of the taxable person, subject to adjustments under Article 10 of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, to "partially reverse" that adjustment whenever the real estate in question is, still during its regularization period, allocated to activities that confer the right to deduct VAT, one is in practice limiting the right to deduct tax enshrined in the VAT Directive.
Moreover, by determining the impossibility of waiving VAT exemption in the execution of new lease contracts having as their object real estate that gave rise to adjustment at once, Portuguese law prevents the taxable person from deducting the VAT supported with all expenses directly related to the promotion, management, maintenance and preservation of real estate that it intends to keep allocated to the exercise of a taxed activity. What naturally places it in an unfavorable position compared to other economic operators.
In summary, Portuguese legislation not only does not allow compliance with what is established in the VAT Directive, particularly the possibility of an adjustment (in favor of the taxable person) occurring if it is found that the initial deduction was, in fact, less than the deduction to which the taxable person was entitled, but also prevents the taxable person from deducting VAT inputs supported after an adjustment in favor of the State under Article 10 of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
Admitting this type of distortions would imply accepting the violation of the principle of tax equality (economic and fiscal equivalence of formally diverse rights) emanating from the principle of neutrality, given the clear discrimination that it would represent for operators acting in the real estate market intended for leasing, compared with other economic operators.
It is precisely because the defense of the principle of neutrality is at stake that EU law bars Member States from the possibility of derogating from or limiting the right to deduct tax in the manner enshrined in the VAT Directive, even when they invoke, as Portuguese legislation confessedly does in the Preamble to Decree-Law No. 21/2007, of 29 January, which approved the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, the need to combat situations of fraud, evasion and abuse.
It suffices, moreover, to compare the text of Directive 2006/69/EC with the Preamble to Decree-Law No. 21/2007, of 29 January, which approved the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, to conclude that, with the exception of measures relating to fair market value and the reversal of the taxable person in case of waiver, all other limiting provisions of the right to waive and deduct tax, including cases of forced adjustment at once, result from the initiative of national legislature, being manifestly disproportionate.
From this it inevitably follows that the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, by virtue of the irreversible character of the obligation to adjust the VAT deducted due to non-use of the real estate at once, without the taxable person being able even to justify the reason that was the origin of that same non-use, does not observe the rule of proportionality.
In light of the above, the Applicant understands that the understanding adopted by AT and the assessments resulting from it are manifestly illegal taking into account:
- The non-conformity of paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate with EU law, in particular the right to deduct VAT enshrined in Article 184 of the VAT Directive, with the consequent violation of the principles of neutrality, tax equality and proportionality, the latter case also taking into account the provisions of Directive 2006/69/EC;
- The non-conformity of paragraph c) of Article 2(2) and paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate with EU law, in particular the provisions of the VAT Directive, insofar as its combined effect determines the impossibility of a VAT taxable person being able to waive VAT exemption in the execution of new lease contracts after a single adjustment of VAT occurs.
Finally, the Applicant proceeds with the interpretation of domestic law to conclude that there was an erroneous application, by AT, of Article 26(1) of the VAT Code and, above all, of the provisions in paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption, in its previous versions, alleging the following:
The regime for waiver of VAT exemption in real estate operations, more specifically in transfers and leases of real estate, has the purpose of enabling VAT taxable persons the option for taxation of these operations when the acquirers or lessees have their activity wholly or partially allocated to VAT taxable operations.
The possibility of opting for taxation has its genesis in the Sixth Directive and is now provided for in Article 137 of the VAT Directive, with community legislature granting each Member State the option to define the procedural rules according to which the right to opt for taxation can be exercised.
National legislature chose to provide in Article 12 of the VAT Code the right of waiver of exemption in very generic terms, currently referring to the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate as to the definition of the terms and conditions under which the said option for taxation can be exercised.
The regime of adjustments of VAT deductions relating to real estate is dealt with, mainly in Article 26 of the VAT Code and Article 10 of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate.
It seems, to say the least, precipitous the conclusion sustained by AT that "Article 10 of the "Waiver Regime", (…) contains as a condition for the maintenance of the option to waive the exemption, that real estate shall not be vacant (…) for a period exceeding two years".
The mechanism of adjustment aims to encourage the continuation, by the taxable person, of the business activity that gave rise to the right to deduct tax, and also to counter - constituting here a true anti-abuse provision -, the diversion of the allocation of real estate to purposes other than or exempt, avoiding the abusive recovery of tax.
Explained in other words, both the scope of Article 26(1) of the VAT Code and paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate aim, each in its own way, to reach those situations in which the real estate has ceased to be allocated to a business activity, even though it may continue to be associated with the general interest of the taxable person.
The Applicant understands that a line of demarcation should be drawn between purely passive situations – in which the taxable person does nothing to profitabilize the asset –, and those other situations in which the real estate, although vacant, continues to be actively promoted by the taxable person with a view to the development of its taxable business activity not exempt from tax.
Just as in the case of preparatory expenses, it is undeniable that the commercial promotion of real estate with a view to its lease subject to VAT constitutes a larval or preliminary state of the taxable business activity exercised by the taxable person. It cannot, therefore, be dissociated from this latter, as is indeed recognized and validated by CJEU case law.
Otherwise, and if a more restrictive interpretation were to prevail, it would lead to an inexplicable penalization of taxable persons owning real estate intended for leasing, who, in addition to obtaining no income from the fact of keeping the real estate vacant, would still be obliged to return to the State part or all of the VAT deducted by reference to that real estate.
The impact reported would be especially onerous in the case of adjustment of VAT at once, under paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate. Here, beyond the losses suffered, promoters would still be obliged to return to the State all the VAT deducted by reference to those real estate for the entire period of regularization not yet elapsed.
CJEU case law has been consistent in defending the maintenance of the right to deduction by the taxable person, regardless of the result of the activity exercised, except in cases of proven fraudulent or abusive situations, thus recognizing that the right to deduct VAT should be maintained – with no need to proceed with any adjustment – in cases in which the assets in question are not effectively used for reasons and circumstances beyond the control of the taxable person.
Thus, in the absence of fraudulent or abusive circumstances and without prejudice to possible adjustments in accordance with the conditions provided for in Article 185 of the VAT Directive, the right to deduction, once arisen, remains acquired even when the planned economic activity did not give rise to taxable operations.
As the mechanism of adjustment provided for in the VAT Directive is an integral part of the VAT deduction regime established by it, a Member State cannot, even though authorized by Article 137(2) to define the rules for waiver of VAT exemption in real estate leasing, cannot limit the right of taxable persons to make deductions linked to taxable operations always and when the right of option has been validly exercised in accordance with the said rules.
In particular, the application of national procedural rules cannot have the consequence of limiting the period in which deductions can be made to a shorter period than that provided by the VAT Directive for the adjustment of deductions.
For this reason, in addition to having no legal support (especially until 2014), accepting the restrictive interpretation in debate would place infractions on equal footing with real estate developers who actively and demonstrably seek to occupy their real estate. With the aggravating factor of violating head-on the principles and rules of community that inform the common VAT system.
It is concluded that, in light of the VAT Directive and the cited case law, both Article 26(1) of the VAT Code and, above all, the provisions in paragraph b) of Article 10(1) of the cited Regime, in their previous versions, should be interpreted as not being applicable whenever, despite the real estate being vacant, it is the intention of its respective owner to lease it subject to VAT, being in a position to prove that he has taken and is taking all necessary efforts to lease the real estate, with waiver of VAT exemption, or to allocate it to taxed operations of another nature, namely the integrated provision of spaces and services ("office centre").
In the case at hand, it is manifest that, although the real estate better identified above has been vacant for more than two consecutive years, such a situation is not attributable to the Applicant who has undertaken (and still undertakes, to the present date) all necessary measures to lease the real estate, with the Applicant's perseverance in the promotion of its real estate being manifest, which resulted in the Applicant executing lease contracts of real estate and service contracts relating to them.
It must therefore be concluded that the Applicant was not bound to perform any adjustment of VAT – neither under Article 26 of the VAT Code, nor under paragraph b) of Article 10(1) of the Regime for Waiver of VAT Exemption –, so the assessments of tax and respective compensatory and default interest are manifestly illegal, by violation of the cited legal provisions.
4. RESPONDENT'S POSITION
AT argued for the dismissal of the application with respect to all contested assessments, alleging, as to the statute of limitations raised by the Applicant with respect to tax relating to autonomous units "C" to "H", relating to the year 2011, that the burden of proof of the submission of communications to report the contracts belonged, under Articles 74(1) of the LGT and 342 of the Civil Code, exclusively to the Applicant, since it is the Applicant who benefits from the grant of statute of limitations of the assessments and that the fact that the final inspection report indicates as the date of contract termination for the said units 12-01-2008 and 01-02-2008, does not mean that it should be assumed, without further, as settled that it was precisely on those dates that the contractual relations between the Applicant and the then lessees ended. In light of which, according to AT, the application for declaration of illegality of the additional VAT assessments, of autonomous units "C" to "H", relating to the year 2011, should be rejected.
With respect to the regularization regime, AT considers, in summary, that:
Decree-Law No. 21/2007 was, as stated in its preamble, approved with the specific objective of combating situations of fraud, abuse and tax evasion that, on a large scale, and in an increasingly rapid manner, were being recorded still during the validity of Decree-Law No. 241/86, having, for that reason, the legislature, under the current Article 137 of the VAT Directive, determined the criteria for access to the waiver regime.
However, Articles 137(2) and (3) of the VAT Directive provide that it is each Member State that defines, by means of domestic legislation, the rules for exercising the right of waiver, assigning them margin to be able to exercise greater or lesser restriction depending on the need and the fiscal and economic policy of each country.
For its part, Article 187(2) of the VAT Directive provides: "The adjustment referred to in the first paragraph is carried out taking into account the changes in the right to deduction during the following years, in relation to the right to deduction of the year in which the goods in question were acquired, produced or, where applicable, first used."
Now, it was precisely on the basis of what was referred to, that is, the faculty conferred by the Directive on Member States to define and restrict the exercise of waiver of exemption in the context of VAT, and also on the basis of the urgent need to combat fraud and abuse from the fiscal point of view, that led precisely the national legislature to "tighten the noose" on the real estate sector, drawing up very specific rules of access to said waiver, embodied in Decree-Law No. 21/2007, of 29 January.
Whereby, in this case, the test here is, it is stressed, the aforementioned freedom that the VAT Directive originally conferred on Member States to well delineate the regime for waiver of exemption.
In the course of the inspection procedures, it was found that the autonomous units of Tables I and II, owned by the Applicant, with respect to which there had been waiver of exemption, were vacant for more than two years.
Notwithstanding the said vacancy, the result of the termination of commercial lease contracts, nevertheless the Applicant – after more than two years of the real estate not being effectively used for business purposes – did not proceed with the adjustments that were legally required, under the provisions of Article 10(1), paragraph b) and (3) of Decree-Law No. 21/2007 and Article 26(1) of the VAT Code.
In accordance with the wording of Article 26(1) of the VAT Code, only the effective use of the real estate for the carrying out of transfers of assets and/or provision of services subject to tax confers the right to deduct the tax supported on the acquisition/construction of the real estate.
The reading of that Article 26(1) of the VAT Code must be concatenated with the wording of Article 10(1), paragraph b), of Decree-Law No. 21/2007, as the latter provides that there is an obligation to proceed with adjustment of deducted tax whenever the real estate is not effectively used for business purposes for a period of more than two consecutive years.
The question to be interpreted is what should be understood by "effectively used", and in the situation of leasing of real estate, one can only subsume to effective and prolonged use over time (which the legislature considered to be 20 years) in the carrying out of taxed operations that allow the Applicant to absorb the tax supported in its acquisition/construction.
Consequently, the fact that the real estate in question is not being used for the carrying out of taxable operations determines, under Article 187(2) of Directive 2006/112/EC, the adjustment of the deducted tax.
Adjustment which, in accordance with the said article, is carried out on the basis of the "changes in the right to deduction during the following years, in relation to the right to deduction of the year in which the goods in question were acquired, produced or, where applicable, first used".
Making it thus obligatory, under the provisions of Article 26(1) of the VAT Code, that the Applicant proceed with annual adjustment of 1/20, whenever there has been deduction of the tax supported, even when the taxable person exercises a taxed activity.
As well as, in accordance with the inspection reports, making obligatory that the Applicant, under the provisions of Article 10(1), paragraph b), of Decree-Law No. 21/2007, adjust the remaining tax corresponding to the period of regularization defined, which is 20 years, under the provisions of Article 24(2) of the VAT Code.
With respect to the year 2011, considering, on the one hand, the legal provisions above mentioned; and considering, on the other, the vacancy of the units, or rather, their non-use in taxed operations, the Applicant should then have proceeded with the adjustments of tax in the 2011/12 period.
With respect to the years 2012 and 2013, the Applicant should then have proceeded with the adjustments of tax in the 2012/12 and 2013/12 periods.
Nothing of what has been alleged is contrary to the principle of neutrality or to what CJEU case law has been deciding, insofar as it relates to the subject matter, it was precisely CJEU case law itself, through the Judgment of 03-12-1998, in the context of case C-381/87 (BelgoCodex), which accepted the thesis that legislative changes introduced within a national legal order in the context of VAT, even if with the objective of eliminating the right to waive exemption in the leasing of real estate, do not violate the principles of neutrality and proportionality.
The Court of Justice argued, in this context, that it is up to the Member States, above all, to assess whether it is appropriate to institute or not the right of option, depending on what they consider appropriate based on the context existing in their country at a given moment.
The States can, therefore, also within the scope of their competencies, revoke the right to opt for taxation (waiver of exemption) after having instituted it and return to the base rule, which is the exemption of tax for real estate leasing operations.
Transposing the aforementioned jurisprudential thesis to the concrete situation, and resorting to the logical element of argumentation, "a maiori, ad minus" - that is, whoever can do the more, can do the less -, we then have that if, in accordance with the CJEU, EU law permits the domestic revocation of the waiver regime that had previously been established, then there are also no reasons to reject the solution advocated in Decree-Law No. 21/2007, which did not revoke the waiver regime, but rather restricted its application, adding conditionalities and consequences that were not previously provided for in Decree-Law No. 241/86 - conditionalities that, if verified, would precisely result in the base rule, which is, as stated, the exemption of tax for real estate leasing operations.
The Portuguese State, in introducing new conditionalities in the regime for waiver of exemption in VAT, did not thus violate any community principles.
And it should not be said that the introduction of Decree-Law No. 21/2007 in the Portuguese legal order violated the principles of trust and legal certainty, whereas, in the situation in question, there are at least two autonomous units whose waiver of exemption only occurred after the entry into force of Decree-Law No. 21/2007, of 29 January, that is, at a time when in the Portuguese legal order Article 10(1), paragraph b), of the said statute was already in force.
Thus, and because, in situations of waiver, the right to deduct VAT is born only at the moment when the lease contract is executed (having, for this purpose, the taxable person to be equipped with the competent certificate), we have that, as to those two units, it cannot be affirmed that Decree-Law No. 21/2007 has eliminated the respective right to deduction.
The arithmetic corrections resulting from the inspection action for the years 2011, 2012 and 2013 and the months of January, March and April of 2014 do not merit censure, and consequently, the impugned VAT assessments must remain valid in the legal order.
5. PRELIMINARY QUESTIONS AND REFERRAL TO THE CJEU
The essential issue discussed in this proceeding is the legitimacy of the interpretation that AT is conferring on Articles 26 of the VAT Code and 10 of the Regime for Waiver of VAT Exemption in Operations Relating to Real Estate, approved by Article 3 of Decree-Law No. 21/2007, of 29 January, taking into account its compatibility with European Union Law, as well as the compatibility of some of its provisions themselves.
In particular, it is intended to determine if:
a) The obligation to adjust the VAT deducted at once due to non-use of the real estate for a period of more than two years, provided for in paragraph b) of Article 10(1) of the said Regime for Waiver of VAT Exemption, is compatible with community rules and principles, in particular with the provisions of the VAT Directive;
b) The combination of paragraph c) of Article 2(2) and paragraph b) of Article 10(1) of the aforementioned Regime for Waiver of VAT Exemption is in accordance with European Union Law, in particular with the provisions of the VAT Directive, insofar as its combined effect determines the impossibility of a VAT taxable person being able to waive VAT exemption in the execution of new lease contracts after a single adjustment of VAT occurs;
c) The interpretation of Article 26(1) of the VAT Code and paragraph b) of Article 10(1) of the mentioned Regime for Waiver of VAT Exemption, in their previous versions, in light of the provisions of the VAT Directive, specifically the question of whether these provisions should be interpreted as not being applicable whenever, despite the real estate being vacant, it is the intention of its respective owner to lease it subject to VAT, being in a position to prove that he has undertaken and is undertaking the necessary efforts to lease the real estate, with waiver of VAT exemption.
In accordance with the conclusions emanating from the Schwarze Judgment (of 01-12-1965, proc. 16/65), the preliminary reference is "an instrument of judicial cooperation ... whereby a national judge and the community judge are called, within the scope of their respective competencies, to contribute to a decision that ensures the uniform application of Community Law throughout the Member States".
However, as is official doctrine of the CJEU, from the Cilfit Judgment (of 06-10-82, case 283/81), the obligation to raise the preliminary question of interpretation may be waived when:
i) the question is not necessary, nor relevant to the judgment of the principal proceeding;
ii) the Court of Justice has already ruled firmly on the question to be referred, or when there is already consolidated case law on it;
iii) the national judge has no reasonable doubt as to the solution to be given to the question of European Union Law, because the meaning of the rule in question is clear and evident.
This does not occur in the case in question.
In fact, it cannot be stated that the act in question is clear or has been duly clarified by CJEU case law in a firm manner or by means of consolidated case law.
Now, in case of "reasonable doubt" regarding European Union Law and with such criteria not being clearly met, the national judge is obliged to make the preliminary referral...
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