VAT Deduction Rights for SGPS Holding Companies: General Expenses and Economic Activity (CAAD 278/2016-T)

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (presiding arbitrator), Clotilde Celorico Palma and Júlio Tormenta (arbitrator members), appointed by the Ethics Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 25-07-2016, agree as follows:

I. REPORT

1. A… SGPS, SA, hereinafter designated "Claimant/A…", TIN…, with registered office at…, Street…, no.…, …-… …, following the additional assessments of Value Added Tax (hereinafter designated as "VAT") in the amount of €133,495.41 and compensatory interest (CI) in the amount of €18,567.23 totaling €152,062.64 relating to the years 2011 to 2014 [cf. Document 1 mentioned in the Claim which formed part of a batch of 7 (seven) documents which due to their extent were sent separately in digital format to CAAD, as per email sent by the Claimant on 30-05-2016; cf. Doc. B and C attached to the Request submitted by the Claimant on 17-10-2016], requested, under paragraph a) of article 2.º no. 1 and articles 10.º nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration or "LFTA") and articles 1.º and 2.º of Order no. 112-A/2011, of 22 March, the constitution of an Arbitral Tribunal and submitted a request for arbitral pronouncement for review of the legality of the tax acts assessing VAT and the inherent compensatory interest, relating to the years 2011 to 2014.

2. The request for constitution of the Arbitral Tribunal was submitted on 18-05-2016 and accepted by the President of CAAD on 20-05-2016 and the Respondent (hereinafter designated as "TA") was automatically notified on 24-05-2016.

Pursuant to paragraph a) of article 6.º no. 2 and paragraph b) of article 11.º no.1 of the LFTA (Legal Framework for Tax Arbitration), as amended by article 228.º of Law no. 66-B/2012, of 31 December, the Ethics Council appointed as arbitrators of the collective Arbitral Tribunal the Judge Counsellor Maria Fernanda dos Santos Maçãs, Prof. Doctor Clotilde Celorico Palma and Dr. Júlio Tormenta, who communicated acceptance of the appointment within the applicable period.

Thus, in accordance with the provision of paragraph c) of article 11.º no. 1 of the LFTA, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the collective Arbitral Tribunal was constituted on 25-07-2016.

To support its request, the Claimant alleges, in summary:

a) The additional VAT assessments for the periods of 2011 to 2014 amounted to €133,495.41 and compensatory interest to €18,567.23 in a total amount of €152,062.64;

b) The assessments for which illegality is requested were based on the tax inspection report (hereinafter designated RIR) notified through Office no. … of 16-12-2015 (cf. Doc. 2 attached to the Claim);

c) Regarding the periods of 2013 and 2014, no RIR was notified;

d) According to the RIR, the corrections made by TA in VAT were limited to the periods of taxation of 2011 and 2012 and concern:

Year 2011

(1) Correction of €184,898.61 relating to VAT allegedly deducted improperly regarding operations supposedly outside the concept of economic activity (articles 20.º and 23.º of the VAT Code);

(2) Correction of €4,382.56 relating to VAT allegedly deducted improperly by application of the final pro rata (article 23.º of the VAT Code).

Year 2012

(3) Correction of €22,734.61 relating to VAT allegedly deducted improperly regarding operations supposedly outside the concept of economic activity (articles 20.º and 23.º of the VAT Code);

(4) Correction of €313.62 relating to VAT allegedly deducted improperly by application of the final pro rata (article 23.º of the VAT Code).

e) The inspection procedure carried out by TA was based on Service Orders, respectively, SO no. 2015… 2015… and SO no. 2015… which pursuant to article 14.º no. 3 of the RCPIT[2] defined the scope of the inspection procedure to the years 2011 and 2012 (cf. Doc.3 attached to the Claim);

f) In order to cover the years 2013 and 2014, it would have been necessary for TA to have notified the Claimant "by means of a reasoned decision," as provided in article 15.º no.1 of the RCPIT, which did not happen; it concludes that the inspection procedure in terms of VAT could only be limited to the years 2011 and 2012, therefore the VAT assessments and CI relating to the years 2013 and 2014 should be annulled (cf. article 99.º of TPPC[3]) by violation of article 87.º nos.1, 2 and 3 of the VAT Code[4], article 77.º nos 1 and 2 of the GTL[5], article 268.º no. 3 of the Constitution[6] and articles 152.º and 153.º, all of the APC[7], since there is no factual or legal basis for them to be consolidated in the tax legal order and hence their challenge;

g) The amount of the additional VAT assessments and CI relating to 2013 (€11,817.50) and 2014 (€13,877.94) amounts to a total of €25,695.44;

h) The inspection procedure is illegal by violation of article 15.º no.1 of the RCPIT, due to the fact that the communication of the extension of the scope of SO no. 02015… from partial (covering only corporate income tax) to general was not clear regarding the change in scope of the external procedure (that is, from partial to general) and was not accompanied by a "reasoned decision" (cf. Doc. 4 attached to the Claim);

i) Since the additional assessments impugned are administrative acts resulting from an illegal external inspection procedure carried out by TA, they suffer from a defect of violation of law, determining therefore the nullity or annulment of the same;

j) Given the unitary character of the challenge of the final act of the procedure, it is in the context of the challenge that any illegality previously committed may be invoked (as per article 54.º of TPPC), namely in the context of a tax procedure. Thus, if there are formalities provided by law so that an administrative act be valid and TA must act according to law in obedience to the principle of legality (cf. articles 8.º and 55.º, both of the GTL, article 3.º of the APC, no. 2 and 3 article 103.º, paragraph i) no.1 article 165.º and no. 2 article 266.º, all of the Constitution), TA must comply with those formalities, which did not happen in the disputed case for the reasons mentioned above; thus, the invalidity of the procedure at the level of tax inspection can only have as a legal consequence the invalidity of the additional assessments made by TA due to the breach of the formalities provided by law in the context of a tax procedure;

k) Regarding the corrections mentioned above in the amount of, respectively, €184,898.61 and €22,734.61, it alleges that A… SGPS is a "mixed holding" company because it provides management services (operations subject and not exempt from VAT) and financing provision (operation subject and exempt from VAT) and not insurance and reinsurance operations to its investees, as TA claims and hence there is an error in the factual assumptions, incorrect interpretation and application of tax law as well as incorrect tax-legal classification by the same whose legal consequence will be the annulment of the corrections proposed by TA, as per paragraph a) of article 99.º of TPPC;

l) The corrections proposed by TA based on the circular letter 30103, of 23-04-2008, suffer from deficient legal reasoning, thus leading to the annulment of the same, as per paragraph c) of article 99.º of TPPC basing its position both in doctrinal and jurisprudential terms, as set out in paragraphs 35 to 52 of the Claim;

m) The situations identified by TA – acquisitions of services provided by non-residents – obliged A… SGPS to proceed with self-assessment and VAT deduction at the same value ("reverse charge"), by virtue of article 6.º no. 8 and article 9.º no.1 paragraph c), both of the VAT Code, therefore it does not agree with TA when the latter denies the deduction made for VAT purposes, as per paragraph 53 of the Claim;

n) It understands that it has a duty-power to deduct the VAT which it self-assessed, since there are services provided by non-residents and if that were not the understanding, it would be violating the principle of neutrality (which implements the equality and neutrality of companies regarding consumption taxation) by denying the right to deduction for VAT purposes; it argues that the principle of neutrality is a structural principle present both in the Sixth Directive[8] and in the VAT Directive[9] as recognized by various doctrine and European case law, cf. paragraphs 62 to 173 of the Claim;

o) The disposal that occurred in 2011 of 58% of the holding it held in B… to C… for €1,160,000, having calculated a bookkeeping gain of €918,656.56 and subsequently in 2012 a bookkeeping gain of €438,700, as mentioned in the RIR, is an operation subject to VAT but exempt under paragraph e) no. 27 of article 9.º of the VAT Code, not agreeing with the position adopted by TA in the inspection regarding the said disposal which qualifies it as an operation outside the scope of VAT because it does not constitute an economic operation (transfer of goods or provision of services) carried out downstream;

p) It further refers that A… SGPS was not limited to acquiring holdings in companies linked to the alternative energy sector but also to effectively intervening in the management of the business of its investees in that sector; it provided technical administration and management services to its investees (as a consequence of the performance of the corporate object characterizing the legal regime of holding companies), VAT having been assessed downstream, as a consequence of that provision of technical services, as mentioned in the RIR;

q) Regarding the services provided in 2011 by D… to the Claimant which gave rise to the issuance of invoice no. …/2011 from D… to the Claimant dated 1-11-2011 with the description "development services rendered in South Africa as per the Development Services Agreement between A… and B… up to final close", in the amount of €803,907.00, TA denies the deductibility of VAT; equally regarding the services provided in 2012 by the same supplier (D…) which gave rise to the issuance of invoice no. …/2012 from D… to the Claimant dated 1-10-2012 with the description "development services rendered in South Africa related with PV projects", in the amount of €60,683.00, TA denies the deductibility of VAT;

r) The Claimant regarding the invoices mentioned above applied the "reverse charge" mechanism (reversal of the taxpayer) having self-assessed and exercised the right to VAT deduction, under the provision of paragraph a) article 6.º no. 6 and paragraph a) article 20.º no.1, both of the VAT Code;

s) The non-acceptance of VAT deduction in the said invoices by TA was due to an objective of collecting tax revenue violating the principles of justice, proportionality and public interest as set out in article 266.º no. 2 of the Constitution, article 55.º of the GTL and articles 4.º, 7.º and 8.º, all of the APC;

t) TA assumes incorrect factual assumptions to deny the deductibility of VAT, as the services provided by D… and described in the invoices in question – no. …/2011 and no. …/2012 – are linked to technical support services, namely environmental engineering, within the scope of the development of photovoltaic and wind energy projects to be developed in South Africa and inherent to applications for tenders for the award of the corresponding licenses by the competent authorities of South Africa and not to "(…) directly related to a holding that A… held in the company registered in South Africa called (…)B… and aim to contribute to the acquisition and holding of shares"; the said technical support services are within the scope of the technical administration and management services that the Claimant provided and provided to its investees;

u) The expenses for development of wind and photovoltaic energy production projects to be operated by the investees of A… SGPS in South Africa, which include the debits made by D… set out in invoices no. …/2011 and no. …/2012 were subsequently debited in 2012 with a margin of 20% to an investee in Malta –B…– in the total amount of €1,988,009.00, as shown in Annex 15 of the RIR and Doc. 2 attached to the Claim; thus, by application of the real allocation method regarding the technical services acquired by the Claimant upstream, there is place for the assessment and deduction of VAT (reverse charge) derived from the subsequent debit to the Maltese company, B…, as a consequence of the rules of location of services for VAT purposes under the VAT Directive, that is, B… will have the right to assess and deduct the VAT corresponding to the rate in force in Malta basing its position on Portuguese doctrine and case law of the Court of Justice, as per paragraphs 200 to 228 of the Claim;

v) It refers that within the scope of the services to be provided by D… it was contractually agreed (Annexes 5 and 6 of the RIR) that, in addition to the provision of technical support and development services in the area of alternative energies, D… would provide support in the search for a buyer for B… the respective fees being invoiced separately from those relating to technical support, as per the contractual separation established between A… SGPS and D…, which subsequently occurred through invoice no. …/2011 from D… to A…, dated in 2011, in the amount of €58,000 with the description "commission for services rendered with regard to identifying a purchaser of all of Vavalum's shares on loan account against B…– amount as per the sale of shares agreement", as per page 22 of the RIR; equally in 2012, D… issued to A… SGPS invoice no. …/2012 dated 1-3-2012 in the amount of €30,450 with the description "Procurement fee based on 7% for sale of B… shares"; it applied the "reverse charge" mechanism having self-assessed and deducted VAT in the amount of €7,003.70 relating to invoice no. …/2012 with TA denying the deductibility of the same;

w) The separation regarding the nature of the services to be provided by D… duly supported by a service provision contract and respective invoices, reinforces the idea that the services provided by the latter were of a different nature, that is, technical services in the area of alternative energies and "procurement" services regarding the acquisition of a buyer for B…; it is further noted that, with subsequent debit of technical services by A… SGPS to a Maltese investee (F…), with VAT self-assessment in Malta, the denial of the deductibility of VAT in Portugal when charging D… to A… SGPS violates European law and internal Portuguese law regarding VAT;

x) There was duplication of VAT collection on the same tax facts (article 205.º TPPC), in that there was an assessment of VAT upon self-assessment by A… SGPS due to the "reverse charge" mechanism and subsequent assessment of VAT resulting from the additional assessment carried out by TA as a consequence of the denial of the deductibility of VAT;

y) It is further noted that the supplier E… (South African company) issued two invoices – no. … and no. … - respectively, on 29-2-2012 and 22-06-2012, in the amounts of €4,745.75 and 2,967.79 with the description "a fee for legal and tax services" with TA denying the deductibility of VAT with the same basis used in the case of D…, that is, the services acquired by the Claimant were outside the scope of the tax by being related to the sale of the holding that the latter had in B…, which does not correspond to the truth, since the services provided by E…[10] had to do with applications for tenders for the award of installation licenses for the infrastructure of the said alternative energies;

z) There should be no compensatory interest, since there is no tax due nor adequate causal nexus between the conduct adopted and the delay in the assessment of tax, as well as any censure based on fraud or negligence by the conduct verified, that is, the deduction of VAT; what exists is a disagreement on tax-legal classification between TA and the taxpayer regarding the exercise of the right to VAT deduction;

aa) Should be indemnified for all expenses incurred with the guarantees provided in tax execution proceedings, to be finally determined in execution of decision, after the lifting thereof, as per article 53.º of the GTL and article 171.º of TPPC;

bb) Requests in addition to the declaration of illegality of the VAT and CI assessments impugned with the consequent declaration of nullity or annulment of the same and recognition of the right to be indemnified for the expenses incurred and to incur due to the guarantees provided, the condemnation of the Respondent in the payment of the arbitration fee and other expenses, if any.

With the Claim were attached documents and witnesses were listed.

1. The TA submitted a Response contesting and alleging, in summary:

a) The Claimant is classified, for VAT purposes, under the normal quarterly periodicity regime, is a mixed taxpayer, carrying out operations subject and exempt, having been the subject of an inspection procedure carried out by the Tax Authority of…;

b) The inspection procedure authorized by Service Order no. OI2015… was initially of partial scope (corporate income tax) for the period of 2011 having the scope subsequently been extended to general and notification given to the Claimant on 12-8-2015. An external Service Order OI 2015… was issued, of general scope, for verification and examination;

c) Arithmetic corrections were made regarding VAT for 2011 and 2012 with the following grounds:

2011

(1) Improper VAT deduction in the amount of €184,898.61 relating to operations outside the concept of economic activity

(a) SGPS (holding companies) that obtain income arising solely from the holding of participations are considered "pure holdings." Thus, the operations associated with obtaining that income are not considered economic activities within the meaning of article 4.º no. 2 of the Sixth Directive, being therefore outside the scope of VAT; SGPS that practice operations, in addition to those related to the holding of participations, such as management services (operations subject to VAT not exempt) and financing provision (operations subject and exempt for VAT purposes under article 9.º no. 28[11] of the VAT Code) are considered "mixed holdings" and mixed taxpayers for VAT, cf. pages 7/63 and 9/63 of the Response;

(b) A… SGPS self-assessed VAT in the amount of €184,898.61 on the value of invoice no. …/2011 issued by D… in the value of €803,907, which it declared in the periodic VAT declaration relating to the last quarter of 2011 (period 1112T), in accordance with the provision of paragraph a) article 6.º no. 6 of the VAT Code[12];

(c) Regarding the amount of €184,898.61, TA states "In the periodic VAT declaration relating to the last quarter of the year 2011 (1112T), the value of VAT deducted amounts to €184,898.61, and relates to the deduction of VAT self-assessed by A… in invoice no. …/2011, in the amount of €803,907.00, issued on 01 November 2011 to A… by the South African company called D… (see Annex 10, page 1) with the following description: 'Development services rendered in South Africa as per the Development Services Agreement between A… and B… up to financial close'. Attached in Annex 16 is an extract from account 2432373 – VAT Deductible – OB&S Other Countries, relating to the year 2011";

(d) Denies the deductibility of VAT in the amount of €184,898.61 under article 20.º no.1 and paragraph a) article 23.º no.1, both of the VAT Code on the ground that "(…) the services in question are directly related to a holding that A… held in the company registered in South Africa called B… (known by the acronym B) and aim to contribute to the acquisition and holding of shares. Now, '... the mere acquisition and simple holding of participations should not be considered economic activities within the meaning of the Sixth Directive, which confer on their author the status of taxable person' and because it considered that '(…) regarding this operation, in which A… proceeded to the deduction of VAT, which is related to the disposal of B…, such tax is not susceptible of being deducted, as it was not borne within the scope of the acquisition of services used for the transfer of goods or provision of services subject to tax and not exempt therefrom', therefore a correction will be made to the VAT deducted by A… SGPS in the tax period 1112T in the amount of €184,898.61.

(2) Regularization of VAT in favor of the State by application of the final pro rata of 65%

(a) Since A… is a mixed taxpayer, it becomes important to ascertain whether the amount of deductible VAT relating to VAT borne in the use of mixed goods and services (those that are used jointly in activities that give the right to deduction and in activities that do not give that right) as inputs (passive operations) was correctly calculated or not, under the provision of article 23.º of the VAT Code, since "On goods or services allocated to the carrying out of operations arising from the exercise of an economic activity, in which part does not give the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations which give rise to deduction, that is, of the pro rata. This deduction coefficient shall have as numerator the provision of services taxed and as denominator the provision of services taxed plus interest obtained. The denominator is composed of the sum of operations that fall within the concept of economic activity, as explained above", cf. pages 10/63 and 18/63 of the Response;

(b) A… deducted the full amount of VAT borne in the use of mixed goods and services, cf. page 17/63 of the Response;

(c) The deduction of the percentage of VAT borne should be calculated taking into account on the side of active operations the following:

• "the provision of services in 2011 amounted to €674,100.00 (with VAT assessment at the normal rate), whereas interest obtained amounted to €364,277.58", having determined a final pro rata of 65%, as per the table below and page 17/63 of the Response:

With a final pro rata of 65%, A… improperly deducted €4,382.56 in the tax period 1103T, therefore there is place for regularization in favor of the State in that amount, as per the table below and page 18/63 of the Response:

(3) The total of corrections proposed for 2011 amounts to €189,281.17 resulting from points (1) and (2), as per the table below and page 19/63 of the Response:

2012

(4) Improper VAT deduction in the amount of €22,734.70 relating to operations outside the concept of economic activity

(a) A… SGPS self-assessed VAT in the amount of €22,734.70 on the value of various invoices issued in 2012 by service providers: D… and E…, as per the table below, having declared in the periodic VAT declaration relating to the last quarter of 2012 (period 1212T), in accordance with the provision of paragraph a) article 6.º no. 6 of the VAT Code;

(b) With the same grounds relating to 2011, it considers that the services provided by D… and E… are directly related to the South African holding B… and denies the deductibility of VAT effected by A…, as is evidenced by the "(…) Annex 19 relating to the extract from account 2432373 – VAT Deductible – OB&S Other Countries, relating to the year 2012 (…)", under article 20.º no.1 and paragraph a) article 23.º no.1, both of the VAT Code, therefore a correction will be made to the VAT deducted by A… SGPS in the tax period 1212T in the amount of €22,734.70 (E…: €1,774.11; D…: €20,960.59) as per the table below and pages 19/63 and 20/63 of the Response:

(5) Regularization of VAT in favor of the State by application of the final pro rata of 58%

Using the same methodology and grounds used for 2011, it determined a final pro rata of 58%, as per the table below and page 22/63 of the Response:

With the use of a final pro rata of 58% an amount of €312.62[14] of regularizations in favor of the State was determined, as per the table below and page 22/63 of the Response:

(6) The total of corrections regarding VAT for 2012 amounts to €23,048.32 resulting from points (4) and (5), as per the table below and page 23/63 of the Response:

(7) The total of corrections regarding VAT relating to the periods of 2011 and 2012 amounts to €212,329.49 43, as per the summary table below and page 23/63 of the Response:

d) A… was notified of the draft inspection report resulting from the inspection procedure for the tax periods to exercise its right to be heard through Office no. …, of 16-11-2015, which it did exercise, as per article 20.º of the Response. TA maintained the proposed corrections regarding VAT resulting from the inspection procedure, cf. page 26/63 of the Response;

e) Regarding the timely request for arbitral pronouncement submitted by A… SGPS on 18-05-2015, TA raised as a preliminary issue - lack of timely presentation of all the assessments impugned by A… regarding VAT when submitting the request for arbitral pronouncement which should have been included as Doc.1 attached to the Claim - defending therefore the preclusion of the presentation of the said additional assessments at a time later than the presentation of the Claim, under article 423.º of the CPC[15]; should this not be the understanding of the Arbitral Tribunal and A… comes to be notified to present the said additional assessments, that it be made possible for it to exercise the right of contradiction regarding the documents presented, cf. page 27/63 of the Response;

f) Within the scope of the request for arbitral pronouncement, the disputed issues are:

(1) Lack of factual or legal basis relating to the additional assessments regarding VAT relating to the periods of 2012 and 2013;

(2) The additional assessments made being illegal due to lack of reasoning of the decision extending the scope of the inspection procedure provided for in article 15.º no. 1 of the RCPIT;

(3) Deficient reasoning of the RIR therefore the additional assessments should be voidable;

(4) Existence of a defect of law by violation of the principle of neutrality and duplication of collection in the transactions that were subject to reverse charge.

g) Regarding the disputed issue identified as f) (1) - Lack of reasoning of the additional assessments relating to the periods of 2013 (€11,817.50) and 2014 (€13,877.94) in a total amount of €25,695.55 – it understands that A… SGPS has no basis, since the said values result from the correction of the value contained in field 61 – Excess to Carry Forward of the periodic VAT declaration relating to the last quarter of 2011 in the amount of €140,500; as a consequence of the correction determined in the inspection regarding the same period in the amount of €189,281.17, A… would move from a situation of VAT to recover before the State in the amount of €140,500 to a debtor situation in the amount of €48,781.17 in 2011, cf. pages 29/63 and 30/63 of the Response;

h) Regarding the disputed issue identified as f) (2) – Defect of inspection procedure by violation of the provision of article 15.º of the RCPIT – it understands that A… SGPS has no basis once within the scope of the partial inspection procedure carried out regarding corporate income tax under Service Order no. OI2015… irregularities were detected regarding VAT and consequently the scope of the inspection procedure was extended from partial to general by means of a "reasoned decision" as provided for in the regulation relating to RCPIT, A… being notified on 12-8-2015 of the change of scope, from partial to general, through Service Order no. OI2015…, with the same having signed the said Service Order to legitimize that change of scope; the "reasoned decision" to which RCPIT refers is nothing more than Service Order no. OI2015… duly notified and signed by the Representative of A… in its relations with TA, therefore no breach of any legal formality is apparent; in case of an eventual lack or insufficiency of notification of the reasoning for the extension of the scope of the inspection procedure, it fell to the Claimant to make use of article 37.º of TPPC for the issuance of a certificate as provided for in the previously mentioned article to remedy any defect that might exist, cf. pages 30/63 to 34/63 of the Response;

i) As for the disputed issue identified as f) (3) - Defect of deficient reasoning of the RIR – it understands that A… SGPS has no basis, since the reasons for the corrections made are explicitly and duly reasoned in the RIR under which TA made the corrections contained in the said final RIR after A… exercised its right of hearing under article 60.º of the GTL and RCPIT; additionally if the reasons underlying the corrections proposed in the RIR were not duly understood and reasoned, the Claimant could not have contested them in the manner it did in the request for arbitral pronouncement; the Claimant could have used the mechanism provided for in article 37.º of TPPC to remedy any defect of lack or insufficiency of reasoning at the level of the RIR that in its view existed, cf. pages 35/63 to 41/63 of the Response;

j) As for the disputed issue identified as f) (4) – Defect of law by violation of the principle of neutrality and duplication of collection in the transactions that were subject to reverse charge - it understands that A… has no basis, since the proposed corrections of €184,898.61 and €22,734.70 relating to the non-exercise of the right to VAT deduction have their basis in the common VAT system; in accordance with the rules set out both in the Sixth Directive and in the VAT Directive, the exercise of the right to VAT deduction arises and depends on the tax having been borne for the exercise of an economic activity and only thus is the principle of neutrality present in the common system of turnover taxes assured; neutrality is only achieved if the right to deduction is exercised in relation to inputs relating to the exercise of an economic activity as the Court of Justice of the European Union had the opportunity to affirm; in the case of "pure holdings" that have as their sole purpose the simple holding of participations and the receipt of dividends resulting from that holding, the VAT borne in their inputs does not give rise to any VAT deduction because there is no exercise of an economic activity for VAT purposes; in the case of "mixed holdings" in which there may be operations subject not exempt (e.g.: provision of management services to its investees") and operations subject exempt (e.g.: interest resulting from the provision of financing to its investees) already there are economic activities, the VAT borne upon the acquisition of inputs related to those activities may be deductible in accordance with the rules of article 23.º of the VAT Code, cf. pages 41/63 to 48/63 of the Response;

k) It proceeds that in the case of the invoices issued by D… on 1-11-2011 in the amount of €861,907 corresponding to invoices no. …/2011 in the amount of €58,000 and no. …/2011 in the amount of €803,907 pertain to services relating to the disposal of the South African investee B…, since the accounting of A… SGPS shows the amount of €803,907 in an accounting account with the designation "B… Disposal Process" and the description of the invoice issued by D… in the amount of €58,000 identifies that that value has to do with fees relating to the search for a possible buyer of B…("commission for services rendered with regard to identifying a purchaser of all of Cavalum's shares and loan accounts against B…– amount as per the sales of shares agreement"), cf. pages 49/63 and 50/63 of the Response;

l) At the end of 2012, B… SGPS issued invoice no. … in the amount of €1,988,000 to F… relating to "the expenses for development of projects for the production and wind and photovoltaic energy to be operated by the investees of A… SGPS in South Africa" which it accounts for in account 21132652 –F…by counterpart of the: account 2813 – Expenses to Recognize - B… Disposal Process (€803,907); account 461644 – Non-Current Assets Held for Sale (€852,766.93) and account 7242 – Services provided to subsidiary F… in the amount of €331,335.07, which makes it indisputable that the VAT improperly deducted by A… is related to the process of disposal of the South African investee B…, cf. page 50/63 of the Response;

m) It notes that A… SGPS ceased to provide consulting and management services to its investees from the end of the 1st quarter of the year 2011, at which time G… Services Ltd was created, which from that date assumed that activity, a fact not contested by the Claimant, cf. page 51/63 of the Response;

n) It notes that A… SGPS in 2012 re-invoiced to F… the services provided by D… to it, embodying that operation the disposal of asset B… to F…, which is inserted in the corporate purpose of A… SGPS constituting its "core business"; the disposal of participations does not integrate the concept of economic activity and therefore is outside the scope of VAT, with respect to the services acquired upstream there being no direct and immediate nexus with downstream economic operations with the right to deduction, cf. page 51/63 of the Response;

o) Additionally it notes that it falls to the Claimant on the basis of article 74.º no.1 of the GTL to prove the facts constituting the exercise of the right to deduction, which it did not do, since the services acquired from D… and E…do not have to do with technical services in the area of alternative energies but rather with operations outside the field of VAT incidence (operations that are not the exercise of an economic activity), that is, services related to the sale of B…, and consequently, the principle of neutrality is not violated by the non-exercise of the right to VAT deduction, cf. page 54/63 of the Response;

p) It does not agree with the Claimant when it alleges that there is duplication of collection as a consequence of the additional assessments; the first VAT assessment effected by A… SGPS (self-assessment) was due to the rule of reversal of the taxpayer through the "reverse charge" mechanism provided for in paragraph a) article 6.º no.6 of the VAT Code while the second VAT assessment in the form of an additional assessment effected by TA occurred due to the incorrect exercise of the right to deduction by the Claimant; the fact that the "reverse charge" mechanism is applied does not automatically mean the exercise of the right to VAT deduction borne at the level of inputs, as is the case with the matter in dispute, when there are operations that do not fall within the concept of economic activity for VAT purposes, outside the scope of VAT incidence, and consequently the exercise of that right being a duty of the taxpayer, does not hold;

q) The absence of fault as an extinguishing cause of compensatory interest alleged by the Claimant does not merit acceptance, since the essential requirements are met for this assessment to be made: existence of a tax debt of VAT, delay in the effectuation of an assessment of that tax and imputability of the delay to the culpable conduct of the taxpayer, as per the case law of the Supreme Administrative Court (Decision 1490/13, of 22-10-2014); in the disputed case A… should have known that, in operations linked to the management of participations (main activity of holding companies), in particular those related to the sale of B…, the VAT borne at the level of inputs related to that activity could not be deducted and hence the reasonableness of error at the level of the conduct of the Claimant should be ruled out; additionally the improper exercise of the right to deduction meets the essential requirements for there to be compensatory interest;

r) The condemnation of the Respondent should fail due to the lack of success of the request for arbitral pronouncement as well as the non-existence of quantification of the damages caused by its conduct;

s) It defends the non-necessity of witness evidence since what is under review are questions of Law, being the examination of witnesses a useless act and therefore prohibited in accordance with article 130.º of the CPC, applicable ex vi article 29.º of the LFTA; in case this is not the understanding of the Arbitral Tribunal, it should notify the Claimant so that it indicates which facts it does not consider documentarily proved, and in that case, indicates as its witness the one listed in the Response;

t) It concludes by requesting that the request for arbitral pronouncement be dismissed with all legal consequences.

It listed a witness.

1. By order of the Arbitral Tribunal of 3-10-2016, A… was notified to, should it wish to exercise the right of contradiction regarding what was alleged by the Claimant in the Response concerning the non-presentation of Doc.1 attached to the Claim corresponding to the assessments impugned, do so within ten days, as well as in the same period, specify the articles of the Claim regarding which it intends to produce witness evidence.

2. By request of 18-10-2016, A… presented three documents: A, B, C. Doc. A concerns the proof of the email sent to CAAD on 30-5-2016 requesting the insertion in the computer system thereof, of the seven documents attached to the Claim referring that in Doc. A was included Doc. 1 mentioned in the Claim relating to the assessments impugned; Doc. B is composed of copies of the additional assessments impugned and Doc. C is a summary table of the said additional assessments. In the request presented it refers that when submitting the request for arbitral pronouncement, it alleged that the seven documents attached to the same would be sent to CAAD separately, in digital format, given their extent and limited computer capacity relative to when the request was submitted.

3. The Claimant in the request referred to above, refers that the assessments impugned had been issued by TA itself based on the conclusions set out in the RIR, therefore were fully known to it, under article 74.º no. 2 of the GTL. The raising of the exception by TA violates principles of different nature (administrative, procedural and constitutional) set out in articles 12.º and 13.º of the request in question. By way of caution and clarification, it presents Doc. B and C. It further alleges that the said additional assessments should be part of the administrative file (hereinafter designated as AF), which had not yet been filed with the proceedings. It reaffirms that TA defends itself by counter-claim, the factuality presented by it being false. It concludes by enumerating the articles of the Claim regarding which witness evidence is to be produced.

4. By order of the Arbitral Tribunal of 31-10-2016, the Claimant was notified of the attachment of the AF[16] (which took place on 24-10-2016) as well as the Respondent to pronounce itself within five days on the documents presented by the Claimant in the request of 18-10-2016. The Respondent did not pronounce itself.

5. By order of the Arbitral Tribunal of 14-11-2016, the attachment of the documents in the request of 18-10-2016 was admitted under the provision of article 423.º no. 2 of the CPC with effect from 30-5-2016, with notice to Claimant and Respondent.

6. By order of the Arbitral Tribunal on 17-11-2016 the meeting provided for in article 18.º of the LFTA was dispensed with under the principle of free conduct of the proceedings (article 19.º of the LFTA) in order to promote speed, simplicity and informality present in tax arbitration (article 19.º no. 2 and article 29.º no. 2, both of the LFTA). It was equally set the holding of a hearing for judgment on 9-12-2016 at 10h at CAAD where witness evidence would be heard followed by oral arguments, if necessary. In the name of procedural speed, the attachment to the proceedings of a copy of the procedural documents in "word" version was requested. Claimant and Respondent were notified.

7. By request of 29-11-2016, the Claimant attached the Claim in "word" and requested the examination of witnesses H… and I… via Skype as they were outside Portugal.

8. By order of the Arbitral Tribunal on 1-12-2016 the request of the Claimant regarding the examination of the witnesses identified in the request of 29-11-2016 was granted provided that they indicated in due time the email address. Equally by agreement of the parties, the date for holding the hearing for witness examination was moved to 6-1-2017 at 11h at CAAD. Claimant and Respondent were notified.

9. On 6-1-2017, the examination of the witnesses listed by the Claimant and Respondent took place at CAAD, with them clarifying the questions requested by the Arbitral Tribunal. A successive period of 15 days was granted by the Arbitral Tribunal for the Claimant and the Respondent, in that order, to present their respective written arguments. By oversight, the Respondent did not attach Annex 57 of the AF to the proceedings, having committed during the week in which the witness examination diligence took place to present the said Annex 57 of the AF, a fact to which the Claimant did not object. Under article 21.º no. 2 of the LFTA, the Arbitral Tribunal extended the period for the rendering of the arbitral decision by two months, having set the date of 25-3-2017 for the rendering thereof.

10. By request of 9-1-2017 the Respondent sent Annex 57 of the AF, with notice to the Claimant.

11. On 24-1-2017 the Claimant presented written arguments maintaining in essence the position previously adopted, reinforced, in its perspective, by the documentary evidence produced.

12. By request of 26-1-2017 the Claimant presented on CD documents A, B and C attached to the written arguments.

13. By order of the Arbitral Tribunal on 30-1-2017, the Respondent was notified to pronounce itself, should it wish, within 10 days, on the content of the documents presented by the Claimant with the request of 26-1-2017.

14. By request of 30-1-2017, the Respondent in exercise of the right of contradiction pronounces itself by the inadmissibility of attachment of the documents in the request presented by the Claimant on 26-1-2017. It bases the withdrawal thereof under article 423.º of the CPC ex vi of article 29.º of the LFTA due to the non-fulfillment of the legal provision contained in no. 1 and the exceptions provided for in nos. 2 and 3 of the article in question. Under the provision of no.1 and the exception provided for in no.2, both of article 423.º of the CPC, because the documents were presented subsequently to the Claim and to the evidence production diligence. Regarding the exception provided for in no. 3 of the same article – supervenance and/or impossibility of attachment of such documents – because the same was not raised by the Claimant. Additionally it alleges that, should the decision of the Arbitral Tribunal be the maintenance of the said documents, the same should be subject of translation under the provision of article 134.º CPC applicable ex vi article 29.º of the LFTA, wishing in that case to exercise the right of contradiction.

15. By order of the Arbitral Tribunal on 5-2-2017, the attachment of the documents presented by the Claimant in the context of written arguments was not accepted, since the exceptions provided for in nos. 2 and 3 of article 423.º of the CPC are not met, therefore it was decided to withdraw the same from the proceedings. Claimant and Respondent were notified.

16. On 14-2-2017 the Respondent presented written arguments maintaining in essence the position previously adopted, reinforced, in its perspective, by the witness evidence produced.

II. CASE MANAGEMENT

1. The Arbitral Tribunal is regularly constituted and is materially competent, under paragraph a) article 2.º no. 1 of Decree-Law no. 10/2011, of 20 January.

2. The Parties enjoy legal personality and capacity, are legitimate and are legally represented (cf. article 4.º and article 10.º no. 2 of Decree-Law no. 10/2011 and article 1.º of Order no. 112/2011, of 22 March).

3. The proceedings do not suffer from nullities.

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

It is necessary to review and decide.

III. REASONING

1. OF THE FACTS

a) Facts Established

With significance for the decision, the following facts are considered established:

(1) The Claimant carries on activities of management of shareholdings in various Portuguese and foreign companies (based in Spain, France, South Africa, Malta and Holland), all operating in the renewable energy sector, of hydric, wind, photovoltaic, biomass, cogeneration and thermal solar origin, cf. Annex 2pg1.pdf/AF5 and Annex 2pg2.pdf/AF6 of the RIR[17];

(2) The Claimant was the subject of an Inspection Procedure carried out by the Tax Authority of…, authorized by external Service Order no. OI2015…, initially covering only corporate income tax relating to the period of 2011, cf. Doc. 3b) attached to the Claim;

(3) On 12-08-2015 notice was given to the Claimant of the extension of the scope of the said Service Order (OI2015…), from partial to general, relating to the period of 2011; an external Service Order no. OI2015… of general scope relating to the period of 2012 was equally issued, cf. Doc. 4 and Doc. 3 a) attached to the Claim, respectively;

(4) The Claimant has accounting organized in accordance with law, prepared in accordance with the accounting standards in force in Portugal: SNC[18], cf. page 4 of the RIR;

(5) The Claimant is a mixed taxpayer for VAT purposes with quarterly periodicity since it has operations subject to tax, namely regarding consulting and management services billed to its investees and exempt operations relating to credit provision to its investees and the application of capital through financial instruments, namely bank deposits, cf. page 4 of the RIR;

(6) The Claimant from the year 2011 began to invest in the constitution of holding companies in France, Holland and Malta; on 20-7-2012 it constituted in Malta J… (holding 99% of it) which in turn constituted in the same jurisdiction F… (hereinafter designated as F…), thus the Claimant held 99% of F…, cf. article 11 of the Response;

(7) On 29-3-2011 the company G…, Ltd was constituted with TIN … with the purpose of providing consulting and management services to the investees of the Claimant which had been provided until that date by A…, cf. page 6 of the RIR;

(8) The Claimant determined in relation to VAT for the periods of taxation of 2011 and 2012, an amount of tax to recover of €140,500 and €102,635, respectively, cf. page 18 of the RIR;

(9) During the periods of taxation under analysis - 2011 and 2012 - the Claimant carried out the following operations related to investments in South Africa (disposal of subsidiary B…[19]) and Malta (sale of studies carried out in the South African market on alternative energies to Maltese subsidiary F…):

2011

(10) On 31-05-2011, through accounting entry no. … of diary 1, A… records the performance of a loan to investee B… in the value of €35,650 ("15% disposal B…") in account 4113644 – Financial Investments - Loans Granted – B…, by counterpart of 7852 – Other Income – Disposals, cf. Annex 12/AF 15 pages 1/2 and page 20 of the RIR;

(11) On 15-06-2011, a Service Provision Contract is entered into between A… and the South African law company D…[20] (and, one month later, an Amendment to the same to include G…, Ltd), cf. Annex5/AF8 and Annex6/AF9 of the RIR, respectively;

(12) Under the Service Provision Contract entered into between the Claimant, G… and D… it is agreed "(…) the provision of services of a continuous character in a subcontracting regime, by D… to A… of:

(i) Consulting on development in renewable energies, for which an hourly fee to be agreed between the parties shall be due, for time actually spent, to be paid on the date of submission of the application;

(ii) Sale of participation in B…, for which A… will pay D… a commission corresponding to 7% of the value of the sale.", cf. Annex 5/AF8 and Annex 6/AF9 of the RIR;

(13) On 26-10-2011, a Sale of Shares and Rights Agreement (Sale of Shares and Claims Agreement) is entered into, under which the shares of B… held at 58% by A…, 18%, by K…[21], 15% by L…[22] and 9% by M… and the contractual rights relating to two photovoltaic energy projects are disposed of to C…[23], cf. Annex7/AF10 of the RIR;

(14) On 27-10-2011, A… records the sale of B… for €1,160,000, which it records as follows (internal doc. no. …, diary 1, as well as extract of account 27812284 – Other Debtors – C…), cf. Annex 8/AF11 pages 1/2 of the RIR:

(i) 27812284/7852 = €1,160,000; 7852 /4113644[24] = €277,000

(ii) From the entries mentioned in (i) relating to the disposal of B…, A… recognizes a receivable in account 27812284 of €1,160,000;

(iii) This receivable of €1,160,000 is to be realized through payment of the price of €1,160,000 as follows: the Italian company C… transfers €298,093 to N…'s account with A… on 03-11-2011 and the remaining value of €861,907 (= €58,000 + €803,907) is settled by set-off relating to the invoices described in the following point leaving account 27812284 settled, cf. Annex 8/AF 11 pages 2/2, page 22 of the RIR, paragraph 177 of the Claimant's written arguments.

(15) With the disposal of B… A… obtained in 2011 a bookkeeping gain of €918,656.56 [(€1,160,000+€35,650+6.56)-277,000], cf. Annex 8/AF11 pages 1/2; Annex 12/AF15 pages ½ of the RIR; paragraphs 191 and 192 of the Claimant's written arguments; in 2012 there was an adjustment to the price of the disposal giving rise to the recognition of a bookkeeping gain of €438,700, cf. Annex 12/AF15 pages 2/2 of the RIR; paragraph 191 of the Claimant's written arguments;

(16) On 01-11-2011, D… invoiced A… a total of €861,907 (recorded in account 27813803 – Other Debtors and Creditors –D…) through 2 invoices, indicated below, and whose amounts were settled in that same year by set-off with D…:

(i) Invoice no. …/2011, in the value of €58,000 with the description: "commission for services rendered with regard to identifying a purchaser of all of A… shares and loan accounts against B…– amount as per the sale of shares agreement" – recorded in 62253 (Commissions Other Markets), by counterpart of 27813803, cf. Annex 9/AF12 of the RIR;

(ii) Invoice no. …/2011, in the value of €803,907 with the description: "development services rendered in South Africa as per the Development Services Agreement between A… and B…" – recorded in account 2813 - Expenses to Recognize – B… Disposal Process, by counterpart of account 27813803, cf. Annex 10/AF13 pages 1/2 of the RIR; the account 2813 remaining with a debit balance of €803,907 on 31-12-2011, cf. Annex 10/AF13 pages 2/2.

(17) On 31-12-2011, the transfer of the B… Project from Financial Investments Under Development (account 451102) to Non-Current Assets Held for Sale (account 461644) is recorded, for the amount of €798,343.25, cf. Annex 11/AF 14 pages 1/3, 2/3, 3/3 of the RIR;

(18) In the context of the inspection procedure relating to the tax period of 2011, it was determined that regarding invoice …/2011 issued on 1-11-2011 by D… to A… in the amount of €803,907, cf. Annex 10/AF pages 1/2 of the RIR, A… self-assessed and deducted VAT in the amount of €184,898.61 (23% x €803,907) having declared in the last periodic VAT declaration relating to the last quarter of 2011 the amount of VAT self-assessed and deducted, cf. page 24 of the RIR and Annex 16/AF 20 of the RIR;

(19) Equally in terms of the inspection procedure relating to the tax period of 2011, it was determined that being A… a mixed taxpayer for VAT purposes, cf. page 4 of the RIR, it should not have deducted the full amount of VAT borne in inputs relating to economic operations subject and not exempt but rather a percentage equal to that VAT borne corresponding to the annual amount of operations which give rise to deduction, that is, the pro rata, cf. page 19 of the RIR; using the methodology of calculation of the pro rata indicated on pages 17/63 of the Response it was determined a final pro rata of 65% resulting in a regularization in favor of the State in the amount of €4,382.56 as per tables below contained on pages 25 and 26 of the RIR and pages 18/63 of the Response:

(20) The total of corrections regarding VAT relating to the period of 2011 amounts to €189,281.17, as per table below contained on page 27 of the RIR and pages 19/63 of the Response:

2012

(21) D… invoiced A… in the amount of €91,133 (€30,450 + €60,683), through the invoices indicated below, which A… records to the credit of account 27813803 – Other Debtors and Creditors: D…, the debit made by D…:

(i) Invoice no. …/2012 in the amount of €30,450, issued on 01-03-2012, with the description: "procurement fee based on 7% of proceeds of payment for sale of B… shares" – in account 62213 – Specialized Work OM, cf. Annex 13/AF 16 pages 1/2 of the RIR;

(ii) Invoice no. …/2012 in the amount of €60,683, issued on 01-10-2012 with the description: "development services rendered in South Africa related with PV projects" – in account 461644 – Non-Current Assets Held Sale –B…, cf. Annex 14/AF 18 of the RIR.

(22) On 31-10-2012, A… issued invoice no. … addressed to company F…, in the value of €1,988,009.00, with the description: "expenses for development of wind and photovoltaic energy production projects to be operated by the investees of A… SGPS in South Africa" – which it recorded to the debit in account 21132652 –F…, cf. Annex 15/AF 19 pages 6/9 and 7/9 of the RIR by counterpart of the following accounts:

(i) 2813 - Expenses to Recognize – B… Disposal Process in the amount of €803,907, settling the same, cf. Annex 15/AF 19 pages 1/9 of the RIR;

(ii) 461644 – Non-Current Assets Held for Sale –B… in the amount of €852,766.93, settling the same, cf. Annex 15/AF 19 pages 4/9 of the RIR;

(iii) 7242 – Services provided to subsidiary F… in the amount of €331,335.07 corresponding to a margin of 20% calculated on the sum of the amounts of accounts 2813 and 461644, cf. Annex 15 /AF 19 pages 5/9 and 6/9 of the RIR.

(23) On 29-11-2012, the amount of €1,988,009 is paid by C… to A… by bank transfer, cf. Annex 15/AF 19 pages 9/9 of the RIR;

(24) Also in 2012, E… invoiced A… in the amount of €7,443.54 (€4,745.75 + €2,967.79), through the invoices indicated below:

(i) Invoice no. … in the amount of €4,745.75, issued on 29-02-2012, with the description: "fee for legal and tax services", cf. Annex 18/AF 22 pages 1/3, 2/3 and 3/3 of the RIR;

(ii) Invoice no. … in the amount of €2,967.79, issued on 22-06-2012, with the description: "fee for legal and tax services", cf. Annex 17 /AF 21 pages 1/3, 2/3 and 3/3 of the RIR.

(25) In the context of the inspection procedure relating to the tax period 2012, it was determined that, regarding the invoices issued by D… and E…, A… self-assessed and deducted VAT in the amount of €22,734.70 having declared in the periodic VAT declarations relating to the first and last quarter of 2012 the amount of VAT self-assessed and deducted, as per table below and pages 27 of the RIR and Annex 19 /AF 23[25] of the RIR:

(26) Equally in terms of the inspection procedure relating to the tax period 2012, it was determined that being A… a mixed taxpayer for VAT purposes, cf. page 4 of the RIR, it should not have deducted the full amount of VAT borne in inputs relating to economic operations subject and not exempt but rather a percentage of that VAT borne corresponding to the annual amount of operations which give rise to deduction, that is, the pro rata, cf. page 29 of the RIR; using the methodology of calculation of the final pro rata indicated on pages 21/63 of the Response it was determined a final pro rata of 58%, and consequently, having as reference that percentage of deduction, an amount of €312.62[26] of regularizations in favor of the State, as per tables below contained on pages 30 of the RIR and pages 22/63 of the Response:

(27) The total of corrections regarding VAT relating to the period of 2012 amounts to €23,048.32 (€22,734.70+€313.62), as per table below contained on page 30 of the RIR and pages 23/63 of the Response:

(28) The total of corrections regarding VAT for the periods of taxation of 2011 and 2012 amounts to €212,329.49, as per page 30 of the RIR and pages 23/63 of the Response:

(29) A… was notified through Office no. …, dated 16-11-2015, of the draft inspection report resulting from the inspection procedure relating to the tax periods of 2011 and 2012, from which resulted proposals for correction in the amount of €212,329.49, to exercise its right to be heard, which it did exercise, cf. article 20.º of the Response and Annex 57 of the RIR joined to the proceedings by request submitted by the Respondent on 9-1-2017. The Claimant was notified;

(30) TA notified A… of the final RIR through Office no. …, dated 16-12-2015, registered under no. RD … PT, maintaining the proposed corrections in the amount of €212,329.49 relating to the periods of taxation of 2011(€189,281.17) and 2012 (€23,048.32), from which resulted additional assessments of VAT (€133,495.41) and CI (€18,567.23) relating to the periods of taxation of 2011 to 2014 in the total amount of €152,062.64, of which €25,695.44 pertain to the periods of taxation of 2013 (€11,817.50) and 2014 (€13,877.94), cf. Doc. 1 attached to the Claim, Doc. B attached to the request submitted by A… on 17-10-2016;

(31) From the corrections made in 2011 in the amount of €189,281.17, A… moved regarding that tax period from a situation of VAT to recover/excess to carry forward to the following period of €140,500 to a situation of VAT to pay of €48,781.17 (€189,281.17-€140,500) corresponding to additional assessment no. 2015…, cf. page 18 of the RIR, Doc. B and Doc. C attached to the request delivered by the Claimant on 18-10-2016.

b) Facts Not Established

(1) Regarding invoice no. …/2011 issued in 2011 by D… in the amount of €803,907 with the description: "development services rendered in South Africa as per the Development Services Agreement between A… and B…" no evidence was produced before the Tribunal by A… that the services in question concerned technical consulting services in the area of alternative energies;

(2) Regarding invoice no. …/2012 issued in 2012 by D… in the amount of €60,683 no evidence was produced before the Tribunal that the services in question concerned legal and tax consulting services relating to technical support in the area of alternative energies;

(3) Regarding the two invoices issued in 2012 by E… in a total of €7,443 (FT…: €4,745.75; FT…: €2,967.79) with the description: "fee for legal and tax services" no evidence was produced before the Tribunal by A… that the services in question concerned legal and tax consulting services within the scope of applications for tenders for the award of installation licenses for infrastructure in the area of alternative energies, cf. paragraph 261 of the Claim.

c) Reasoning on Established and Unestablished Facts

Regarding the factual matter the Arbitral Tribunal does not have to pronounce on everything alleged by the parties, it falling to it, rather, the duty to select the facts that matter for the decision and to distinguish the matter established from the not established (cf. article 123.º no. 2 of TPPC and article 607.º no. 3 of CPC, applicable ex vi paragraphs a) to e) of article 29.º no.1 of the LFTA).

Thus, the facts relevant for the judgment of the case are chosen and selected according to their legal relevance, which is established in view of the various plausible solutions of the question(s) of Law (cf. article 596.º of CPC applicable ex vi paragraph e) article 29.º no.1 of the LFTA).

Thus, taking into account the positions adopted by the parties, the documentary evidence, the witness evidence and the AF joined to the proceedings, the facts listed above were considered established, with significance for the decision.

2. ON THE LAW

The Arbitral Tribunal finds it necessary to delimit the object and claim of the present arbitral proceedings.

Now, the questions that present themselves for decision are:

• The additional assessments relating to the years of 2013 and 2014 have no factual or legal basis

• The additional assessments impugned from 2011 to 2014 would be illegal due to lack of reasoning for the extension of the scope of the inspection procedure

• The reasoning of the inspection report would be insufficient and consequently the assessments would be voidable

• The additional assessments of VAT suffer from a defect of violation of law, namely by offence of the principle of neutrality and duplication of collection in the part relating to "reverse charge" operations

Additional assessments relating to the years of 2013 and 2014 have no factual or legal basis

a) The Claimant alleged the lack of reasoning of the additional assessments relating to the periods of taxation of 2013 (€11,817.50) and 2014 (€13,877.94) in a total amount of €25,695.44, since the inspection procedure related to the periods of taxation of 2011 and 2012 based on service orders of general scope authorizing the inspection procedure relating to the periods of 2011 and 2012;

b) It happens that the additional assessments relating to 2013 and 2014 in the amounts of, respectively, €11,817.50 and €13,877.94 totaling €25,695.44 are a consequence of corrections made regarding VAT in the periods of 2011 and 2012 in the amounts of, respectively, €189,281.17 and €23,048.32 totaling €212,329.49, cf. points 28 and 30 of the factual matter;

c) Resulting from the corrections made in 2011 in the amount of €189,281.17, the Claimant moved from a situation of creditor before the State of €140,500, which it had declared in the periodic declaration of the last quarter of 2011 (1112T) with VAT to recover/carry forward to the following period, to a debtor situation of €48,781.17 and subsequently the values of VAT declared previously by the Claimant (including 2013 and 2014) had to be recalculated taking into account not only the correction relating to 2011 but also that relating to 2012;

d) The system for determining VAT functions as a running account system and due to the indirect subtractive method adopted in Portugal, it is necessary to determine for each tax period whether the taxpayer is in a situation of tax to recover or tax to pay. Should the taxpayer be in a situation of tax to recover, it may carry forward the amount determined to the following period, cf. article 22.º no.4 of the VAT Code, which is what the Claimant did. Now, if the amount of tax to carry forward is not correct in a given tax period, the values of VAT determined in subsequent periods must be corrected by the tax authority. This is what the Respondent did, complying with the law, as stated in article 48.º of the Response. Thus, the claim by the Claimant of illegality committed by the Respondent regarding the additional assessments of 2013 and 2014 is without merit.

The additional assessments impugned from 2011 to 2014 would be illegal due to lack of reasoning for the extension of the scope of the inspection procedure

e) The Claimant alleged that there was violation of article 15.º no.1 of the RCPIT - non-existence of a "reasoned decision" - determining the change in scope of the inspection procedure, therefore the assessments were illegal due to lack of reasoning for the extension of the scope of the inspection procedure;

f) There exists a Service Order (OI2015…) signed on 12-8-2015 by the representative of the Claimant whose scope is general and not partial (only relating to corporate income tax) as initially planned, cf. Doc. 4 and Doc. 3 b) attached to the Claim and point 3 of the factual matter; thus, as of 12-8-2015 the Claimant became aware that the scope of the inspection had been extended encompassing not only corporate income tax but other taxes; with said signature, the Claimant legitimized the change of scope from partial to general; the "reasoned decision" to which RCPIT refers is the Service Order no. OI2015… duly notified and signed by the representative of the Claimant who thereby acknowledged the change of scope; no breach of any legal formality is apparent.

Furthermore, the Claimant cannot now claim that it was not properly notified when it itself signed and received a copy of the Service Order extending the scope from partial to general, authenticating that notification through its signature.

In this sense, the arguments put forward by the Claimant regarding the alleged violation of article 15.º no.1 of the RCPIT are without merit, given the documentary evidence (Doc. 4 and Doc. 3 b) attached to the Claim which prove the notification, the legitimacy and the extension from partial to general scope, as well as the signature acknowledging the same.

The reasoning of the inspection report would be insufficient and consequently the assessments would be voidable

g) The Claimant alleged deficient reasoning of the RIR asserting that the Respondent in the conduct of the inspection procedure should have clearly explained the reasons for denying the deductibility of VAT in the way the Claimant understood them, namely that the services were related to technical support in the area of alternative energies rather than being related to the sale of holding B…;

h) Nevertheless, on careful review of the RIR and the testimony at the hearing, specifically the testimony of the representative of TA during the hearing, the reasoning provided by the Respondent appears adequate. In the RIR, pages 7 to 35, TA sets out clearly and comprehensively the legal and factual grounds for denying the deductibility of VAT, pointing out that:

(1) the services provided by D… and E… were directly related to the sale of shareholding B…, as evidenced by the accounting entries (specifically the recording of the €803,907 in account 2813 - Expenses to Recognize – B… Disposal Process);

(2) the services were not for the exercise of economic activities that could have entitled A… to VAT deduction, since the sale of shareholding is not an economic activity for VAT purposes;

(3) the subsequent debiting of these services to the Maltese company F… (through the invoice of €1,988,009) confirms that these services were part of the broader transaction involving the sale/transfer of shareholding to Malta;

(4) in terms of the principle of neutrality and the application of the pro rata, the Respondent set out detailed and reasoned calculations, as shown in the tables in pages 17 to 30 of the RIR, which systematically explain how the pro rata was calculated in relation to the taxable operations (management services) and exempt operations (financial income);

(5) the Respondent provides legal references to both Portuguese law and EU law, namely the Sixth Directive and VAT Directive, explaining how the principle of neutrality requires that VAT deduction only apply to inputs related to taxable economic activities.

This reasoning, while contested by the Claimant, is not deficient and the Claimant has been given the opportunity to present contrary evidence and argument, which it did.

The additional assessments of VAT suffer from a defect of violation of law, namely by offence of the principle of neutrality and duplication of collection in the part relating to "reverse charge" operations

i) The Claimant alleged that the denial of VAT deduction regarding the services provided by D… and E… violates the principle of neutrality enshrined in EU law, particularly in the Sixth Directive and the VAT Directive. The Claimant further alleged that there was duplication of VAT collection because it first self-assessed VAT through the reverse charge mechanism and then TA imposed additional VAT assessments denying the deductibility.

On the principle of neutrality:

j) The principle of neutrality in VAT, although indeed a structural principle of the common VAT system under EU law, operates only in relation to inputs used for the supply of taxable goods or services. This has been consistently held by the Court of Justice of the European Union in numerous decisions, including the seminal case establishing that the right to deduct input VAT depends upon the tax having been borne in relation to the supply of goods or services which are themselves subject to VAT (or in certain cases, to exempt supplies that are outside the scope for VAT purposes but which are nonetheless considered supplies).

k) However, the principle of neutrality cannot apply where the activities in question do not constitute economic activities within the meaning of EU law. The sale or transfer of holdings (shareholdings or participations) is not an economic activity for VAT purposes. This is a principle confirmed repeatedly by both the Court of Justice and in the VAT Directive itself.

l) In the present case, the evidence clearly shows (and has been established as fact, specifically in point 14 of the factual section above) that the services provided by D… and E… were directly related to the sale of the shareholding B…. The invoices themselves identify the services as procurement and sale-related fees (the €58,000 commission for identifying a purchaser), and development services that were later (re)invoiced to the Maltese company F… as part of the transfer of the shareholding/business to Malta, as evidenced by the accounting entries where the €803,907 in development costs were recorded in account 2813 – "Expenses to Recognize – B… Disposal Process."

m) The Claimant argues that these services should be considered as technical consulting services in the area of alternative energies and should therefore be attributable to the taxable activities (management services) of the Claimant. However, this assertion was not established as a fact. The Tribunal found in the factual section (point (1) under "Facts not established") that regarding invoice no. …/2011 no evidence was produced that the services concerned technical consulting services in the area of alternative energies. Similarly, regarding invoice no. …/2012 no evidence was produced that the services concerned technical support in the area of alternative energies, and regarding the two invoices from E…, no evidence was produced that they concerned legal and tax consulting in the scope of applications for alternative energy licenses.

n) Given that the characterization of the services as relating to the sale of shareholding B… has been established and the characterization as relating to alternative energy consulting has not been established, the services do not qualify as inputs to taxable (economic) activities, and the principle of neutrality does not apply. The Respondent was therefore correct in denying the deductibility of VAT.

o) Furthermore, it is worth noting that the Claimant's argument regarding neutrality is somewhat circular. The Claimant argues: "I self-assessed VAT under reverse charge and deducted it; therefore I am entitled to the deduction." However, the mere performance of reverse charge does not, in and of itself, confer the right to deduction. The right to deduction under the reverse charge mechanism (or under any mechanism) requires that the input VAT be borne in relation to inputs used for taxable economic activities. If the underlying supplies do not relate to taxable economic activities (as is the case with shareholding sales), then the reverse charge mechanism itself does not create a right to deduction.

p) Therefore, the Claimant's arguments regarding violation of the principle of neutrality are without merit.

On duplication of collection:

q) The Claimant argues that there is a duplication of VAT collection because it first self-assessed VAT under the reverse charge mechanism (in accordance with the rules applicable to services from non-residents) and subsequently TA denied the deductibility and assessed additional VAT.

r) This argument conflates two different steps in the VAT system. The reverse charge mechanism is a mechanism of assessment and payment of VAT. When the Claimant self-assessed VAT under reverse charge, it was performing its obligation as a taxpayer to assess and report VAT on supplies from non-residents. At the same time, the Claimant also deducted that VAT, claiming that the inputs could be attributed to taxable activities.

s) However, if those inputs cannot, in fact, be attributed to taxable activities (because they relate to the sale of shareholding rather than to the provision of management services), then the deduction should not have been permitted. The assessment of additional VAT by the Respondent is not a "second" VAT assessment on the same supply; rather, it is the correction of an erroneous deduction. The reverse charge creates an obligation to self-assess VAT, but it does not, in and of itself, create an automatic right to deduct. The right to deduct depends upon the nature of the activity to which the input relates.

t) In this case, the reversal of roles (self-assessment by the taxpayer rather than assessment by the tax authority) does not mean that both the assessment and the deduction can coexist. The reverse charge assessment stands (the amount of €22,734.70 and €184,898.61 remain assessed), but the deduction is correctly denied. This is not a duplication; it is a correction of an erroneous claim to deduction.

u) The Respondent also points out (which the Tribunal accepts) that the legislative framework for VAT deduction is found in the VAT Code and the VAT Directive, and both explicitly restrict the right to deduction to inputs used in the course of taxable economic activities. The application of the pro rata method similarly restricts deduction in proportion to taxable activities. All of these restrictions would be rendered meaningless if, merely by invoking reverse charge and self-assessing, a taxpayer could claim unlimited deduction rights.

v) Therefore, the Claimant's arguments regarding duplication of collection are also without merit.

Regarding compensatory interest:

w) The Claimant alleges that compensatory interest should not be charged because there was no culpability on its part; rather, it was merely an issue of differing interpretation of tax law between the Respondent and the Claimant.

x) However, according to the case law of the Supreme Administrative Court (cited by the Respondent, Decision 1490/13 of 22-10-2014), compensatory interest is due where the essential requirements are met: (1) existence of a tax debt, (2) delay in assessment, and (3) imputability of the delay to culpable conduct of the taxpayer.

y) In the present case, all three requirements are met. There is a tax debt (the VAT improperly deducted). There was a delay (the VAT was deducted and reported by the Claimant in 2011 and 2012, but the corrections were not made until 2015). The delay is imputable to the Claimant's conduct in improperly claiming the deduction.

z) The Claimant's argument that it was merely a matter of differing interpretation does not shield it from compensatory interest where it has incorrectly exercised the right to deduction on a matter that should reasonably have been clear to it - namely, that the services relating to the sale of a shareholding do not constitute inputs to taxable economic activities.

aa) Therefore, the assessment of compensatory interest is properly due.

On indemnification:

bb) The Claimant has requested indemnification for guarantees provided in tax execution proceedings. However, no specific evidence has been presented regarding the amount and nature of these guarantees, the costs incurred, or the basis in law for an award of damages in the context of an arbitral proceeding. Article 171.º of the TPPC permits recovery of damages in tax execution proceedings, but the specific quantification and award of such damages would more appropriately be determined in those execution proceedings themselves, not in the present arbitration. The Claimant's request for indemnification is therefore denied without prejudice to the Claimant's right to pursue such claims in tax execution proceedings if applicable.

CONCLUSIONS:

1. The additional assessments relating to 2013 and 2014 are legally founded as they result from the correction of the VAT carry-forward from 2011, which in turn resulted from the corrections made in the inspection procedure regarding 2011 and 2012.

2. There is no violation of article 15.º no.1 of the RCPIT regarding the extension of the inspection scope, as the Service Order extending the scope was duly notified and signed by the Claimant's representative.

3. The reasoning of the RIR is adequate and not deficient.

4. There is no violation of the principle of neutrality, as the principle only applies to inputs relating to taxable economic activities. The services were not related to taxable economic activities (management services) but rather to the non-taxable activity of sale of shareholding. Therefore, the denial of VAT deduction is correct.

5. There is no duplication of collection; the reverse charge assessment stands but the deduction is correctly denied as the inputs do not relate to taxable economic activities.

6. Compensatory interest is properly due.

7. The request for indemnification is denied.

Based on all the foregoing, the Claimant's request for arbitral pronouncement is dismissed.

DECISION

1. We declare that the additional VAT assessments and compensatory interest relating to the tax periods 2011 to 2014, totaling €152,062.64, are legal and well founded.

2. We dismiss the request for arbitral pronouncement submitted by A… SGPS with all legal consequences.

3. We condemn the Claimant to pay the arbitration fee and costs, as applicable.

Given in the manner of our deliberation, in the seat of CAAD on the day of the decision.

(Signed)

Fernanda Maçãs
Presiding Arbitrator

Clotilde Celorico Palma
Arbitrator Member

Júlio Tormenta
Arbitrator Member