Process: 29/2015-T

Date: October 15, 2015

Tax Type: IVA

Source: Original CAAD Decision

Summary

In Process 29/2015-T, the Portuguese Tax Arbitration Centre (CAAD) examined whether VAT paid on legal services related to due diligence preparatory to a potential share acquisition was deductible as input tax. The claimant company, engaged in manufacturing electric lamps and lighting equipment, contested an additional VAT assessment of €6,032.39 for December 2009. The Tax Authority (AT) denied the deduction under Articles 4, 20, 21, 23, and 27 of the Portuguese VAT Code (CIVA), arguing that operations involving share negotiations fall outside the VAT scope as they do not constitute economic activities under Article 1(1) CIVA. Consequently, AT maintained that costs associated with such financial operations do not confer the right to input tax deduction. The claimant countered that a direct and immediate causal nexus existed between the due diligence services and its overall economic activity, citing CJEU case law (Cases C-29/08 and C-496/11) and CAAD precedent (Case 128/12-T). The company argued that due diligence constitutes a pre-contractual information-gathering operation that does not itself create legal or financial alterations, distinguishing it from actual securities transactions exempted under Article 9(27)(e) CIVA. Furthermore, the claimant emphasized that these costs formed part of general expenses incorporated into product pricing, supporting deductibility. The dispute centered on whether preparatory advisory services related to potential corporate restructuring maintain sufficient connection to taxable economic activities to warrant VAT recovery, reflecting broader European jurisprudence on the scope of deduction rights for costs linked to share capital transactions.

Full Decision

ARBITRATION DECISION

1. Report

A..., SA, taxpayer no. ..., with registered office at Rua ..., no. ..., ..., requested the constitution of an Arbitral Tribunal pursuant to the corresponding Legal Framework for Tax Arbitration, for examination of the legality of the Value Added Tax assessment, corresponding to additional assessment no. ... in the amount of €6,032.39.

The respondent is the Tax and Customs Authority (AT).

The request for constitution of the arbitral tribunal was presented on 17-01-2015, having been accepted by the President of CAAD on the 19th of that month and notified to AT on that same day.

Pursuant to the provisions of article 6, paragraph 2, subparagraph a), and article 11, paragraph 1, subparagraph b) of the RJAT, the Deontological Council designated the undersigned as sole arbitrator, who communicated acceptance of the appointment within the applicable timeframe.

In accordance with the provisions of article 11, paragraph 1, subparagraph c) of the RJAT, the sole arbitral tribunal was constituted on 17-04-2015.

AT submitted a timely response.

By order of 15 September of the current year and with the agreement of the parties, the meeting provided for in article 18 of the RJAT was dispensed with, as well as the submission of arguments by the parties.

The arbitral tribunal was properly constituted and is competent.

The parties have legal personality and capacity, are legitimate and are properly represented (articles 4 and 10, paragraph 2, of the same statute and article 1 of Order no. 112-A/2011, of 22 March).

The proceedings are not affected by any nullities.

2. Subject Matter of the Dispute

Following an inspection action carried out pursuant to Service Order no. OI2012 ..., which commenced on 10.10.2012 and concluded on 26.02.2013, the Claimant was subject to an additional VAT assessment in the amount of €6,032.39, with reference to the period of December 2009. This additional assessment results from AT considering improper the deduction of VAT supported by the Claimant and which had been levied on legal services fees relating to services preparatory to a possible due diligence to be carried out on the Claimant.

The Claimant, for its part, contests this consequence (non-deductibility of the VAT supported with such services).

The question at issue in the present case thus amounts to determining whether the VAT included in a cost (input) supported by the Claimant is deductible, for purposes of calculating the total amount of VAT owed by it with reference to the period of December 2009.

More specifically, the deductibility of the tax assessed to the Claimant by the service provider was contested by AT, based on articles 4, 20, 21 and 27 (page 4 of the administrative file) and 23 (page 13 of the same file), all of the CIVA, whereas the Claimant maintains, to the contrary, that this amount is deductible under the general terms and under article 23 of the same Code.

2.1 Position of the Claimant

The Claimant contests the assessment in question, arguing that there is a direct and immediate causal nexus between the service to which the VAT relates (preparation of a due diligence prior to a possible acquisition of shares of the Claimant) and the totality of its economic activity (manufacturing of electric lamps and other lighting equipment), thus requesting the annulment of the tax act.

The Claimant does not contest that article 23 of the CIVA addresses the issue of so-called mixed taxable persons, as they carry out operations conferring the right to deduction of VAT supported upstream, alongside operations that do not confer such right, but contends that the said article does not permit the conclusion that the right to deduction of VAT paid upstream for services aimed at the accomplishment of transactions involving transmission or acquisition of share participations is denied. And, in this context, it considers that included within the set of deductible inputs are due diligence operations, which the Claimant describes as a "pre-contractual operation of the company undertaking negotiations, carried out by the transferors or prospective acquirers, aimed at gathering exhaustive information regarding patrimonial, accounting, financial, legal and tax aspects of the company subject to potential restructuring, with the consultancy services in question being provided by specialized entities, normally investment banks, lawyers, auditors and tax and financial consultants". The Claimant further clarifies that such services consist of "a set of information prior to the accomplishment of any operation related to acquisitions and mergers", thus corresponding to the "provision of services (...) which, by itself, does not entail any legal and financial alterations", and that, therefore, such due diligence operations should not be classified "as operations relating to securities for purposes of the provision in subparagraph e) of paragraph 27 of article 9 of the CIVA (Binding Information in Case no. ..., with order of the SDG of Taxes dated 06.07.2012)". The Claimant further adds that "with regard to the right to deduction of VAT assessed to the acquiring entity of the service of 'due diligence', it has been the decision of the CJEU and the Administrative Arbitration Centre (CAAD) that it is granted, given the existence of a direct and immediate relationship between the expenses relating to upstream services and the set of economic activities of the taxable person".

To this end, the Claimant further adds that "the acquisition and merger operation that was envisaged, which moreover turned out not to be realized, formed the basis of the restructuring and reorganization of the company, with a view to its sustained growth and prospects for strengthening internationalization, for which the inherent economies of scale were shown to be an important factor", and accordingly concludes that since "it is all too evident that there is a direct and immediate causal nexus with the set of economic activity of the claimant, the VAT supported in the said expenses is deductible, as follows from the case law of the CJEU (Case no. C-29/08, with judgment of 29.10.2009 and Case no. C-496/11, with judgment of 06.09.2012) and of the CAAD (Case no. 128/12-T, with judgment of 23.04.2013)". In this context the Claimant further notes that such nexus "results from the fact that the costs of the services in question form part of its general expenses, as such accepted as tax deductible expenses, and being, as such, constitutive elements of the price of the goods it supplies or of the services it provides, which in the perspective of the aforementioned case law suffices to confer the right to deduction".

2.2 Position of the Respondent

For its part, AT contested the claim, maintaining the grounds of the tax act.

In summary, AT maintains that "the operations relating to the negotiation of share participations and/or associations of a non-economic activity do not constitute, for VAT purposes, an activity subject to tax, since they do not have express provision in article 1, paragraph 1, of the VAT Code", for which reason they correspond to operations outside the scope of tax, from which it would follow that services subject to and not exempt from tax, "when associated with financial operations", would fall within the scope of an activity that would be outside the field of application of tax, and thus would not confer the right to deduction of VAT supported upstream. In support of its thesis it cites the Court of Justice judgment of 29.04.2009 in case C-77/01 where it states that "(…) the simple sale of shares and other negotiable securities (…) do not constitute economic activities within the meaning of article 4, paragraph 2 of the Sixth Directive 77/388/CEE of the Council, of 17 May 1977 (…) and, therefore, are not covered by the scope of this Directive" and that "(…) it is well-established case law that the mere acquisition and simple holding of share participations should not be considered economic activities within the meaning of the Sixth Directive, which confer upon its author the status of taxable person. Indeed, the mere taking of financial interests in other undertakings does not constitute an exploitation of an asset with a view to obtaining income of a permanent character, because the possible dividend, fruit of such participation, results from the mere ownership of the asset and is not consideration for any economic activity within the meaning of the said directive (…)".

The Respondent likewise cites the conclusions of Advocate General Ján Mázak, presented on 11.12.2007 in case C-437/06, according to which the part of the activity of the taxable person engaged in the accomplishment of operations not included in the concept of economic activity and, therefore, situated outside the field of incidence of VAT, is not capable of conferring the right to deduction of tax supported upstream. And it recalls the conclusion of the CJEU, within the scope of the same case, according to which "(…) when a taxable person simultaneously exercises economic activities, taxed or exempt, and non-economic activities that do not fall within the scope of application of the Sixth Directive, (…) the deduction of value added tax which fell due on expenses related to the issue of shares and atypical hidden participations is permitted only insofar as these expenses can be attributed to the economic activity of the taxable person, within the meaning of article 2, paragraph 1, of this directive."

Finally, AT also cites the opinion of Rui Laires, according to which "(…) when a taxable person simultaneously exercises economic activities, taxed or exempt, and non-economic activities within the meaning of the common VAT system, (…) the deduction of VAT levied on the acquisition of goods and services used in both types of activities is admitted only as regards the portion of use attributable to the economic activities of the taxable person, and is not admitted as regards the portion of use attributable to the respective activities considered non-economic" (in CCTF no. 423, annotation to the Court of Justice judgment of 12.02.2009, Case C-515/07).

In these terms AT concludes that the action is unfounded, given the "non-acceptance of deduction of VAT supported in the acquisition of such services insofar as it is not directly related to operations, downstream, relating to transmissions of goods or provision of services subject to tax and not exempt therefrom", as the Claimant has not "been able to prove the alleged causal nexus between the expenses in question and one or several operations downstream with the right to deduction", without prejudice to the fact that "even if it could be concluded that such services would form part of the Claimant's general expenses, as in the case law relating to holding companies that it cites, which is conceived with caution and by mere duty of representation, still it would have to exist a direct and immediate nexus between these expenses and the set of economic activity of the Claimant, with this party having to have made proof that the costs of the services form part of its general expenses, being, as such, constitutive elements of the price of the goods it supplies or of the services it provides, which did not occur".

3. Matters of Fact

3.1. Proven Facts

a) The Claimant is a commercial undertaking engaged in the activity of manufacturing electric lamps and other lighting equipment, with its outputs thus being subject to VAT and not exempt therefrom, being a taxable person falling within the normal VAT regime, with monthly periodicity, pursuant to article 41, paragraph 1, subparagraph a) of the VAT Code.

b) The Claimant was subject to an inspection action following Service Order no. OI2012 ..., which resulted in an additional VAT assessment relating to the period of December 2009, in the amount of €6,032.39, along with other assessments for Corporate Income Tax and Stamp Tax.

c) This assessment is contained in Collection Document no. ... 2013 ..., for the said amount, with 30 June 2013 as the deadline for voluntary payment.

d) That assessment resulted from the fact that the Claimant had deducted VAT in the aforesaid amount which had been levied on lawyers' fees corresponding to services preparatory to a possible due diligence to be carried out on the Claimant.

e) Such fees are set out in invoice no. ..., dated 09.12.2009 and amount to €30,161.95, having been recorded in the Claimant's accounting.

f) That due diligence was related to a possible negotiation of share participations of the Claimant itself, being directly related to an operation of purchase and sale of shares of the Claimant itself and aimed to prepare a detailed set of information of a legal, financial and patrimonial nature of the undertaking.

g) That acquisition operation was never realized.

h) In the tax act in dispute, AT maintains that "(…) the VAT deducted in the amount of €6,032.39, in document ..., dated 09.12.2009, recorded in accounting in account 2432313 – VAT OBS Normal Rate (…..) is not capable of deduction, as it relates to fees for legal services provided (…) which are related to (…) legal due diligence that will be carried out in the context of the offer of shares representing the share capital of A… (…)".

i) In the grounds it is further stated that having "the operation in question consisted in the study of company participations with a view to making a decision on a merger operation with a Spanish entity, which constitutes operations relating to the negotiation of participations in undertakings and/or associations, operations which in accordance with paragraph 27 of article 9 of the CIVA are characterized as non-economic operations, relating to the activity exercised by the taxable person" which do not confer the right to deduction of VAT supported upstream.

j) From the opinion of the Team Leader of 8/4/13, with a concordant order of the Division Leader of the same date, it appears that the taxable person "improperly deducted VAT from fees for legal services related to the study of share participations when this output did not contribute to the accomplishment of taxable operations".

k) The Claimant submitted, in a timely manner, a gracious objection to that assessment, which was dismissed by order of the Head of the Tax Justice - Contentious Division of the Finance Management of ..., of 10 October 2014.

3.2. Unproven Facts

There was no proof of the existence of any relationship between the services in question and the activity of the Claimant or part thereof, nor that such services were related to the establishment of bases for potential reorganization of the Claimant, specifically that it would pass through a merger involving the Claimant itself in the consequence of the acquisition, by third parties, of share capital portions of the Claimant itself.

3.3. Grounds for the Establishment of the Matters of Fact

The proven facts are based on the allegations of the parties and on the documents offered, whose correspondence to reality is not controversial, with the exception of the said nexus between services and activity.

4. Matters of Law

As has been stated, the question at issue in the present action consists in knowing whether the VAT included in certain services acquired by the Claimant is capable of deduction under the mechanism specific to that tax, under which the amount of VAT owed by the taxable person does not result directly, solely, from the VAT levied by it in the exercise of its activity, as the "debt of the taxable person to the State does not result directly from the application of the rate to the said amount (this operation only provides the determination of the amount of tax to be borne by the customer), but from the difference between the result of that operation and the amount of tax supported in the acquisition of goods and services, during the same period" (José Casalta Nabais, Tax Law, 2010, 6th edition, Almedina).

As the Respondent correctly states, the right to deduction of VAT supported upstream by taxable persons of the tax is the "guarantor of neutrality, a structuring principle of the common Value Added Tax system, is provided for in articles 19 and 20 of the VAT Code and is conditioned to the existence of a direct and immediate relationship between the goods and services acquired (inputs) and the operations which, falling within the perimeter of the concept of economic activity, are taxed". Or in other words, "to confer the right to deduction of VAT supported, the expense must have been incurred by a taxable person as such, the goods and services acquired are intended for actual use in the taxed activity of the taxable person or an exempt activity that confers the right to deduction (exports and like operations) and the expense is not excluded from the right to deduction of VAT (article 20, paragraph 1 of the CIVA)" – Cidália Lança, Value added tax, in Lessons in Taxation, João Ricardo Catarino and Vasco Branco Guimarães (Coord.), 2012, Almedina, page 311. From this it follows that, for what now concerns us, deduction is conditioned, from the outset, to the actual use of the services acquired in an activity of the taxable person, and then it must be determined whether or not they are deductible, in accordance with the rules of the institute of the right to deduction.

Nexus with the Activity of the Claimant

But this is equivalent to, even before inquiring into the nexus of the input (or operations carried out upstream) with possible outputs (or operations carried out downstream) that confer the right to deduction, in knowing whether such inputs have any relationship with the outputs of the taxable person, i.e. whether they are in any way related to its activity (whether the inputs will be effectively used in an activity of the taxable person, in accordance with what was stated above). Indeed, article 20, paragraph 1 of the CIVA, before seeking to know whether the tax supported is included in one of its subparagraphs, a) or b), presupposes that the expense falls within its body, in the sense of presupposing (rather, imposing) that the tax has been levied on goods or services acquired, imported or used by the taxable person for the accomplishment of its own operations. Only if this is so will there then need to be determined whether such operations (outputs) correspond to transmissions of goods and provision of services subject to and not exempt from tax (subparagraph a) of that paragraph) or to operations that fall within subparagraph b) of the same paragraph.

Now, it is unequivocal, as it is uncontroversal, that the services that gave rise to the fees to which was added the VAT whose deduction is controversial, "had as their objective the analysis of documentation at a moment prior to the legal due diligence that would be carried out in the context of the offer of shares representing the share capital of the Claimant". From this it follows that it was considered possible an eventual negotiation aimed at the transmission of all or part of the share capital of the Claimant and that, as is normal, it was anticipated that the acquirer would intend to carry out a due diligence on the Claimant (entity subject to the potential acquisition, total or partial), to protect its negotiating and contractual position. It is therefore not surprising that, as normally occurs, the shareholder or shareholders of the undertaking whose share capital portions would be subject to negotiation and transmission (in the capacity of potential transferors, therefore), would wish to have advance notice of the themes potentially controversial that could arise from a due diligence to be carried out by one or more prospective acquirers, having therefore engaged a law firm to carry out prior analytical work that would permit this desired advance notice. Advance notice that, naturally, would favor the negotiating position of the transferors of the share capital portions and, therefore, could facilitate the conclusion of the desired transmission on terms more favorable to the transferors.

It thus appears clear that the operation would not be related to the activity of the Claimant, but rather to the activity of its shareholders, as the service consisted in the preparation of a due diligence to be carried out by one or several acquirers, for the benefit of an operation (transmission of share capital portions) by the shareholders of the Claimant and their respective negotiating and contractual position. It is therefore an operation related to the activity of the prospective transferor(s), not of the entity whose share capital portions could come to be transmitted. It is therefore irrelevant to know whether the operation would be related to an economic activity or not of the Claimant. In these terms the question is posed incorrectly. What is at issue is whether the service is in any way related to the activity of the Claimant. And the answer cannot be other than negative. As is evident, it is in no way related to the activity of the Claimant. Rather, it is related to the activity of the holder(s) of the respective share capital. It should therefore be a cost of the potential transferor and it would be within that legal sphere that the deductibility, or not, of the VAT supported should be assessed. In the Claimant that VAT should not be deductible as the link (nexus) with its activity fails, whatever it may be.

Burden of Proof

And even if doubts remained about the existence of relationship, or nexus, between the expense and the activity of the Claimant, contrary to what the rules of normality and experience would dictate, the fact is that the Claimant did not make proof of that same relationship, when it was incumbent upon it to bear such burden, in accordance with article 74 of the LGT.

In fact it is not clear what the Claimant intended to acquire share participations of another entity in order to, incorporate by merger the respective assets or be itself incorporated by merger in the other entity, with a view to improving the conditions of operation of its economic activity. Rather, it was allegedly intended to analyze the acquisition of share portions of the Claimant by another entity. And only after that acquisition, should it occur, perhaps would there then come, mediately, the possibility of there occurring an eventual further operation, now of merger. But such operation, if it existed, would be remote and manifestly uncertain, and therefore incapable of justifying any due diligence promoted by the Claimant at the time that it was promoted. Moreover, such operation, whose plausibility was not even demonstrated, would, moreover, be quite improbable, as it is known that the merger that allegedly would be envisaged would be a transnational merger, with a foreign entity, and therefore quite complex and with material consequences. Now, once again, the rules of normality and experience dictate that such a possible merger, improbable, given its transnational nature, would always be posterior to the acquisition. Thus, in a direct manner, the due diligence and, therefore, also the services preparatory to it, are directly connected with the activity of the shareholder(s) of the target undertaking and not with the activity of the latter.

Grounds of the Tax Act

And if it be questioned whether the framework explained above finds expression in the motivation of the tax act, there must be concluded affirmatively. For this conclusion flows unequivocally from the grounds of the act in dispute, based on the presupposition that the Claimant "improperly deducted VAT … with … study … when this output did not contribute to the accomplishment of taxable operations", that is, to the accomplishment of the activity of the Claimant, or of any operation to be carried out by it. Whereby the VAT supported is not related to the activity of the Claimant, and it is further certain that, as the Respondent affirms, at least, it is not demonstrated, in this context, what the relationship of the corresponding services is with the activity of the Claimant, all the more so as these are rather directly related to an operation of purchase and sale of shares of the Claimant itself (in which it is, therefore, the "target" and not a "party").

As the AT correctly states and follows from the grounds of the act, (see the opinion of the Team Leader of 8/4/13, with a concordant order of the Division Leader of the same date, in which it is concluded that the taxable person "improperly deducted VAT from fees for legal services related to the study of share participations when this output did not contribute to the accomplishment of taxable operations") the "deduction of VAT supported in the acquisition of such services should not be accepted insofar as it is not directly related to operations, downstream …" and the Claimant has not "been able to prove the alleged causal nexus between the expenses in question and one or several operations downstream …", not being demonstrated "a direct and immediate nexus between these expenses and the set of economic activity of the Claimant". In other words, it is not concluded that the goods and services acquired were intended for actual use in the activity of the taxable person (see Cidália Lança, op. cit.).

Conclusion

It is not, therefore, in the present case a matter of any issue relating to the interpretation of national legislation in conformity with Community law, in the case in question, with regard to the right to deduction of VAT supported upstream by mixed taxable persons, as they carry out any combination of operations subject to and exempt from tax, operations subject to but exempt from tax, or operations not subject. Rather, it is a matter of the right to deduction of VAT supported by passive operations that relate to the activity of another economic agent and not to the activity of the agent that in practice bore the expense and, therefore, also the VAT. And as we have seen the answer is negative.

Whereby it continues that the nexus between the input in question and the outputs, or activities, whatever they may be, of the Claimant is not verified, or demonstrated.

Concluding, the question should not be posed at the level of the link of the inputs with activities connected with subparagraph a) or subparagraph b) of paragraph 1 of article 20 of VAT, but rather (solely) with the accomplishment of activities by the taxable person. It is not so much a matter of concluding by the "non-acceptance of deduction of VAT supported in the acquisition of such services insofar as it is not directly related to operations, downstream, relating to transmissions of goods or provision of services subject to tax and not exempt therefrom", but rather of refusing this deductibility for the non-existence of any relationship with any operations of the Claimant to be carried out downstream. And it is incumbent on the Claimant the absence of proof of the "alleged causal nexus between the expenses in question and one or several operations downstream with the right to deduction", that is, of "a direct and immediate nexus between these expenses and the set of economic activity of the Claimant", this party not having been able to demonstrate "that the costs of the services form part of its general expenses, being, as such, constitutive elements of the price of the goods it supplies or of the services it provides".

For, as the Claimant recognizes, a due diligence corresponds to a "pre-contractual operation … carried out by the transferors or prospective acquirers" and therefore does not relate to operations to be carried out by the acquiree but by third parties, reason for which it has no right when it concludes for the existence of "a direct and immediate relationship between the expenses relating to upstream services and the set of economic activities of the taxable person", or there exists a "direct and immediate causal nexus with the set of economic activity of the claimant".

In these terms it is not seen that the tax act in question merits censure, and should thus remain established in the legal order.

5. Operative Part

In accordance with the above, it is decided to judge the claim to be wholly unfounded with the legal consequences.

6. Value of the Proceedings

In accordance with the provision of article 306, paragraphs 1 and 2, of the CPC and article 97-A, paragraph 1, subparagraph a) of the CPPT and article 3, paragraph 2 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at €6,032.39.

7. Costs

Pursuant to article 22, paragraph 4 of the RJAT, the amount of costs is fixed at €612.00 (six hundred and twelve euros), in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, entirely at the charge of the Claimant.

Text elaborated by computer, in accordance with the Code of Civil Procedure (CPC), applicable by reference of article 29, paragraph 1, subparagraph e) of the RJAT, with blank lines.

Lisbon, 15-10-2015

The Sole Arbitrator

(Jaime Carvalho Esteves)

Frequently Asked Questions

Automatically Created

Is VAT paid on legal services related to share negotiations deductible as input tax in Portugal?
VAT deductibility on legal services related to share negotiations in Portugal depends on establishing a direct and immediate nexus between the services and the taxable person's overall economic activity. While the Portuguese Tax Authority typically denies deduction by classifying share transactions as outside the VAT scope under Article 1(1) CIVA, taxpayers can successfully challenge this position by demonstrating that preparatory services like due diligence constitute general business costs incorporated into pricing of taxable outputs. CAAD and CJEU case law (C-29/08, C-496/11) support deduction where such costs relate to business restructuring and sustainable growth rather than mere passive shareholding.
What are the legal grounds under Articles 20 and 23 of the Portuguese VAT Code for input tax deduction?
Article 20 CIVA establishes the general right to deduct input VAT on goods and services acquired for taxable business activities. Article 23 CIVA addresses 'mixed' taxable persons who perform both operations conferring deduction rights and operations that do not, requiring pro-rata calculations. The key legal test is whether a direct and immediate relationship exists between the upstream costs and either specific taxable transactions or the taxpayer's economic activity as a whole. Costs forming part of general expenses that constitute price elements of taxable supplies typically qualify for deduction, even when connected to corporate restructuring activities.
Can the Portuguese Tax Authority deny VAT deduction on costs connected to share capital transactions?
The Portuguese Tax Authority can deny VAT deduction on costs connected to share capital transactions by invoking the principle that mere acquisition, holding, or sale of shares does not constitute an economic activity under Article 4(2) of the EU VAT Directive, as these operations fall outside the VAT scope per Article 1(1) CIVA. However, this denial can be challenged when the services represent preparatory advisory work (due diligence, consultancy) rather than the share transaction itself, and when the taxpayer demonstrates these costs support their broader taxable business operations, represent general overhead expenses, or relate to business restructuring for commercial purposes rather than passive investment.
How does CAAD arbitration resolve disputes over additional VAT assessments on professional service fees?
CAAD arbitration resolves disputes over additional VAT assessments on professional service fees by examining whether a direct and immediate causal nexus exists between the contested costs and the taxpayer's economic activity. The tribunal evaluates whether services constitute actual exempt financial transactions or preparatory business activities, analyzes the commercial purpose (e.g., restructuring for growth versus passive investment), reviews CJEU precedents on input tax deduction scope, and determines if costs form part of general expenses incorporated into taxable output pricing. CAAD applies the principle that costs with sufficient connection to the overall taxable business qualify for deduction even when indirectly related to non-taxable operations.
What criteria determine whether VAT on upstream costs qualifies for deduction under Portuguese tax law?
Under Portuguese tax law, VAT on upstream costs qualifies for deduction when: (1) a direct and immediate relationship exists between the input and either specific taxable output transactions or the economic activity as a whole; (2) the costs constitute general business expenses incorporated into pricing of taxable supplies; (3) the services relate to the taxpayer's economic activity rather than activities outside the VAT scope; (4) the taxpayer is conducting taxable operations conferring deduction rights; and (5) proper documentation exists. The nexus test examines whether costs serve business purposes like restructuring, growth, and operational efficiency rather than passive non-economic activities like simple shareholding.