Process: 278/2017-T

Date: December 15, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Process 278/2017-T addresses whether a real estate investment fund management company has standing to challenge VAT assessments totaling approximately €108,000 for fiscal years 2012-2014. The fund leased commercial property units under three operational structures: (a) monthly rent for spaces and parking (claimed VAT-exempt under Article 9(29) CIVA), (b) common area management expenses invoiced with VAT at 23%, and (c) rebilled expenses. The Tax Authority disputed multiple aspects: first, it argued one specific lease constituted transfer of a business operation rather than simple property rental, thus not qualifying for Article 9(29) exemption; second, it contested the fund's direct allocation method for VAT deduction on common area expenses, requiring instead pro-rata deduction under Article 23 CIVA; third, it identified improper VAT adjustments via credit notes and rebilled expenses. The claimant argued the disputed lease was merely 'bare walls' rental—passive provision of real estate space without transferring business equipment or operations. A critical procedural issue emerged regarding active procedural legitimacy (legitimidade processual ativa): whether a management company can represent an investment fund in tax arbitration under RJAT. Investment funds, as collective investment organisms under Portuguese and EU law, have special legal personality constraints affecting litigation capacity and representation authority. The case title's reference to 'ilegitimidade processual ativa' suggests this standing issue may have been determinative, potentially resulting in dismissal without substantive review of the VAT exemption and deduction methodology disputes.

Full Decision

The arbitrators Counselor Maria Fernanda dos Santos Maçãs (arbitrator-president), Dr. Ricardo Rodrigues Pereira and Dr. Emanuel Augusto Vidal Lima, designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. REPORT

  1. On 19 April 2017, the commercial company A... – Real Estate Investment Fund Management Company, S.A., NIPC..., with registered office at ..., ..., ..., room..., Lisbon (hereinafter, Claimant), in its capacity as management company and in representation of the Special Closed Real Estate Investment Fund B..., NIF..., filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2, no. 1, paragraph a), and 10, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking the declaration of illegality and annulment of the acts of additional assessment of VAT nos. 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016..., 2016... and 2016... and corresponding statements of account reconciliation and assessments of compensatory interest, relating to the fiscal years 2012, 2013 and 2014.

The Claimant attached 22 (twenty-two) documents and did not request the production of any other evidence.

The Respondent is the AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. In essence and in brief summary, the Claimant alleged as follows:

On 16 December 2009, the Fund acquired several autonomous units of an urban property, constituted under a horizontal property regime, the majority of which were encumbered with lease agreements for non-residential purposes.

Within the scope of such lease agreements, the Fund ensures not only the provision of real estate space in "bare walls" mode – i.e., the mere passive placing of properties at the disposal of the tenant entities – but also the services necessary for the administration, maintenance and conservation of the common areas of the property – e.g., cleaning, water, climate control system management, elevator maintenance, etc. – which are billed to tenants in proportion to the areas respectively occupied, having established a fixed counterpart per square meter. The Fund further re-bills other expenses it incurs on behalf of the tenants, debiting them for the exact amount of the cost originally incurred.

Thus, the Fund debits to its tenants charges relating to three types of distinct operations, namely: (a) monthly rents due for the spaces and/or car parks leased, exempt from VAT under no. 29 of article 9 of the VAT Code; (b) expenses incurred by the Fund necessary for the management of the common areas of the property, invoiced with VAT at the rate of 23%, in a fixed amount calculated according to the quota share occupied by each tenant, in accordance with no. 1 of article 4 of the VAT Code; and (c) re-billing of other expenses incurred by the Fund in its own name, but on behalf of the tenants, in accordance with no. 4 of article 4 of the VAT Code.

With respect to VAT deduction, the Fund, in light of the economic operations conducted on that property, does not deduct the tax incurred in the acquisition of goods and services used in activities that do not confer such a right, in this case, in the leasing operations exempt from VAT relating to the units and car parks.

As regards VAT borne in expenses essential to the conservation, maintenance and management of the common parts of the property, as well as re-billed charges, the Fund deducts by direct allocation the tax incurred in the costs necessary to carry out these taxed operations.

Following an inspection activity, requested by the Claimant itself, in view of the Fund's liquidation, the AT proposed various VAT corrections relating to the fiscal years 2012, 2013 and 2014, in the following terms: (i) € 48,879.89 relating to fiscal years 2013 and 2014, concerning the alleged failure to assess VAT on the rents charged by the Fund to a commercial company, within the scope of a lease agreement for non-residential purposes concerning one of the aforementioned autonomous units; (ii) € 54,954.86 relating to VAT fully deducted in the years 2012, 2013 and 2014, by direct allocation of condominium expenses charged to tenants, VAT which, in the AT's view, the Fund should have deducted through application of the pro rata deduction method provided for in article 23 of the VAT Code; (iii) € 1,647.97 of VAT improperly adjusted in favor of the Fund, based on three credit notes issued without compliance with the provisions of no. 5 of article 78 of the VAT Code; and (iv) € 2,408.22 of VAT relating to an invoice issued on 15 July 2014, by the company that acquired the aforementioned urban property from the Fund, this amount relating to the re-billing of expenses that had already been invoiced by the Fund to the tenant entities of said property. The Claimant accepts and does not contest the amount of € 4,056.19 relating to the corrections detailed in (iii) and (iv).

With respect to the alleged failure to assess VAT by the Fund within the scope of the activity conducted in the autonomous unit object of the lease agreement for non-residential purposes mentioned in (i), the AT considers that the activity carried out in that unit does not constitute a pure lease and, consequently, exempt from VAT, but rather, unlike the reality observed in the remaining units leased by the Fund, a lease whose sole purpose is the operation of a business, being subject to VAT, in accordance with no. 1 of article 4 of the VAT Code.

The Claimant maintains, in this context, that the lease agreement in question provides only for the mere temporary provision, for consideration, of a real estate space to the tenant entity, with no evidence, formally or materially, of the gathering of other types of elements that would allow one to infer that one is dealing with an atypical contract for the onerous transfer of the operation of a commercial establishment (in this case, a restaurant) and, consequently, not subsumable under the exemption of no. 29 of article 9 of the VAT Code.

Even if one were to admit, purely as a hypothesis, a contrary interpretation, one must bear in mind that the Fund could never be the owner of the goods and equipment in question (e.g., furniture, machinery and utensils) by force of the national and community legislation that regulates and delimits its activity as a collective investment organism.

The Claimant argues, therefore, that the agreement in question constitutes an actual lease operation in "bare walls" mode, exempt from VAT in accordance with no. 29 of article 9 of the VAT Code, insofar as only the real estate space per se was assigned by the Fund, in exchange for remuneration, and nothing more.

Moreover, according to the Claimant, even if one were to consider the VAT classification advocated by the AT, one would arrive at an economic result corresponding to that obtained through application of the exemption provided for in no. 29 of article 9 of the VAT Code; indeed, even if the Fund, within the scope of the lease agreement under analysis, were to invoice the monthly rents plus VAT to the tenant, the impact on the State's coffers would be null, because although the tax would be fully assessed, the tenant, as a VAT taxable person without restrictions on the exercise of its deduction right, could fully deduct the tax borne on those inputs for the pursuit of its restaurant business activity.

Regarding the allocation of condominium expenses to the tenant entities, referred to above in (ii), the AT considers that these are not subject to full deduction by the Fund, under the general terms of article 19 and no. 1 of article 20 of the VAT Code, and that the exercise of the right to deduct these costs should have been made by the Fund through application of the pro rata method enshrined in article 23 of the VAT Code, because these are inputs applied to resources of mixed use, that is, to operations that confer the right to deduct VAT and operations that do not confer such a right.

The Claimant contests this position of the AT, stating that, taking into account that the right to deduction is a structuring principle of the VAT mechanism that cannot, in principle, be limited and given the fact that the upstream expenses have a clear direct and immediate nexus with the economic operations carried out downstream that confer such a right – i.e., the acquisition by the Fund of the goods and services necessary for the management, maintenance and conservation of the common parts of the property are subsequently invoiced to tenants with VAT taxation – there are no reasons for not accepting within the Fund's sphere the deduction of the entirety of the tax that has burdened the acquisition of those upstream expenses.

For perfect neutrality to be achieved regarding the fiscal burden borne by the Fund, the Claimant argues that the pro rata method should be set aside for purposes of deductibility of VAT incurred within the scope of the economic operations in question, since it is demonstrated, through objective elements, that the goods and services acquired for condominium management were not used in mixed resources.

Moreover, the costs incurred in the acquisition of these goods and services form part of the constitutive elements of the price of the downstream operations (common area management services) that fully confer the right to deduction, i.e., the provision of services for the management, maintenance and conservation of the common parts of the property in question, carried out by the Fund to the tenant entities, in exchange for payment of a fixed monthly remuneration taxed at VAT.

1.2. The Claimant concludes its initial pleading by petitioning as follows:

"In these terms and in other matters of Law that Your Excellency will so wisely provide, the Claimant requests an arbitral ruling on this claim and, consequently, requests that the illegality of the acts of additional assessment of VAT sub judice be declared, and corresponding compensatory interest, in the amount of € 116,658.59, because they are contrary to law and suffer from error in the factual and legal presuppositions, and that they be annulled."

  1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 27 April 2017.

  2. The Claimant did not proceed to appoint an arbitrator, wherefore, under the provisions of paragraph a) of no. 2 of article 6 and paragraph a) of no. 1 of article 11 of the LRAT, the President of the Deontological Council of the CAAD appointed as arbitrators of the collective Arbitral Tribunal the undersigned signatories, who communicated acceptance of the appointment within the applicable timeframe.

3.1. On 12 June 2017, the Parties were duly notified of this appointment and did not express an intention to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs b) and c), of the LRAT and articles 6 and 7 of the CAAD Code of Ethics.

3.2. Thus, in accordance with the provision in paragraph c) of no. 1 of article 11 of the LRAT, the collective Arbitral Tribunal was constituted on 28 June 2017.

  1. On 18 September 2017, the Respondent, duly notified for this purpose, filed its Answer in which it specifically contested the arguments made by the Claimant, concluding that this action should be dismissed.

The Respondent attached no documents nor requested the production of any other evidence.

4.1. In essence and also in brief, it is important to extract the most relevant arguments upon which the Respondent based its Answer:

The lease contracts designed for exemption are those in which one party provides the temporary enjoyment of a property only, against payment, whereas it is already another type of contract (transfer of operation) when that same property is, as in the situation at hand, equipped with all the equipment for a commercial activity, such as a restaurant, to be developed there.

It is immaterial, in this case, who holds the ownership of the equipment found in the unit, because, in objective terms, they formed part of it at the moment it was leased by the Fund; indeed, such equipment could have been removed from the unit before its lease, but the Claimant preferred to keep them.

Thus, it is concluded that the contract at hand encompassed, in substance, both the bare walls of the unit and the equipment embedded in it, which closely approximates the figure of a transfer of operation.

Now, a contract for the transfer of operation does not coincide with a lease contract, having distinct characteristics and objects, which is why it is not subsumed under the exemption provided for in no. 29 of article 9 of the VAT Code; and, by elimination, as it does not fit within the concept of transfer of goods, it is, for VAT purposes, considered a true provision of services, in accordance with the provision of article 4, no. 1, of the VAT Code.

With respect to the question of condominium expenses, it must be stated that the Claimant conducts operations subject to tax and not exempt that confer the right to deduction and exempt operations that do not confer such a right, and when goods and services are used in the performance of both types of operations, the deduction of VAT is made in accordance with what is determined in article 23 of the VAT Code; in the specific case, the expenses in question are necessary and used in the performance of operations subject to tax and not exempt (parking space agreements and the lease of the aforementioned unit as to which it is considered that there is a contract for transfer of operation), as well as in exempt operations that do not confer the right to deduction (assignment of space for installation of telecommunications equipment and exempt property leases) and not exclusively in the performance of operations subject to tax.

Given that it is not possible to make real allocation of these expenses to each type of operation and their use is mixed, the method of deduction of tax is that which is stipulated in article 23 of the VAT Code, which is characterized as the method of the percentage of deduction (pro rata).

The Respondent thus concludes its pleading:

"In these terms and in other matters of law, and with the most learned provision of Your Excellencies, this request for an arbitral ruling should be judged as not proven and therefore rejected, and consequently the Respondent absolved of all claims, all with the due and legal consequences."

4.2. On the same date, the Respondent attached to the case file its respective administrative file (hereinafter, abbreviated as AF).

  1. On 1 October 2017, an order was issued dispensing with the holding of the meeting referred to in article 18 of the LRAT, granting a deadline for the submission of written arguments and setting 28 December 2017 as the deadline for issuance of the arbitral award.

  2. On 18 October 2017, a request was filed in the name of the company "C...", NIPC..., which is hereby given as fully reproduced and in which, among other things, the following is stated:

"1. The Special Closed Investment Fund B... ("Fund"), Claimant in this proceeding and here represented by its management company A... – Real Estate Investment Fund Management Company, S.A. ("A..."), was subject to liquidation on 22 December 2016 (...).

  1. Following the foregoing, the product resulting from said liquidation was entirely reimbursed to its sole participant, here Claimant (...).

  2. In this context, as the sole participant of the Fund is here the Claimant at the date of said liquidation act, it (...) hereby requests the succession, in its sphere, of any assets and rights that may be recognized to the Fund within the scope of this proceeding (...).

  3. And, specifically, as in this case it has been petitioned to this Tribunal that it deign to declare the illegality of a set of acts of additional assessment of Value Added Tax, and assessment of corresponding compensatory interest, in the amount of € 116,658.59, it hereby requests, in case of allowance of the request for arbitral ruling sub judice, its designation as holder of the right to restitution of the amounts of tax improperly paid by the Fund."

6.1. On 20 October 2017, notification of the Respondent was ordered to state its position, if it so wished, regarding that request of "C..." and the suspension of the deadline for the submission of arguments was determined.

6.2. On 4 November 2017, notification of the Claimant was ordered to state its position, if it so wished, regarding the same request of "C..." and regarding its own (eventual) lack of active standing.

6.3. The parties submitted no arguments.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly constituted and is competent.

The proceeding is not affected by any nullities.

The parties possess legal personality and legal capacity, are duly represented and the AT is a proper party; the determination of the standing of the Claimant depends on the prior establishment of the proven and unproven facts, with relevance for the consideration and decision of the case, which will be effected hereinafter.

The cumulation of claims is admitted – various acts of assessment of VAT are at issue, and the declaration of illegality and annulment of each of them are sought – because it is verified that the allowance of the claims formulated by the Claimant depends essentially on the consideration of the same factual circumstances and the interpretation and application of the same legal principles or rules.

There are no other exceptions or any prior issues that preclude knowledge of the merits and of which it is necessary to know.

III. GROUNDS

III.1. FACTUAL

§1. PROVEN FACTS

With relevance for the consideration and decision of the case, the following facts are considered proven:

a) In the years 2012, 2013 and 2014, the commercial company "A... – Real Estate Investment Fund Management Company, S.A." (hereinafter, "A..., S.A."), NIPC..., was the management company and, therefore, the legal representative of the "Special Closed Real Estate Investment Fund B..." (hereinafter, "Fund B..."), NIF....

b) The "Fund B..." is a special closed real estate investment fund, of full distribution, constituted by private subscription from qualified investors, on 22 October 2009, having commenced its activity on 15 December 2009 with an initial planned duration of 7 years.

c) The assets of the "Fund B..." were initially represented by equal units of participation with a base value of € 5.00 each, and the initial capital of the fund was € 6,650,000.00, represented by 1,330,000 units of participation.

d) On 31 December 2014, the capital of the "Fund B..." was € 134,609.00, represented by 1,645,057 units, with unit value of € 0.818.

e) "D..., S.A." assumed the functions of depository of the "Fund B..." and, in that capacity, was entrusted with the custody of all the Fund's asset holdings, with all applications of the "Fund B..." made with this bank.

f) The "Fund B..." entered the liquidation phase on 26 March 2015, in accordance with the resolution of the participants' assembly, dated 26 March 2015.

g) The company "A..., S.A.", in its capacity as management company and legal representative of the "Fund B...", requested from the Tax and Customs Authority, under the provisions of no. 1 of article 2 of Decree-Law no. 6/99, of 8 January, that it initiate general scope inspection procedures for the "Fund B...", for the years 2012, 2013 and 2014.

h) Following this and in compliance with Service Orders nos. OI2015..., OI2015... and OI2015... of 18 November 2015, the "Fund B..." was subject to external inspection procedures, of general scope, relating to the years 2012, 2013 and 2014, with the objective of verification and inspection, aiming at confirmation of compliance with the respective obligations in all tax matters, which were carried out by the Tax Inspection Services of the Lisbon Finance Directorate.

i) Following this inspection activity, the respective Tax Inspection Report was prepared – a copy of which constitutes document no. 10 attached to the request for arbitral ruling and is hereby given as fully reproduced – which was notified to the company "A..., S.A.", as legal representative of the "Fund B...", through official document no. ..., dated 11 November 2016, from the Tax Inspection Services of the Lisbon Finance Directorate, sent by registered mail.

j) In that Tax Inspection Report, the following VAT corrections to be made were noted, among others:

k) Subsequently, the "Fund B..." was notified of the disputed additional VAT assessments, copies of which constitute documents nos. 1 to 9 attached to the request for arbitral ruling and which are hereby given as fully reproduced, dated 19 November 2016 and with a payment deadline of 19 January 2017.

l) The "Fund B..." was liquidated on 22 December 2016, with the Fund's portfolio being composed solely of cash, in the amount of € 14,908.23, with no liabilities, whereby the value of each unit of participation was € 0.0091 [cf. information on the situation of the "Fund B..." provided in the information dissemination system relating to funds/asset management accessible on the CMVM website].

m) At the date of liquidation, the company "C...", NIPC..., was the sole participant of the "Fund B...", having received, on 21 December 2016, the amount of € 14,908.23, referred to in the previous proven fact, through "D..., S.A.".

n) On 19 April 2017, the request for constitution of an arbitral tribunal that gave rise to this proceeding was filed. [cf. CAAD case management information system]

o) On 18 October 2017, a request was filed in the name of the company "C...", NIPC..., which is hereby given as fully reproduced and in which, among other things, the following is stated:

"1. The Special Closed Investment Fund B... ("Fund"), Claimant in this proceeding and here represented by its management company A... – Real Estate Investment Fund Management Company, S.A. ("A..."), was subject to liquidation on 22 December 2016 (...).

  1. Following the foregoing, the product resulting from said liquidation was entirely reimbursed to its sole participant, here Claimant (...).

  2. In this context, as the sole participant of the Fund is here the Claimant at the date of said liquidation act, it (...) hereby requests the succession, in its sphere, of any assets and rights that may be recognized to the Fund within the scope of this proceeding (...).

  3. And, specifically, as in this case it has been petitioned to this Tribunal that it deign to declare the illegality of a set of acts of additional assessment of Value Added Tax, and assessment of corresponding compensatory interest, in the amount of € 116,658.59, it hereby requests, in case of allowance of the request for arbitral ruling sub judice, its designation as holder of the right to restitution of the amounts of tax improperly paid by the Fund."

§2. UNPROVEN FACTS

With relevance for the consideration and decision of the case, there are no facts that were not proven.

§3. REASONING ON THE FACTUAL MATTER

With respect to the proven factual matter, the Tribunal's conviction was based on the facts articulated by the Parties, whose correspondence with reality was not challenged, on the documents and on the respective administrative file attached to the case.

III.2. LEGAL

§1. OF THE STANDING OF THE CLAIMANT

As follows from what is provided in nos. 1 and 4 of article 9 of the TCPT (applicable ex vi article 29, no. 1, paragraph a), of the LRAT), have standing in the tax proceeding, in addition to the tax administration, taxpayers, including substitutes and responsible parties, other tax-obligated parties, parties to tax agreements and any other persons who prove a legally protected interest.

Focusing our attention on active standing, we gather from the provision of article 30 of the CPC (applicable ex vi article 29, no. 1, paragraph e), of the LRAT) that the claimant is a party with standing when it has a direct interest in bringing the action (no. 1), such interest in bringing the action being expressed by the utility derived from allowance of the action (no. 2); in the absence of legal indication to the contrary, those holding the relevant interest for purposes of standing are considered to be the subjects of the legal relationship in controversy, as configured by the claimant (no. 3).

As Jorge Lopes de Sousa emphasizes (Code of Tax Procedure and Process, Annotated and Commented, 6th Edition, Lisbon, Áreas Editor, 2011, p. 113), "active standing is a necessary condition to obtain an appreciation of the merits of the claim and not a condition of its allowance, which justifies that, to recognize standing, one does not require verification of the actual holding of the legal relationship invoked by the interested party (as required to decide on allowance), but only the assertion of that holding."

In the case law realm, we find various decisions pronouncing on this concrete question, in the following terms:

  • Decision of the Supreme Administrative Court, issued on 05/05/1999, in case no. 023105:

"I – The standing of taxpayers to challenge tax acts depends on the existence of a direct, personal and legitimate interest in the annulment of the challenged acts (...).

II – The relevant interest for this purpose will be the benefit that the annulment of the act, supplemented by the subsequent execution of the judgment, brings to the appellant.

(...)

IV – (...) only errors unfavorable to taxpayers should be considered relevant for this purpose."

  • Decision of the Central Administrative Court of the North, issued on 15/10/2010, in case no. 00049/10.5BECBR:

"I. Standing is the procedural presupposition by which law selects the subjects of each judicial dispute, and interest in action is the presupposition by which the party, having standing, justifies the lack of need for judicial protection;

II. Standing will be concerned with the substantive interest, which derives from the party's position relative to the legal relationship in dispute, while interest in action will be concerned with an adjective interest, which derives from the objectively existing situation of need for judicial protection of that substantive interest;"

  • Decision of the Central Administrative Court of the South, issued on 22/01/2015, in case no. 08203/14:

"2. The standing of the parties ("legitimatio ad causam") is the procedural presupposition which, reflecting a correct connection between the parties and the object of the case, enables them for the management of the proceeding. As a rule (direct standing), the parties with standing will be those holding the legal relationship in substance in controversy (cf. article 30, no. 3, of the Civil Procedure Code, "ex vi" article 2, par. e), of the Tax Procedure and Process Code; article 9 of the Tax Procedure and Process Code), thus assuring the coincidence between the subjects who, in their own name, intervene in the proceeding and those in whose legal sphere the judicial decision is directly going to produce its effect. From analysis of article 30, no. 3, of the Civil Procedure Code, it is concluded that the supplementary criterion for assessing procedural standing should be based on the interest in action or response, considering the object of the proceeding, individualized by the legal relationship in substance in controversy as the Claimant configures it.

  1. If any of the parties lacks standing, the Court must refrain from knowing the merits of the case and absolve the defendant from the proceeding (cf. articles 278, no. 1, par. d), 576, no. 2, and 577, par. e), all of the Civil Procedure Code, applicable "ex vi" article 2, par. e), of the Tax Procedure and Process Code), such exception being a dilatory exception of knowledge known ex officio (cf. article 578 of the Civil Procedure Code).

  2. The standing of the parties must be determined in accordance with the law in force at the moment the decision on it is issued."

Returning to the specific case, the "Special Closed Real Estate Investment Fund B...", by its nature, is subject to Decree-Law no. 71/2010, of 18 June, which establishes the Legal Regime of Real Estate Investment Funds (hereinafter "Legal Regime"). According to article 2, no. 2, of the Legal Regime, real estate investment funds constitute autonomous assets, and it is certain that their administration can only be exercised by a real estate investment fund management company, in accordance with article 6 of the referenced Legal Regime.

As flows from this legal regime, funds are represented by a management entity, however "they have judicial personality, as autonomous assets that they are" (VEIGA, Alexandre Brandão da, in Real Estate and Moveable Investment Funds – Legal Regime, Almedina, Coimbra, April 1999, pages 407-408), the law not permitting judicial representation of funds to participants. These have rights only with respect to the fund regarding the replacement of the management entity and liquidation. [cf. Decision of the Lisbon Court of Appeal, issued on 03/04/2014, in case no. 2014/10.3TVLSB.L1-2].

Having said this, and as was proven, the "Special Closed Real Estate Investment Fund B...", represented in this proceeding by its management company, "A..., S.A.", was subject to liquidation on 22 December 2016 – that is, on a date prior to the institution of this proceeding (19/04/2017) – and, following this, the product resulting from said liquidation was entirely reimbursed to its sole participant, the company "C...". Thus, and as we shall see below, on the date of institution of this arbitral action the "Special Closed Real Estate Investment Fund B..." was extinct.

On the matter of the moment of extinction of the real estate investment fund, note the understanding of Alexandre Brandão da Veiga (Real Estate and Moveable Investment Funds – Legal Regime, Almedina, Coimbra, April 1999, page 306): "as the law does not define once more in a systematic manner what the moment of extinction of the fund is, we can only clarify conclusions on the basis of legal construction. A distinction must be made here between compulsory and non-compulsory liquidation. In both cases, liquidation cannot close until there has been complete distribution. In the case of compulsory liquidation, liquidation occurs at the moment of approval of accounts by the CMVM. In the case of non-compulsory liquidation, liquidation terminates with the closing of accounts by the management entity. The moment of termination of liquidation is the moment of extinction of the fund. The extinction of the fund has as consequences the termination of the duties of the management entities and the depository (but not obviously the extinction of the responsibilities incurred while such) and the lapse of the administrative authorization of the fund."

In the case law realm, we find various decisions pronouncing on this concrete question, in the following terms:

  • Decision of the Supreme Court of Justice, issued on 06/03/2008, in case no. 08B402:

"1. Real estate investment funds constitute autonomous assets, without legal personality.

  1. But if it is true that legal personality necessarily confers, to whoever possesses it, judicial personality, it is not true the contrary proposition, that is, that lack of legal personality necessarily means lack of judicial personality.

  2. Faced with article 6 of the Civil Procedure Code, despite the Real Estate Investment Fund lacking legal personality, one cannot, without more, deny it the susceptibility of being a party, which comes to it, considering this rule, from the circumstance of constituting an autonomous asset.

  3. Extinguished the Fund, the autonomous asset holding judicial personality ceased to exist."

  • Decision of the Lisbon Court of Appeal, issued on 03/04/2014, in case no. 2014/10.3TVLSB.L1-2:

"III – Judicial personality is the "presupposition of the remaining subjective presuppositions", thus it should be known first.

IV – Although article 6, paragraph a) of the Civil Procedure Code seems to give a restrictive reading of the concept of autonomous asset for purposes of extension of judicial personality, this concept must encompass real estate investment funds.

V – In the case of non-compulsory liquidation of the Real Estate Investment Fund, liquidation terminates with the closing of accounts by the management entity and the moment of termination of liquidation is the moment of extinction of the fund."

Subsuming this factuality to the concrete applicable adjective legal norms, the lack of standing of "A..., S.A." becomes evident, since on the date of institution of this arbitral action, the closing of accounts of the "Special Closed Real Estate Investment Fund B..." had already occurred, coinciding with the closure of liquidation which is the moment of extinction of the fund. Thus, the "Special Closed Real Estate Investment Fund B..." has been extinct since 22 December 2016. This means that from that date forward ceased, on the one hand, the duties of the management company with respect to the fund, and on the other hand, the judicial personality of the autonomous asset of said fund.

The lack of standing of "A... S.A." for this arbitral action constitutes a dilatory exception (article 577, paragraph e), of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraph e), of the LRAT), of ex officio knowledge (article 578 of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraph e), of the LRAT) and whose allowance prevents the court from knowing the merits of the case, giving rise to absolution of the Respondent from the proceeding (articles 278, no. 1, paragraph d), and 576, no. 2, of the Civil Procedure Code, applicable ex vi article 29, no. 1, paragraph e), of the LRAT), which will be determined finally.

In this sequence, the determination of the request formulated by the company "C..." is prejudiced.

IV. RULING

In the terms set forth, this Arbitral Tribunal rules:

a) Finds proven, and therefore allows, the dilatory exception of lack of standing of the Claimant and, consequently, absolves the Tax and Customs Authority from the proceeding;

b) Condemns the Claimant to the payment of the costs of the proceeding.

V. VALUE OF THE PROCEEDING

In accordance with the provisions of articles 306, no. 2, of the Civil Procedure Code, 97-A, no. 1, paragraph a), of the Tax Procedure and Process Code and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceeding is fixed at € 116,658.59.

VI. COSTS

In accordance with the provisions of articles 12, no. 2, and 22, no. 4, of the LRAT and article 4, no. 4, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 3,060.00 (three thousand and sixty euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, to be borne by the Claimant.

Notify.

Lisbon, 15 December 2017.

The Arbitrators,

(Maria Fernanda dos Santos Maçãs)

(Ricardo Rodrigues Pereira)

(Emanuel Augusto Vidal Lima)

Frequently Asked Questions

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Is property leasing exempt from VAT under Article 9(29) of the Portuguese VAT Code (CIVA)?
Yes, Article 9(29) of the Portuguese VAT Code exempts property leasing from VAT. However, this exemption applies specifically to 'bare walls' rental—the passive provision of real estate space for consideration. The exemption does not apply when the lease involves transfer of a business operation including equipment, inventory, and operational elements. Tax authorities may challenge the exemption if the agreement constitutes more than simple property rental, particularly when furniture, machinery, or commercial establishment operations are included.
Can a real estate investment fund management company file a tax arbitration claim on behalf of the fund?
This presents a complex issue of active procedural legitimacy in Portuguese tax arbitration. While management companies typically represent investment funds in operations, tax arbitration standing under RJAT requires the claimant to be the actual taxpayer or have explicit legal authorization. Investment funds have special legal status under regulations governing collective investment organisms. The management company's capacity to represent the fund in arbitration depends on whether the fund has procedural capacity and whether proper representation authority exists under applicable fund and tax procedural law.
How are common area management charges treated for VAT purposes in commercial property leases?
Common area management charges (cleaning, maintenance, utilities for shared spaces) are generally treated as separate taxable services subject to standard VAT rates when billed to tenants, constituting supply of services under Article 4(1) CIVA, distinct from exempt rental. However, the VAT deduction method for expenses supporting both exempt (rent) and taxable (management services) activities is disputed. Taxpayers may argue for direct allocation when costs are clearly attributable to taxable activities, while tax authorities often require pro-rata deduction under Article 23 CIVA for mixed-use expenses.
What is active procedural legitimacy (ilegitimidade processual ativa) in Portuguese tax arbitration proceedings?
Active procedural legitimacy (legitimidade processual ativa) refers to legal standing—the requirement that the claimant has the legal right to bring the arbitration claim. In tax arbitration under RJAT, the claimant must be the taxpayer directly affected by the contested administrative act or have explicit legal authorization to represent them. Lack of active procedural legitimacy is a procedural defect resulting in dismissal without judgment on merits. For investment funds, this is particularly complex because the fund may be the taxpayer while management companies handle operations and representation.
Are additional VAT assessments on mixed property lease and service charges subject to arbitral review under the RJAT?
Yes, additional VAT assessments are subject to arbitral review under the Legal Regime of Arbitration in Tax Matters (RJAT). Article 2(1)(a) and Article 10 of Decree-Law 10/2011 establish jurisdiction for tax arbitration over administrative acts related to VAT assessments, including additional assessments, compensatory interest, and settlement statements. Taxpayers can challenge substantive tax classifications (such as exemption qualifications) and procedural issues (such as VAT deduction methodologies), provided they have active procedural legitimacy to bring the claim.