VAT Deduction Rights for SGPS Holding Companies – CAAD Arbitration 299/2016-T

ARBITRAL DECISION

Claimant: A..., SGPS, S.A.

Respondent: TAX AND CUSTOMS AUTHORITY

I. REPORT

1. A..., SGPS, S.A., (hereinafter referred to as Claimant) legal entity no. ..., with a share capital of €40,000,000.00, registered in the ... Section of the Commercial Registry of Porto, with registered office at Rua ..., no. ..., ..., Room ..., in the city of Porto, filed on 01 June 2016 a petition for the constitution of an arbitral tribunal, pursuant to the provisions of paragraph a) of no. 1 of article 2 and article 10, nos. 1 and 2 of Decree Law no. 10/2011, of 20 January (hereinafter referred to as RJAT) and of articles 1 and 2 of Regulation no. 112-A/2011, of 22 March, whereby the Tax and Customs Authority (hereinafter referred to as AT or Respondent) is requested to declare the illegality and consequent annulment of eight additional VAT assessments, as well as three assessments of the corresponding compensatory interest, referring to the tax years 2011 and 2012, better identified, respectively, as follows:

• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,
• additional assessment no. ...,

in the amount of €55,120.51, and,

Regarding compensatory interest:

• assessment no. ...,
• assessment no. ...,
• assessment no. ...,

in the amount of €3,402.63.

1. The petition for the constitution of the Arbitral Tribunal was accepted by His Excellency the President of the CAAD on 03 June 2016 and was immediately notified to the Respondent in accordance with legal requirements.

2. In accordance with and for the purposes of the provisions of paragraph a) of no. 2 of article 6 of the RJAT, by decision of His Excellency the President of the Deontological Council of the CAAD, duly notified to the parties within the prescribed periods, the undersigned was designated as arbitrator, who communicated acceptance of the responsibility to the Deontological Council and to the Administrative Arbitration Centre within the period stipulated in article 4 of the Deontological Code of the Administrative Arbitration Centre.

3. The Sole Arbitral Tribunal was constituted on 05 August 2016, in accordance with the requirement of paragraph c) of no. 1 of article 11 of the RJAT, as amended by article 228 of Law no. 66-B/2012, of 31 December.

4. On 05 October 2016, an arbitral order was issued and duly notified to the parties, which justified the waiver of the holding of the hearing referred to in article 18 of the RJAT, granted the parties the opportunity to submit written arguments, and set the date for the pronouncement of the decision.

5. The Claimant on 17 October submitted written arguments, wherein it fundamentally reiterates and defends the position it had already evidenced in its initial pleading.

6. On 28 October 2016, the AT submitted its written arguments wherein it reiterates and argues for the dismissal of the petition formulated by the Claimant, in accordance with what was already expressed in its response.

7. On 23 November 2016, an arbitral order was issued, duly notified to the parties, regarding the extension of the period for the pronouncement of the decision and its notification.

8. To substantiate its petition, the Claimant alleged, in very brief summary, and with particular relevance the following:

a. "The Claimant is a management company holding participations ("SGPS"), constituted under Decree Law no. 495/88, of 30 December, whose corporate purpose is the holding and management of shareholdings, as an indirect form of exercising economic activities" (see article 1 of the petition for arbitral determination),

b. "The Claimant plays a fundamental role in leading the continued effort of growth and expansion of B..., by virtue of its status as a holding company of this business group" (see article 2 of the petition for arbitral determination),

c. "It is thus within this context that the Claimant carries out the following activities:
i) Provision of management services to the subsidiaries;
ii) Financing to the subsidiaries; and
iii) Holding of shareholdings (see article 3 of the petition for arbitral determination);

d. "In order to provide services to its subsidiaries, indicated in i) above, the Claimant resorts, primarily, to the management services provided by C..., Lda." (see article 4 of the petition for arbitral determination),

e. "In this context, the Claimant entered into a management services provision contract with C..., assuming its entire corporate and administrative structure, and ensuring the executive management thereof, namely at the level of advisory services within the scope of acquisition processes, in shareholder representation in subsidiary companies and, also, at the level of co-investment" (see article 5 of the petition for arbitral determination),

f. "In turn, the Claimant entered into management services provision contracts with its subsidiaries, namely with D..., E..., F..., SA ("..."), G..., H... SGPS, SA ("H...") and I..., SA ("I...") (see article 6 of the petition for arbitral determination),

g. "(...) the Claimant simultaneously carries out operations subject to VAT, which confer the right to deduct the tax, i.e., provision of management services to its subsidiaries – and operations exempt from VAT – e.g., the granting of financing to its subsidiaries" (see article 8 of the petition for arbitral determination);

h) "within this scope, the Claimant used, in compliance with tax rules (e.g., article 23 of the VAT Code), for the purposes of VAT deduction, simultaneously, the methods of deduction based on actual allocation and the pro-rata method" (see article 9 of the petition for arbitral determination);

i) "(...) the Claimant effectively provides services (of management) subject to VAT, to its subsidiaries (...)" [see article 27 of the petition for arbitral determination];

j) "(...) the Claimant deducted the upstream tax incurred, by application of the pro-rata method, since (...) it carries out taxable operations (e.g., provision of services to subsidiaries) and also exempt operations that confer the right to deduction" (see article 29 of the petition for arbitral determination);

k) culminating its substantiation (articles 95 and 96 of the ppa) in the following terms:

j1) "Based on the interpretation of the law, as well as on Community and national jurisprudence in this respect, the Claimant herein calculated, for the years in question, deduction percentages of 100%, as results from the calculations presented in Docs, nos. 14 and 15" from which "it results that the VAT deducted, in the years 2011 and 2012, in the amount of €146,124.78 and €119,012.87, respectively, is in compliance with the applicable rules";

l) concluded its petition by requesting the "full annulment of the VAT assessments (in the amount of €55,120.51) and compensatory interest (in the amount of €3,402.63), in the total amount of €58,523.14, with the consequences arising therefrom, including the payment of indemnifying interest in accordance with the terms of articles 100 of the LGT."

1. The AT, duly notified for this purpose, submitted its response in a timely manner, sustaining a perspective contrary to that presented by the Claimant, and dissenting therefrom, in accordance with the position it had already assumed in the Tax Inspection Report, which can be essentially reduced to the following: the fact that the Claimant is a management company holding participations (SGPS) whose legal regime set out in Decree Law no. 495/88, of 30 December, determines that its contractual purpose is "the management of shareholdings of other companies, as an indirect form of exercising economic activities" and notwithstanding no. 1 of article 4 of the normative in question, allowing SGPS "(…) the provision of technical administration and management services to all or some of the companies in which they hold the participation provided for in no. 2 of article 1, or with which they have entered into a subordination contract" such activities are considered merely accessory, are not considered covered by the concept of "economic activity" for VAT purposes, and do not permit the exercise of the right to full deduction of the upstream tax borne by the Claimant.

It further emphasizes the importance of distinguishing between the concepts of "economic activity" and "non-economic activity" for VAT purposes, with recourse to the jurisprudence of both the CJEU and national courts and administrative doctrine, to conclude that the right to deduction of the tax deducted by the Claimant in 2011 (€146,124.78) is excluded with respect to:

(i) Expenses for services provided by C...: €132,586.11;
(ii) Expenses for Official Audit of Accounts: €2,530.00;
(iii) Expenses with Lawyers: €6,394.00;
(iv) Expenses directly related to the acquisition of financial participations: €4,370.00,

as well as the total tax deducted by the Claimant in the year 2012 (€119,012.87) with respect to:

(i) Expenses for services provided by C...: €117,012.87:
(ii) Expenses for Official Audit of Accounts: €1,326.53

(see Tax Inspection Report, pages 15 and 17 and tables therein inserted, which are hereby reproduced.

1. The Arbitral Tribunal is materially competent, is regularly constituted, in accordance with articles 2, no. 1, paragraph c), 5 and 6, no. 1 of the RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented, (articles 3, 6 and 15 of the CPPT, pursuant to article 29, no. 1, paragraph a) of the RJAT).

3. There is thus no obstacle to the examination of the merits of the case.

II - SUBSTANTIATION

A. MATTER OF FACT

A.1. Facts established as proven

a. The Claimant is a commercial company, with registered office in national territory whose corporate purpose is "the management of shareholdings of other companies, as an indirect form of exercising economic activities" subject to the specific legal regime of management companies holding participations (SGPS) approved by Decree Law no. 495/88, of 30 December, with the amendments introduced thereto;

b. Alongside the exercise of the aforesaid activity, the Claimant engages in other operations, namely, the granting of financing to its subsidiaries, as well as the provision of administration and management services:

c. For VAT purposes, the Claimant is subject to the normal regime with quarterly periodicity, in accordance with paragraph b) of no. 1 of article 41 of the VAT Code;

d. The Claimant, applying 100% deduction in the calculation of the pro-rata for the year 2011, deducted VAT in the amount of €146,124.78 and in 2012 in the amount of €119,012.87.

e. The Tax and Customs Authority conducted external tax inspection procedures under service orders nos. OI 2014... and OI 2015... of a general nature for the periods of 2011 and 2012.

f. As a result of that inspection action the AT prepared the Tax Inspection Report whose copy is part of the attached administrative proceedings, whose content is hereby reproduced, in which it is noted among other things the following:

"(...) the second paragraph of no. 1 of article 9 of Directive 2006/112/CE of 28 November, of the Council on VAT provides that economic activity shall be 'any activity of production, commercialization or provision of services, including extractive, agricultural and liberal professions or equivalent activities. In particular, economic activity is considered to be the exploitation of tangible or intangible property with the aim of obtaining revenue of a permanent character'.

"On the other hand, the Court of Justice of the European Communities (now Court of Justice of the European Union) defined that the following are outside the concept of economic activity:

• Dividends from shareholdings;
• Capital gains from the sale of shares or other negotiable securities;
• Income from investments in investment funds;
• Interest on bonds;
• Interest due by the occasional granting of credit by holdings using the dividends distributed by the subsidiaries;
• Capital contributions to companies;
• Issuance of shares representing the capital of a commercial company"

"This is also the understanding upheld by the Tax Administration contained in Circular Memorandum no. 30103, of 23 April 2008, of the Office of the Deputy General Director, Area of Tax Management – VAT, wherein it in its 'Section VII - Concepts - B - Operations excluded from the concept of economic activity, proceeds to a clarification in the sense and scope of the provisions of article 23 of the VAT Code, which came to apply, precisely, the Community discipline on the deduction regime'

"From the foregoing, there is no doubt that the main activity of SGPS, of management of the shareholdings held, cannot be considered as economic, which is why the legal regime itself of the latter qualifies as 'indirect form of exercising economic activities', as was already mentioned above."

"Moreover, this understanding is in line with the legislation (Directive 77/388/CEE, of 17 May and Directive 2006/112, CE of 28 November) and Community jurisprudence (Satam and Polysar, Securenta judgments), and the Community regulations referred to were transposed into internal legislation, with the publication of the State Budget of 2008, which determined the amendment of article 23 of the VAT Code, precisely to proceed with its harmonization"

"Because this type of activity is qualified as the main activity, namely, for the purposes of the Legal Regime of SGPS, a number of resources are allocated thereto, since its development implies, among other activities, the acquisition of advisory and/or audit services related to the potential acquisition of strategic participation; evaluation of investment opportunities; actions aimed at evaluating projects for development and internationalization of the group, etc. These services are indispensable to provide decision-makers with all relevant information for the taking of options and decisions, so as to achieve the strategic objectives of the group represented thereby, aiming to encourage and regulate, in a centralized manner, the harmonization of a set of common management policies for the companies that make up the economic group, namely, in the financial, commercial, production, investment and disinvestment areas"

"As regards the provision of services to subsidiaries, it is indisputable that it is permitted for SGPS, in certain circumstances, to develop these activities (in parallel with the activity of management of shareholdings) which are, however, merely accessory thereto."

"With respect to these operations covered by the scope of VAT, susceptible of being carried out by SGPS in complement of its main activity, the provision of technical services to subsidiary companies stands out, which are subject to tax, configuring, in view of the residual concept contained in no. 1 of article 4 of the VAT Code, services effectively taxed, with the right to deduction relative to the inputs directly allocated thereto"

"On the other hand, in the area of operations included in VAT scope but exempt therefrom, are the operations of granting credit to the subsidiary companies, bank deposits and investments in securities within the scope of treasury operations, insofar as they constitute the counterpart to the placement of capital at the disposal of third parties, as well as any revenues resulting from the rental of immovable property for the installation of the subsidiary companies. In this case, given the exemption to which they are subject, as a rule, these activities do not confer the right to deduct the tax included in the inputs used for their realization."

"To that extent, it is concluded that, as a general rule, SGPS do not constitute a taxable person with the right to full (100%) deduction of the upstream VAT borne with the acquisition of goods and services, since, as was stated, the main activity developed does not fit within the concept of economic activity, and the other activities are merely complementary, reflex, and accessory thereto, depending on its existence".

"The right to deduction is provided for in no. 1 of article 20 of the VAT Code, according to which:

"1. Only the tax that has been levied on goods or services acquired, imported or used by the taxable person for the realization of the following operations may be deducted:

a) Transfers of goods and provision of services subject to the tax and not exempt therefrom;

b) Transfers of goods and provision of services consisting of:

i) Exports and exempt operations in accordance with article 14;

ii) Operations carried out abroad that would be taxable if carried out in national territory: (…)

"From the application of these rules it follows that an SGPS, when it acquires certain goods and services to use them, exclusively and entirely, in the provision of technical administration and management services to subsidiaries (as is permitted to it, in an accessory capacity, by the legal regime of SGPS, which, in principle, will be considered economic activities, taxed and with the right to deduction), may fully deduct the tax borne. In the inverse situation, the acquisitions of goods and services being used only and exclusively in the exercise of the activity of management of shareholdings, the right to deduction shall be entirely barred.

"Furthermore, if we are facing goods and services used to perform both operations with the right to deduction and without the right to deduction, the right to deduction of the tax borne is limited to the part of the VAT proportional to the amount relating to the first operations by force of the provisions of article 173 of the VAT Directive, transposed into the VAT Code through article 23"

"At this particular point, attention must be paid to what is contained in Circular Memorandum no. 30103, previously identified, in particular in sections IV, V and VI, where it is provided that 'in the case of goods and services of mixed use partially allocated to the realization of operations not arising from an economic activity, the determination of the amount of non-deductible VAT relating to these cannot be based on the pro-rata method provided for in no. 4 of article 23 of the VAT Code, and must mandatorily use actual allocation based on the actual use', resorting to objective criteria/allocation keys to be defined in the concrete case."

"Thus, for there to be recognition of the right to deduction, it is necessary that there be a functional/causal relationship between the input and the taxable activity, and also an economic relationship, that is, a reflection at the level of the outputs."

"This means that to confer the right to deduction, it is required that the services acquired not only have economic substance but also that an effective interconnection and dependence between the inputs and the outputs can be established, on the assumption that the price of the downstream operations, which are embodied in the provision of administration and management services, incorporates the upstream cost incurred. Therefore, for there to be no limitations to the right to deduction it is necessary that the taxable person objectively demonstrates the verification of these assumptions"

g. Following the conclusions of the inspection, the AT made corrections to the VAT of 2011, in the amount of €34,907.14 and €20,213.37, with respect to the year 2012, which are the origin of the controversial additional assessments.

h. Following the corrections made, the AT proceeded to assess compensatory interest,

i). On 01 June 2016, the Claimant submitted the petition for arbitral determination which gave rise to the present proceedings.

A.2. Facts established as not proven

It was not proven that the Claimant provided any guarantee under the provisions of article 199 of the CPPT.

A.3. Substantiation of the matter of fact established as proven and not proven

With respect to the matter of fact, the tribunal does not have to rule on everything that was alleged by the parties, as it falls upon it the duty to select the facts that matter for the decision, to discriminate the proven from the not proven matter [(see art. 123, no. 2 of the CPPT, and article 607 of the Code of Civil Procedure, applicable, pursuant to article 29, no. 1, paragraphs a) and e) of the RJAT)].

Thus, the facts relevant to the judgment of the case are chosen and cut according to their legal relevance, which is established in view of the various plausible solutions to the question(s) of law (see article 596 of the CPC, applicable pursuant to article 29, no. 1, paragraph e) of the RJAT),

Thus, taking into account the positions assumed by the parties, the documentary evidence joined to the file and the attached PA, the facts listed above are considered proven as relevant to the decision.

B. OF LAW

The issue that is the object of the present proceedings, framed by the matter of fact established, is whether the corrections carried out by the AT, which gave rise to the additional assessments here in question, comply with the rules governing VAT deduction at the level of European law and internal law and with the administrative and judicial interpretation that has been carried out thereon, especially by the CJEU.

In fact, and as has come to be peacefully understood by jurisprudence and is a corollary of the mandatory preliminary ruling requirement provided for in article 267 of the Treaty on the Functioning of the European Union, the jurisprudence of the CJEU has a binding character for national courts when it has as its object questions connected with European Union Law.

Although the identification of some characteristics inherent to VAT and the observation of some consensus generated around it constitute a common and consensual place, when we address the issue of the right to exercise deduction in the case of holding companies (fundamentally managerial holdings), some specific questions continue to arise regarding the methods of VAT deduction, whether from the perspective of the fullness of its deduction, or that related to goods of mixed use, thus imposing an even if very brief foray, by way of introduction, into the conceptual analysis relating to the neutrality of the tax, the right to deduction, economic and non-economic activities and general expenses or charges.

Reserving for a later time, and in a brief note, the identification of some arbitral decisions handed down within the scope of the CAAD, where questions with similar factual similarity to those underlying the present proceedings were decided.

The right to deduction embodies one of the principal characteristics of VAT through which the structuring principle of tax neutrality is ensured, assuming particularities and focus of divergent interpretative approaches, at the jurisprudential, doctrinal and administrative level, when we are faced with mixed taxable persons, and, in particular before "holding" companies.

This neutrality will be realized according to Sérgio Vasques [1] in the sense that "neutral tax is that which does not interfere in the decisions of economic agents, leaving producers the freedom to choose what to produce and how to produce it (producer neutrality), while leaving consumers the freedom to choose what to consume without diverting them from their natural inclination (consumer neutrality). Realized in this way, neutrality is a notion that arises linked in the first place to the notion of economic efficiency, and as a rule it is when the choices of producers and consumers are left unchanged that an optimal allocation of resources in the market is achieved".

In a simple approach it can be said that the right to VAT deduction, a crucial mechanism to ensure neutrality, confers on taxable persons the right to deduct from the amount of tax of which they are debtors, the VAT incurred in their acquisitions of goods and services when the same have as their purpose the realization of operations that confer the right to deduction, that is, the realization of the principle of neutrality is only ensured in the circumstance that taxable persons relieve themselves of the same, subtracting the VAT incurred in their inputs from the VAT they charge on their outputs.

The right to deduction arises at the moment when the tax becomes exigible (article 167 of the VAT Directive and article 22, no. 1 of the VAT Code) and, as a rule, only the tax that has been levied on goods or services acquired, imported or used by the taxable person, for the realization of taxable operations, can be deducted (article 168 of the VAT Directive and article 20, no. 1 of the VAT Code),

With respect to goods and services used by a mixed (or partial) taxable person to carry out operations with the right to deduction, as operations without the right to deduction, this is only permitted with respect to the part of the VAT proportional to the amount relating to the first category of operations (articles 173 VAT Directive and article 23, nos. 1 and 2 of the VAT Code.

"The rules for the exercise of the right to VAT deduction contemplate a series of requirements for this purpose, some more linked to the type of expenses, others to the taxable person in question, so that we can distinguish between objective and subjective requirements for the exercise of the right to deduction" [2]

Synoptically and with respect to the methods, in general, that the VAT taxable person has at its disposal to exercise its right to VAT deduction, there must be considered the indirect subtractive method, the carry-forward method and the reimbursement method and, for what will matter here the pro-rata method or the percentage of deduction and the actual allocation method, for mixed taxable persons.

The general rule of the right to deduction is found in article 168 of the VAT Directive in the following sense: "when goods and services are used for the purposes of its taxable operations, the taxable person has the right, in the Member State in which it carries out these operations, to deduct from the amount of the tax of which it is debtor, the following amounts (….)".

Prevailing in the internal order the provisions of article 19 of the VAT Code:

"1. For determining the tax due, taxable persons deduct, in accordance with the following articles, from the tax levied on the taxable operations they carry out:

a) The tax due or paid for the acquisition of goods and services from other taxable persons:

b) The tax due for the import of goods,

c) The tax paid for the acquisition of goods or services covered by paragraphs e), h), i), j) and l) of no. 1 of article 2;

d) The tax paid as the recipient of taxable operations carried out by taxable persons established abroad, when the latter do not have a legally accredited representative in the national territory and have not invoiced the tax;

e) The tax paid by the taxable person on the exit of goods from a non-customs warehouse regime, in accordance with no. 6 of article 15"

Contemplating no. 2 of the normative in question the essential formal requirements for the exercise of the right to deduction.

It is not a matter of controversy, in the present case, the quality of mixed taxable person conferred on the Claimant insofar as, and put in simple form, it engages in the pursuit of its activity operations that confer the right to deduction and operations that do not confer such right.

No. 1 of article 23 of the VAT Code (as amended by article 52 of the State Budget Law for 2008 (Law no. 67-A/2007, of 31 December) regulates the methods of deduction relative to goods of mixed use, in the following sense:

"1. When the taxable person, in the exercise of its activity, carries out operations that confer the right to deduction and operations that do not confer that right, in accordance with article 20, the deduction of the tax borne in the acquisition of goods and services that are used in the realization of both types of operations is determined as follows:

a) In the case of a good or service partially allocated to the realization of operations not arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2, the non-deductible tax resulting from that partial allocation is determined in accordance with no. 2;

b) Without prejudice to the provisions of the preceding paragraph, in the case of a good or service allocated to the realization of operations arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the amount of the annual operations that give rise to deduction".

The taxable person may also, in view of the provision of no. 2 of the aforementioned article 23 of the VAT Code: "notwithstanding the provisions of paragraph b) of the preceding number (…)" carry out the deduction according to the actual allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of these goods and services in operations that confer the right to deduction and in operations that do not confer that right, without prejudice to the General Tax Authority coming to impose special conditions on it or to cease that procedure in the event that it is verified that they cause or can cause significant distortions in taxation".

The normative in question contains the transposition of article 173 of the VAT Directive providing as methods of deduction, under the conditions provided therein, the pro-rata percentage deduction method, based on the relationship between the volumes of business generated by activities that allow the deduction of the tax borne and by activities that do not allow such deduction, and the actual allocation method, linked to the actual use of goods and services acquired by the taxable person.

The regime provided for in article 23 of the VAT Code raises, from the outset, the problem of delimiting the concept of "operation not arising from the exercise of an economic activity", which has been the subject of extensive pronouncement by Community jurisprudence regarding holding companies.

The position of the AT with respect to this segment is what emerges from its position set out, whether in its response or in the attached proceedings, (Tax Inspection Report) partially transcribed above, and it can be concluded from already and in our understanding, that the considerations made by the AT diminish the necessary distinction that should be made as to the activities conducted by a holding company of a strictly financial character, from those other cases in which there is what the doctrine designates by mixed holding or managerial holding, that is, citing point 13 of the Polysar Judgment (C-60/90), (…) "when the participation is accompanied by direct or indirect interference in the management of the companies in which the participation was made".

In the case of the present proceedings, the expenses incurred by the Claimant arising from the services provided by C..., with the official audit of accounts and with lawyers (this expense being only evidenced in the year 2011) are in question.

The first note to be retained is that the fact that the Claimant is the sole client of C..., and between both entities there is a contract entered into on 2009-07-10, under the terms of which this "undertakes to provide all management services that A... SGPS, S.A., may request of it, assuming its entire corporate and administrative structure and ensuring the executive management of A... SGPS, S.A. and reporting directly to its administration, including therein, designated but not exhaustively: Advisory services within the scope of acquisition processes – identification and selection of targets (...), management of the negotiation process (...), final structuring of the operation and closing (...) - Shareholder representation in subsidiary companies of A... SGPS, S.A., and Co-Investment" and, on the other hand, there being contracts between the Claimant and several of its subsidiaries, did not contribute to inferring therefrom, without more, that the tax borne by the Claimant with the services provided by said C..., is deductible only, to the exact extent of the part that was "recharged" to its subsidiaries, in the expression used by the AT.

The second of the notes to be registered, citing the arbitral decision of 2015-10-20 within the scope of arbitral proceedings no. 15/2015-T, and the laborious considerations that therein stand out, which making theirs as well are welcomed in their entirety in the situation at hand, identify various decisions handed down by the CJEU, (with undeniable relevance to the matter that convenes us), is the following:

"(...) the CJEU, with respect to the acquisition of financial participations, has already ruled that the situation is different, falling within the scope of the exercise of an economic activity, in the event that the acquisition of a financial participation in a company is accompanied by '(...) direct or indirect interference in the management of the company (...), insofar as such interference implies the realization of transactions subject to VAT in accordance with the VADC, such as the provision of administrative, accounting and computer services.

The CJEU distinguishes, to this extent, holdings that interfere, directly or indirectly, in the management of the subsidiaries, from those that do not."

It is further retrieved from arbitral proceedings no. 77/2012-T, of 27/12/2012, where also costs incurred with a managerial holding company were in question, where the AT understood that various goods and services had been exclusively used in the claimant's activity not subject to VAT, [3] the following:

"In the case at hand, it is not controversial that the Claimant is an SGPS that provides services to the companies in which it holds participations"

"The aforementioned CJEU judgment C-496/11 – Portugal Telecom) immediately removes the conceptual obstacle raised by the Tax and Customs Authority regarding the inadmissibility of full VAT deduction borne by an SGPS, given its nature, when it is a company of this type that provides services to its subsidiaries.

In fact, it is expressly stated in that judgment that 'if it is to be considered that all services acquired upstream have a direct and immediate nexus with downstream economic operations with the right to deduction, the taxable person in question would have the right, under article 17, no. 2 of the Sixth Directive, to deduct the entirety of the VAT that has burdened the upstream acquisition of the services in question in the principal proceedings. This right to deduction cannot be limited by the simple fact that the national regulation, by reason of the corporate purpose of said companies or their general activity, qualifies the taxable operations as accessory of their main activity'"

Thus the Claimant is correct in arguing, as a first line, that the right to deduction arises from a relationship of use; if the resources were used by the Claimant in activities that confer the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity compared to the totality of revenues.

The aforementioned CJEU jurisprudence has explicit support in European Union legislation, in article 168 of the VAT Directive (Directive 2006/122/CE) which establishes that, when goods and services are used for the purposes of its taxable operations, the taxable person has the right, in the Member State in which these operations are carried out, to deduct from the amount of the tax of which it is debtor the amounts of VAT due or paid in that Member State in relation to goods that have been or will be delivered to it and in relation to services that have been or will be provided to it by another taxable person.

(…)

"On the other hand, still in keeping with the aforementioned CJEU judgment the interference of the Claimant "in the management of the companies in which it took participations constitutes an economic activity", for the purposes of VAT taxation, with the Claimant being authorized to deduct the VAT paid upstream, on the condition that the services acquired upstream present a direct and immediate nexus with downstream economic operations with the right to deduction"

"Furthermore, as is stated in the same judgment [4] "a right to deduction in favor of the taxable person is equally admitted, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, in fact, a direct and immediate nexus with the entirety of the taxable person's economic activity"

"Thus, there is legal coverage and deduction by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its subsidiaries with the right to deduction or which, not having a direct and immediate nexus with certain services, are VAT borne with costs that form part of the Claimant's general expenses that have a direct and immediate nexus with the entirety of its economic activity".

(…)

"In fact, it is not apparent that any of these expenses is related to the mere holding of shareholdings and receipt of dividends from the subsidiaries, which constitute the 'non-economic activity' of the Claimant. In fact, '...dividends, as well as the other social rights, ultimately constitute the proper content of the property right, not involving that minimum of activity or economic decision that VAT subjection implies or presupposes'. These social rights 'are not the counterpart of an economic activity, they result from the mere ownership of a good, the shareholding; they are neither the counterpart of taxable activity nor of exempt activity, falling outside the field of application of VAT'.[5]

With respect to CJEU jurisprudence and referring to the most recent, it can be read in the conclusions of the CJEU Judgment of 16 July 2015, in the joined cases C-108/14 and C-109/14 (Larentia+Minerca and Marenave Schiffahrts);

(…)

"19. The mere acquisition and mere holding of shares shall not be considered economic activities within the meaning of the Sixth Directive, which confer on their holder the status of taxable person. In fact, the simple taking of financial participations in other companies does not constitute an exploitation of property with the aim of obtaining revenue of a permanent character, because the possible dividend, fruit of such participation, results from the simple ownership of the asset (see, in particular, judgments Cibo Participations, C.16/00, EU:C:2001:495, no. 19 and Portugal Telecom – C/496/11, EU:C:2012:557, no. 32)"

"20. However, the Court of Justice declared that the situation is different when the participation is accompanied by direct or indirect interference in the management of the companies in which the participation was taken, without prejudice to the rights that the holder of participations has in the capacity of shareholder or partner (see, in particular, judgments Cibo Participations, C-16/00. EU:C:2001;495, no. 20, and Portugal Telecom, C.496/11,EU:C:2012;557, no. 33)"

"21. The interference of a holding company in the management of the companies whose participations it acquired constitutes an economic activity within the meaning of article 4, no. 2, of the Sixth Directive, insofar as it implies the realization of transactions subject to VAT by virtue of article 2 thereof, such as the provision of administrative, financial, commercial and technical services by the holding company to its subsidiaries (see, in particular, judgments Cibo Participations, C-16/00, EU:C:2001; 495, no. 22 and Portugal Telecom, C-496/11: EU:C:2012;557, no. 34).

"22. Secondly, it is also important to recall that the right to deduction provided for in articles 17 et seq. of the Sixth Directive is an integral part of the VAT mechanism and cannot, in principle, be limited. This right is exercised immediately in relation to the entirety of the taxes that were levied on upstream operations. Any limitation of the right to deduction has an impact at the level of the tax burden and must be applied similarly in all Member States. Consequently, only derogations expressly provided for by the Sixth Directive are permitted (see, in particular, judgment Portugal Telecom, C-496/11, EU:C:2012:557, no. 35).

"23. For VAT to be deductible, upstream operations must present a direct and immediate nexus with downstream operations with the right to deduction. Thus, the right to deduction of VAT that was levied on the acquisition of goods or services upstream presupposes that the expenses incurred in the acquisition formed part of the constituent elements of the price of the taxable operations downstream with the right to deduction (see, in particular, judgments Cibo Participations, C-16/00, EU:C:2001:495, no. 31, and Portugal Telecom, C-496/11, EU:C:2012:557, no. 36).

"24. However, the right to deduction in favor of the taxable person is equally admitted, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, in fact, a direct and immediate nexus with the entirety of the taxable person's economic activity (see, in particular, judgments Cibo Participations, C-16/00, EU:C:2012;495, no. 33, and Portugal Telecom, C.496/11, EU; C:2012:557, no. 37)

"25. Under these conditions, as emphasized by the Advocate General in no. 39 of its conclusions, the costs linked to the acquisition of participations in its subsidiaries borne by a holding company that participates in the management thereof and which, to that extent, exercises an economic activity, as was recalled in no. 21 of this judgment, must be considered allocated to the economic activity of this holding company and the VAT paid with respect to these costs gives the right to full deduction, in application of article 17, no. 2 of the Sixth Directive.

"26. The deduction regime provided for in article 17, no. 5 of the Sixth Directive only covers cases in which goods and services are used by a taxable person to simultaneously carry out economic operations that give the right to deduction and economic operations that do not give the right to deduction, that is, goods and services of mixed use. Member States may only use one of the deduction methods referred to in article 17, no. 5, third subparagraph, of this directive for these goods and services (judgment Portugal Telecom, C-496/11, EU:C:2012:557, no. 40)"

This being so:

It follows from the position of the Respondent that the criterion it chose for the disregard of VAT deduction of the Claimant with respect to general expenses has more to do with the reasoning it carried out regarding the legal nature and purpose of SGPS (arising from no. 1 of article of Decree Law no. 495/88, of 30 December) than with the nature of the operations it pursued.

This understanding is evident when it identifies (article 10 of the response) "that the controversial question relates to the ability of a Management Company Holding Participations, such as the Claimant, to deduct the VAT borne with the acquisition of goods and provision of services related to certain types of activities related to the management of shareholdings and the respective revenues, and which translate into expenses typical of a holding's functioning"

Concluding further that:

(…) "according to the understanding of the Tax Administration, such activities are not considered covered by the concept of economic activity" (article 11) and (….) "in that circumstance the exercise of such activity of management of shareholdings does not permit the exercise of the right to full deduction of the upstream tax borne by the Claimant" (article 12) and considering that the services provided by the Claimant to its subsidiaries share a merely accessory character of its activity.

It will thus be necessary, following the jurisprudence and doctrine on this segment, to distinguish between a pure holding company or merely financial from the others (called mixed or managerial) that provide services of various kinds within the scope of the management of its subsidiaries, referring itself without need of any other considerations, under pain of redundancy and unnecessary repetitions, to the conclusions above briefly transcribed as to the CJEU Judgment of 16 July 2015, in the joined cases C-108/14 and C-109/14 (Larentia+Minerca and Marenave Schiffahrts), to conclude that the expenses here in question, incurred with the services provided by C..., with lawyers and with the official audit of accounts, constitute general charges of the Claimant and, as such, capable of deduction in VAT.

Additionally, as above announced, and again avoiding repetitions and transcriptions that are deemed unnecessary, reference is made to some arbitral decisions handed down within the scope of the CAAD, namely, in the proceedings: 77/2012-T, of 27/12/2012; 128/2012-T, of 23/04/2013; 148/2012-T, of 05/07/2013, 18/2013-T, of 09/10/2013; 15/2015-T of 20/10/2015, and 316/2015-T, of 05/01/2016, where the sense of the decisions and the substantiation of law that underlay them does not diverge from the understanding of the present tribunal.

Concluding in the understanding of this Sole Tax Arbitral Tribunal, that the deductions to which the Claimant proceeded in the year 2011 in the amount of €146,124.78 and €119,012.87 in the year 2012, are in compliance with the rules that govern this tax, in accordance with European Union Law, with its respective transposition into internal law and with the judicial interpretation that has been carried out thereon.

Annulling, in consequence, the VAT assessment acts underlying.

Compensatory Interest Assessment

As the VAT assessments made on the basis of the corrections referred to are illegal, the corresponding compensatory interest assessments are also illegal, for the same reasons, which are integrated into the respective tax debts on which they depend, in accordance with the provisions of article 35, no. 8 of the General Tax Law:

"Compensatory interest is integrated into the tax debt itself, with which it is jointly assessed".

Indemnification for Undue Provision of Guarantee

The Claimant further requests the reimbursement, with indemnifying interest, of the amounts spent with the provision of adequate guarantee that it alleges (articles 98 to 100 of the petition for arbitral determination) to provide under the provisions of article 199 of the CPPT.

However, it does not follow from the documentary evidence presented by it with the petition for arbitral determination or from the remaining documentary body of the proceedings, the joining of any document from which it can be concluded that such guarantee was provided, a fact that, had it been verified, would constitute a matter of fact established as proven.

Consequently, this Tribunal will not take cognizance of the petition for condemnation of the AT to reimburse the Claimant with such alleged expenses.

Indemnifying Interest

In accordance with the provisions of paragraph b) of article 24 of the RJAT, the arbitral decision on the merits of the petition for which there is no remedy or challenge binds the tax administration from the end of the period provided for remedy or challenge, such administration being required, in the precise terms of the success of the arbitral decision in favor of the taxable person and until the end of the period provided for the execution of sentences of tax judicial courts, to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for that purpose", which is in keeping with the provision of article 100 of the LGT, applicable pursuant to paragraph a) of no. 1 of article 29 of the RJAT, which provides:

Article 100

Effects of decision favorable to taxable person

"The tax administration is obliged, in the case of total or partial success of the complaint, judicial challenge or appeal in favor of the taxable person, to the immediate and full restoration of the legality of the act or situation that is the object of the litigation, including the payment of indemnifying interest, if applicable, from the end of the period for the execution of the decision."

Although article 2, no. 1, paragraphs a) and b) of the RJAT uses the expression "declaration of illegality" to define the competence of arbitral tribunals that function under the auspices of the CAAD, making no mention of condemnatory decisions, it should be understood that the powers that are attributed in judicial challenge proceedings to tax courts are comprised in its competence, and this is the interpretation that harmonizes and combines with the sense of the legislative authorization on which the Government based itself for the approval of the RJAT, in which it proclaims, as the first directive, that "the tax arbitral process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters".

The judicial challenge process, despite being fundamentally a process of annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnifying interest, as follows from article 43, no. 1 of the LGT, in which it is established in the following sense: "indemnifying interest is due when it is determined, in amicable complaint or judicial challenge, that there was error imputable to the services from which results payment of the tax debt in an amount superior to that legally due" and from article 61, no. 4 of the CPPT (as amended by Law no. 55-A/2010, of 31 December) in the sense that "if the decision recognizing the right to indemnifying interest is judicial, the period for payment counts from the beginning of the period for its spontaneous execution".

Given what has been said, no. 5 of article 24 of the RJAT, by stating that "interest payment is due, regardless of its nature, in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process", should be interpreted in the sense of permitting the recognition of the right to indemnifying interest in the tax arbitral process.

In the case at hand, it is manifest that the illegality of the tax assessment acts, as well as of the respective compensatory interest assessments, is imputable to the AT, recognizing oneself, consequently, that there is ground for the perception of the respective indemnifying interest by the Claimant.

III. DECISION

In harmony with the foregoing, this Sole Arbitral Tribunal decides as follows:

a) - to judge the petition for declaration of illegality of the aforementioned VAT assessments and compensatory interest as well-founded:

b) - to judge the petition for condemnation of the Tax Administration to pay to the Claimant indemnifying interest on the global amount to be reimbursed, calculated on the amounts of the identified assessments, and from the dates of their respective payment until the actual reimbursement.

c) - not to take cognizance regarding the petition for indemnification for undue guarantee.

IV. VALUE OF PROCEEDINGS

In accordance with that provided for in articles 296, nos. 1 and 2 of the Code of Civil Procedure, approved by Law no. 47/2013, of 26 June, 97 A) no. 1, paragraph a) of the Code of Tax Procedure and Process, and article 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the proceedings is valued at €58,523.14.

V. COSTS

In accordance with the provisions of articles 12, no. 2, 22, no. 4 of the RJAT, and articles 2 and 4 of the Regulation of Costs in Tax Arbitration Proceedings, Table I attached hereto, the amount of costs is set at €2,142.00 to be borne by the Respondent.

NOTIFY

Text prepared by computer, in accordance with the provisions of article 131 of the Code of Civil Procedure, applicable by reference of article 29, no. 1, paragraph e) of the Legal Regime of Tax Arbitration (RJAT), with blank verses, and reviewed by the arbitrator.

The present decision is written in accordance with the orthography prior to the Orthographic Agreement of 1990.

Lisbon, December 7, 2016.

The Arbitrator

(José Coutinho Pires)

[1] Value Added Tax, Almedina, 2015, page 105.

[2] Clotilde Celorico Palma, Introduction to Value Added Tax, IDEFF Notebooks, no. 1, 4th Edition, Almedina, October 2009, pages 194 and 195.

[3] There were in question there, among others, services with the preparation, revision and conception of the accounts report, administrative services and consulting services, services related to advisory services and business development.

[4] Citing earlier jurisprudence of the CJEC adopted in the judgments Kretztecnick, no. 36, Investrand, no. 24 and SKF, no. 58

[5] JOSÉ XAVIER DE BASTO and MARIA MODETE OLIVEIRA, The right to VAT deduction in holding companies, in Taxation, no. 6, page 8.