CAAD 303/2015-T: VAT on Clinical Analyses – Waiver of Exemption and Compensatory Interest

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (Presiding Arbitrator), Dr. Magda Feliciano and Dr. Armando Tavares, appointed by the Ethics Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, constituted on 24-07-2015, agree as follows:

1. Report

A…, S.A., NIPC …, with registered office at Rua …, …, … floor, Room …, …, …, Porto, came, in accordance with subparagraph a) of article 10.º, n.º 1 and subparagraph a) of article 5.º, n.º 3, both of Decree-Law n.º 10/2011, of 20 January, called the Legal Framework of Tax Arbitration ("LFTA"), to request the constitution of the Collective Arbitral Tribunal with a view to the declaration of illegality and annulment of additional VAT assessments and compensatory interest, in the total amount of € 556,957.24 as indicated below:

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 15-05-2015.

In accordance with the provisions of subparagraph a) of article 6.º, n.º 2 and subparagraph b) of article 11.º, n.º 1 of the LFTA, the Ethics Council appointed as arbitrators the signatories, who communicated their acceptance of the assignment within the applicable period.

On 09-07-2015, the Parties were notified of this appointment, and did not manifest any will to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11.º, n.º 1, subparagraphs a) and b) of the LFTA and articles 6.º and 7.º of the Code of Ethics.

Therefore, in compliance with the provision of subparagraph c) of article 11.º, n.º 1 of the LFTA, the collective arbitral tribunal was constituted on 24-07-2015.

The Tax and Customs Authority responded by raising the exception of lack of material jurisdiction on the grounds that the recognition of a right in tax matters is at issue and requesting that a preliminary reference be made to the CJEU. On the merits, the Tax and Customs Authority contends that the request for arbitral decision should be dismissed.

By order of 01-10-2015, the meeting provided for in article 18.º of the LFTA was dispensed with and it was decided that the proceedings should continue with written arguments.

The Parties submitted written arguments.

The arbitral tribunal was regularly constituted.

The parties have legal personality and capacity, are legitimate (articles 4.º and 10.º, n.º 2, of the same statute and article 1.º of Ordinance n.º 112-A/2011, of 22 March) and are duly represented.

The proceedings are free from nullities.

It is necessary to address the exception of lack of jurisdiction as a priority.

2. Question of Lack of Material Jurisdiction of this Arbitral Tribunal due to the Recognition of a Right in Tax Matters

The Tax and Customs Authority contends that this Arbitral Tribunal lacks material jurisdiction to determine the request for arbitral decision because, in summary, in order to assess the lawfulness of the assessments, it is first necessary to decide on the lawfulness of the prerequisites of the right of waiver of VAT exemption which the Claimant exercised, under the provisions of subparagraph b) of article 12.º, n.º 1 of the VAT Code, therefore "the acts of additional VAT assessment effected should be qualified as consequential acts, having regard to the concept, albeit restricted, adopted by both doctrine and case law".

The Tax and Customs Authority states that "should be qualified as consequential acts those which were produced, or endowed with certain content, by reason of the existence of earlier supposedly valid acts which serve as their cause, basis or prerequisite" and considers that "the acts of additional VAT assessment pending appreciation in this arbitral instance are in a relationship of dependence on the recognition or not of the right by the Claimant to waive the VAT exemption, in accordance with article 12.º, n.º 1, subparagraph b), of the VAT Code".

Therefore, the Tax and Customs Authority understands that "this arbitral instance lacks material jurisdiction to hear one of several requests formulated in these proceedings, namely, whether the Claimant has or does not have the right of waiver of the exemption provided for under subparagraph 2) of article 9.º, as provided in article 12.º, n.º 1, subparagraph b), both of the VAT Code" and that "determining whether the Claimant should be classified in the normal VAT regime with the right to deduct VAT does not translate into an act that may be susceptible to appreciation by this Tribunal, as it falls outside the material scope of tax arbitration as moulded by the legislator".

The jurisdiction of the arbitral tribunals functioning at CAAD is defined, in the first place, by article 2.º, n.º 1 of the LFTA, which establishes the following:

1 - The jurisdiction of arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of acts of tax assessment, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts of determination of taxable matter when not giving rise to the assessment of any tax, of acts of determination of taxable income and of acts of fixing asset values;

In the second place, the jurisdiction of the arbitral tribunals functioning at CAAD is limited by the binding commitment of the Tax and Customs Authority which, in accordance with article 4.º, n.º 1 of the LFTA, was defined by Ordinance n.º 112-A/2011, of 12 March, which establishes the following, insofar as relevant here:

The services and organisms referred to in the preceding article commit themselves to the jurisdiction of the arbitral tribunals functioning at CAAD which have as their object the assessment of claims relating to taxes whose administration is entrusted to them, referred to in n.º 1 of article 2.º of Decree-Law n.º 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to the administrative procedure in accordance with articles 131.º to 133.º of the Tax Procedure and Process Code;

b) Claims relating to acts of determination of taxable income and acts of determination of taxable matter, both by indirect methods, including the decision of the revision procedure;

c) Claims relating to customs duties on imports and other indirect taxes affecting goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff contingents, or whose resolution depends on laboratory analysis or steps to be taken by another Member State in the context of administrative cooperation in customs matters.

Ordinance n.º 112-A/2011, with respect to the acts falling within those indicated in article 2.º, only excluded from the scope of the binding commitment of the Tax Administration, in non-customs matters, claims relating to acts of self-assessment, withholding at source and payment on account which have not been preceded by recourse to the administrative procedure and claims relating to acts of determination of taxable income and acts of determination of taxable matter, both by indirect methods, including the decision of the revision procedure.

It is manifest that we are not faced with any of the situations in which Ordinance n.º 112-A/2011 removes the jurisdiction of the arbitral tribunals functioning at CAAD, therefore jurisdiction must be assessed only in light of the LFTA.

As can be seen from article 2.º of the LFTA, the jurisdiction of the arbitral tribunals functioning at CAAD was defined by the LFTA only having regard to the type of acts which are the object of the claims of taxpayers and not as a function of the type of questions which it is necessary to assess in order to decide whether the acts are lawful or unlawful.

There is, in particular, no prohibition on the assessment of matters relating to the verification of the prerequisites of the right of waiver of VAT exemption or any other questions of lawfulness relating to acts of the types referred to in article 2.º of the LFTA. A tax assessment which departs from the disregard of an exemption or a waiver of exemption does not cease to be a tax act of assessment. And the claim for assessment of the lawfulness or unlawfulness of that disregard underlying an act of assessment does not, therefore, cease to be the assessment of a claim relating to the declaration of illegality of acts of assessment, in which that disregard materialises.

Thus, in arbitral proceedings, similarly to what occurs in judicial challenge proceedings, any illegality can, as a rule, be imputed to acts of assessment, as derives from article 99.º of the CPPT, subsidiarily applicable.

This will not be the case only in situations where the law provides for the autonomous challengeability of administrative acts which are prerequisites of acts of assessment, being only to that extent that the assessment of the lawfulness of acts of assessment in all aspects is excluded. However, for there to be such autonomous challengeability, it is necessary that there be some administrative act in tax matters, since challengeability relates to acts and not to legal positions assumed explicitly or implicitly as prerequisites of acts of assessment, but not materialised in autonomous tax acts.

The consequential acts, of which the Tax and Customs Authority speaks, are consequential to other tax or administrative acts and, in the case in question, there is no indication that any administrative act was carried out assessing whether the Claimant has or does not have the right to waive the VAT exemption.

That is to say, for there to be a limitation to the challengeability of the impugned assessment acts, some administrative act would have had to be carried out previously which was a prerequisite of these assessment acts, which did not occur in the case in question.

Therefore, since the assessment acts are injurious to the interests of the Claimant and are the only acts carried out by the tax administration regarding the situation assessed therein, their contentious challengeability must be ensured on the grounds of any illegality, as derives from the principle of effective judicial protection, enshrined in articles 20.º, n.º 1, and 268.º, n.º 4, of the CRP.

Moreover, when there is no autonomous challengeable act prior to an assessment act concerning its prerequisites, "any illegality previously committed may be invoked in the challenge of the final decision" (final part of article 54.º of the CPPT), therefore all questions relating to the lawfulness of assessment acts can be assessed in tax courts in judicial challenge proceedings, as derives from subparagraph a) of article 97.º, n.º 1 and article 99.º of the same Code.

In fact, in tax courts, even when, assessment acts having been carried out, a situation is present in which it could be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (by enabling, in addition to the assessment of the lawfulness of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere option, as derives from the very text of article 145.º, n.º 3 of the CPPT, in stating that "actions may only be brought whenever this procedural means is the most appropriate to ensure full, effective and efficient protection of the right or legally protected interest". That is, what this provision provides is a limitation to the use of the action and not a limitation to the use of the judicial challenge procedure.

Indeed, it is manifest that the judicial challenge procedure includes the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnificatory interest and the right to compensation for undue security, therefore the fact that the recognition of rights is at issue is not an obstacle to the use of judicial challenge proceedings.

Thus, having the tax arbitral process been created as an alternative to the judicial challenge procedure, it must be concluded that there is no obstacle to the lawfulness of the assessment acts in question in these proceedings being assessed by this Arbitral Tribunal, as in tax courts that lawfulness could be assessed in judicial challenge proceedings.

Therefore, the exception of lack of material jurisdiction raised by the Tax and Customs Authority fails.

3. Facts

3.1. Proven Facts

The following facts are considered proven:

• The Claimant commenced operations on 06-01-1978, being classified for the exercise of "Clinical Analysis Laboratories" (CAE 086901);

• The Claimant has its seat in Porto and has collection points for patient care and sample collection in various locations, providing services in the field of Clinical Pathology (Clinical Analyses), namely: Biochemistry, Haematology, Coagulation, Serology, Microbiology, Immunology, Endocrinology, Drug Monitoring and Clinical Toxicology and also, residually and of insignificant materiality, in the field of Veterinary Clinical Pathology (Veterinary Clinical Analyses);

• For VAT purposes, it was classified on 01-01-1986 in the exemption regime enshrined in article 9.º of the VAT Code;

• On 29-12-2000, by submission of a declaration of changes, the Claimant waived the VAT exemption, in accordance with subparagraph b) of article 12.º, n.º 1 of the VAT Code and, as a consequence, was classified, from 01-01-2001, in the normal VAT regime of monthly periodicity, by option, subjecting the totality of operations carried out in the scope of its activity to VAT, as well as deducting the totality of tax incurred in the acquisition of goods and services;

• On 27-06-2014, the Claimant submitted the periodic VAT return n.º …, relating to the period of May 2014, having requested the refund of VAT credit accumulated since October 2012 in the amount of €152,310.13;

• The Tax and Customs Authority selected this refund for analysis, giving rise to an external inspection procedure authorised by Service Order OI2014… and directed to the VAT of the period 201405, whose scope was extended to the year 2013 and periods 201401 to 201404, inclusive, having taken place between 22-07-2014 and 28-11-2014;

• In that inspection action, the Tax and Customs Authority understood that, by submission of a declaration of changes on 29-12-2000, the Claimant had improperly waived the VAT exemption, in accordance with subparagraph b) of article 12.º, n.º 1 of the VAT Code, therefore corrections should be effected;

• In the Tax Inspection Report drawn up in that inspection action, the tenor of which is given as reproduced, reference is made, among other things, to the following:

II.3.1. Tax Classification of the Taxpayer

The taxpayer commenced operations on 06-01-1978, being classified for the exercise of the activity of "Clinical Analysis Laboratories" (CAE 086901).

For VAT purposes, the taxpayer was classified, on 01-01-1986, in the exemption regime enshrined in article 9.º of the VAT Code, having waived the VAT exemption, in accordance with subparagraph b) of article 12.º, n.º 1 of the same Code, on 29-12-2000, by submission of a declaration of changes. As a consequence, it was classified, from 01-01-2001, in the normal regime of monthly periodicity, by option.

II.3.2. Activity Exercised and its Classification for VAT Purposes

A… SA (hereinafter referred to as A… or taxpayer) has its seat at Rua …, in the city of Porto, occupying several floors of the same building in its premises, in a total area of approximately 2,000 m², and having branches (collection points) for patient care and sample collection in various locations. The activity of A…, a reference clinical analysis laboratory of the city of Porto which carries out practically all clinical analyses of utility currently available worldwide, is the provision of services in the field of Clinical Pathology (Clinical Analyses), namely: Biochemistry, Haematology, Coagulation, Serology, Microbiology, Immunology, Endocrinology, Drug Monitoring and Clinical Toxicology.

The analysis carried out of the taxpayer's accounts also made it possible to identify the provision of services, albeit residually and of insignificant materiality, in the field of Veterinary Clinical Pathology (Veterinary Clinical Analyses).

The provision of Clinical Analysis services benefits from the VAT exemption enshrined in article 9.º of the VAT Code, unlike the provision of Veterinary Clinical Analysis services which is subject to VAT at the standard rate.

II.3.3 Waiver of VAT Exemption

On 29-12-2000, the taxpayer made the choice for the normal taxation regime for the activity of Clinical Analyses, in accordance with subparagraph b) of article 12.º, n.º 1 of the VAT Code, by submission of a declaration of changes.

As a consequence, A… began to subject to VAT the totality of operations carried out in the scope of its activity, as well as to deduct the totality of tax incurred in the acquisition of goods and services.

As will be demonstrated in Chapter III of this Report, the said waiver of VAT exemption could not have been carried out due to lack of legal basis.

Thus, since in the exercise of its activity A… carried out operations which, in accordance with article 20.º of the VAT Code, gave the right to deduction (Veterinary Clinical Analyses) and operations which did not give such right (Clinical Analyses), in obedience to what is stipulated in n.º 1 of article 23.º of that Code, it could only deduct part of the tax incurred in the acquisition of goods and services.

III. DESCRIPTION OF FACTS AND GROUNDS OF PURELY ARITHMETIC CORRECTIONS

III.1. Legislative Framework of Clinical Analysis Activity

The following exposition aims to classify the activity of Clinical Analyses for VAT purposes.

III.1.1. Article 9.º, n.º 1, of the VAT Code

In accordance with n.º 1 of article 9.º of the VAT Code, the following are exempt from tax: "Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions".

Given that the VAT Code does not contain any definition regarding paramedical activities, it is necessary to resort to Decree-Law n.º 261/93, of 24 July, as well as Decree-Law n.º 320/99, of 11 August, since these are the statutes that contain the requirements to be observed for the exercise of the respective activities.

The list attached to Decree-Law n.º 261/93, of 24 July, provides, in item 1, the activity of Clinical Analyses and Public Health. In accordance with the description presented there, this activity translates into "the development of activities at the level of clinical pathology, immunology, clinical haematology, genetics and public health, through the study, application and evaluation of analytical techniques and methods proper to them, for diagnostic and screening purposes".

It is important to note that the exemption provided for in n.º 1 of article 9.º of the VAT Code operates independently of the legal nature of the service provider and, in particular, of the fact that it is a natural or legal person and, likewise, that this exemption is based on subparagraph c) of article 132.º, n.º 1 of Directive 2006/112/EC of the Council, of 28 November (which recast Directive 77/388/EEC of the Council, of 17 May, commonly called the Sixth Directive).

III.1.2. Article 9.º, n.º 2, of the VAT Code

In accordance with n.º 2 of article 9.º of the VAT Code, the following are exempt: "Medical and health services and operations closely connected therewith provided by hospital establishments, clinics, dispensaries and similar establishments".

This provision transposes into domestic legal order subparagraph b) of article 132.º, n.º 1 of the said Directive 2006/112/EC of the Council, of 28 November, which provides that Member States shall exempt the following operations: "Hospital care and medical care, as well as operations closely linked thereto, provided by public law bodies or, under conditions of social assistance comparable to those for public bodies, by hospital establishments, centres for medical assistance and diagnosis and other establishments of the same nature, duly recognised".

Thus, this exemption covers the provision of medical and health services (health acts) consisting in providing assistance to persons, diagnosing and treating diseases or any health anomalies and operations connected therewith, carried out by the establishments expressed in that rule or by similar establishments (hospitalisation/admission).

On the other hand, similar establishments are considered, for the purposes of the said exemption, establishments, public or private, which diagnose and treat diseases or any other health anomaly, that is, establishments which effectively carry out operations of the nature of health services.

III.1.3. Court of Justice of the European Communities Judgment - Scope of n.ºs 1 and 2 of Article 9.º of the VAT Code

The Court of Justice of the European Communities (CJEU), in the Judgment of 10 September 2002, delivered in Case C-141/00, concerning the Kügler case (n.º 36), highlighted that subparagraphs b) and c) of article 132.º, n.º 1 of the VAT Directive, although intended to regulate the exemptions applicable to medical assistance services, have different scopes.

Whereas subparagraph b) - which corresponds to n.º 2 of article 9.º of the VAT Code - exempts the provision of assistance services provided in the hospital environment, including closely connected operations, subparagraph c) - which corresponds to n.º 1 of article 9.º of the VAT Code - is intended to exempt the provision of services of a medical and paramedical character provided outside those places, whether in the private home of the provider, whether in the patient's home, whether in any other place.

III.2. Concrete Situation of the Taxpayer

III.2.1 Activity Actually Exercised

The activity actually exercised by the taxpayer, which benefited from VAT exemption, under article 9.º of the VAT Code and for which the Laboratory waived the exemption, in accordance with subparagraph b) of article 12.º, n.º 1 of the VAT Code, consisted essentially in the provision of health services in the field of Clinical Pathology, that is, in the provision of Clinical Analysis services.

The collection of samples to be analysed was carried out, as a rule, at the central laboratory or at one of the various collection units, and could also occur at the patient's home or in the installations of the respective employer entity. Subsequently, the processing of the samples to be analysed was carried out and the relevant analysis report was issued. A… also proceeded with the processing of samples collected at collection points of other entities, in particular related entities, when its services were subcontracted.

It should be noted that in no case did the services provided involve the hospitalisation or admission of patients, and, as stated in the preceding paragraph, it is evident that they were not provided in a hospital environment.

III.2.2. Classification for VAT Purposes

As derived from the exposition in point III.1. Legislative Framework of Clinical Analysis Activity, the taxpayer cannot consider the activity exercised in the field of Clinical Analyses exempt from tax by classification in n.º 2 of article 9.º of the VAT Code, but only by invocation of the provisions of n.º 1 of the same article.

Consequently, being classified in n.º 1 of article 9.º of the VAT Code, the taxpayer could not waive the exemption, due to the absence of a legal provision permitting it to do so, since the waiver of exemption provided for in subparagraph b) of article 12.º, n.º 1 of the VAT Code only applies to the exemption of n.º 2 of article 9.º of the VAT Code.

III.2.3. Tax Consequences

The taxpayer, not being able to have carried out the waiver of VAT exemption due to lack of legal basis, should be considered as a mixed taxpayer, since in the exercise of its activity it carried out operations which, in accordance with n.º 1 of article 20.º of the VAT Code, gave the right to deduction (namely the provision of services in the field of Veterinary Clinical Pathology which are subject to VAT at the standard rate) and operations which did not give such right (the provision of Clinical Analysis services, exempt from VAT under n.º 1 of article 9.º of the VAT Code).

Consequently, in obedience to what is stipulated in n.º 1 of article 23.º of the VAT Code, it could only deduct part of the tax incurred in the acquisition of goods and services.

The determination of the amounts of tax incurred which the taxpayer could deduct should follow the rules stipulated in the said article 23.º of the VAT Code: in particular that contained in subparagraph b) of n.º 1 of that article which indicates that "(…) where a good or service is used for carrying out operations arising from the exercise of an economic activity provided for in subparagraph a) of article 2.º, n.º 1, part of which does not give the right to deduction, tax is deductible in the percentage corresponding to the annual amount of operations giving the right to deduction [prorata].

However, subparagraph b) of n.º 3 of the same article stipulates that "the tax administration may require the taxpayer to proceed in accordance with the provisions of the preceding number (…): b) Where the application of the process referred to in n.º 1 leads to significant distortions in taxation".

In fact, in the case in analysis, the application of a prorata would lead to significant distortions in taxation since, given the reduced materiality of the provision of Veterinary Clinical Analysis services, it would lead to a deduction of tax disproportionate, tens/hundreds of times higher than the amounts of tax assessed on those services in the periods in question.

On the other hand, the use of the method of actual allocation for the determination of the amounts of tax incurred relating to goods and services used for carrying out the provision of Veterinary Clinical Analysis services appears impossible to implement.

n.º 8 of Circular Order n.º 79783, of 18-07-1989, of the VAT Services Directorate, which addresses substantially identical issues, states that "With respect to (…) goods and services whose allocation is totally impossible to carry out, the deduction of tax should be effected in proportion to the indicators which prove to be most just and rational: turnover, space occupied, number of machine hours, etc. (…)".

Thus, we shall consider that the tax which the taxpayer could deduct corresponds to a proportion of the tax deducted in the periods analysed, assessed by the weight of the provision of Veterinary Clinical Analysis services in total services provided (see footnote 2). Given that the amounts assessed of deductible tax are materially irrelevant, their distribution by line item and by period is not justified, therefore they will be considered in the first tax period of each year in field 24 of the periodic VAT return.

It should be noted that the VAT which was regularised in favour of the taxpayer (field 40 of the periodic VAT returns) is not relevant for determining the amount of tax deducted unduly, given that it concerns corrections to tax previously assessed.

Similarly, in passive operations, the amounts of VAT regularisations in favour of the State should be corrected.

Thus, when the acquisitions of goods or services which gave rise to those regularisations were recorded and the respective VAT deducted in the periods analysed, as the VAT deducted by the taxpayer was considered non-deductible, the respective regularisation in favour of the State will be eliminated.

With regard to the VAT regularised in favour of the State which concerns the rectification of tax deducted in years prior to 2013, the same shall not be corrected since in those years it was entirely deducted by the taxpayer.

III.3. Regularisations in Favour of the State Omitted

Following the analysis carried out on the documents supporting the accounting records of the taxpayer, it was found that it did not effect VAT regularisations in favour of the State in the situations, amounts and periods identified in Table I.

III.4. Determination of Amounts of VAT Omitted

As properly explained in point III.2.3. Tax Consequences, the tax incurred by the taxpayer during the periods analysed would only be deductible to the extent corresponding to operations giving the right to deduction (provision of Veterinary Clinical Analysis services), therefore the remaining VAT deducted will have to be considered as improperly deducted, in accordance with n.º 1 of article 20.º of the VAT Code. On the other hand, the amounts of VAT regularisations in favour of the State must be corrected.

In light of what has been stated above, the amounts of VAT omitted are those determined in Tables II to IV, amounting, in the years 2013 and 2014, to a total of € 1,367,351.17 and € 562,070.36, respectively:

It is important to note that the amounts considered in the above tables of VAT deducted and of regularisations in favour of the State were those entered in the periodic VAT returns submitted by the taxpayer with reference to those periods.

Following the inspection, the following assessments were effected:

• On 24-03-2015, the Claimant paid the sums assessed, in the total amount of € 556,957.24 (documents numbered 3 attached with the request for arbitral decision, the tenors of which are given as reproduced);

• On 20-12-1989, the VAT Services Directorate issued Circular Order n.º 147532, relating to "Clinical Analysts" in which it states, among other things, the following:

Clinical analysis services are included in the exemption provided for in n.º 2 of article 9.º of the VAT Code, the following prerequisites being to be observed:

The development of analyses linked to health care still constitutes a provision of medical services;

Clinical analysis laboratories, whether run by clinical analysis specialists, whether run by pharmacists or other licentiates, are considered covered by the expression "similar" referred to in the said n.º 2 of article 9.º.

• On 12-03-2015, the Claimant submitted the request for arbitral decision which gave rise to these proceedings.

3.2. Facts Not Proven

There are no facts relevant to the decision of the case which have not been proven.

3.3. Grounds for the Determination of the Facts

The facts were considered proven based on the documents attached with the request for arbitral decision and on the administrative file.

4. Law

4.1. General Observations

The Claimant provides clinical analysis services which do not involve hospitalisation of those to whom the analyses are carried out.

The Tax and Customs Authority, in the Tax Inspection Report underlying the impugned assessments, understood, in summary, the following:

– The exemption provided for in article 132.º, n.º 1, subparagraph b), of Directive n.º 2006/112/EC of the Council, of 28-11-2006, "covers medical and health services (health acts) consisting in providing assistance to persons, diagnosing and treating diseases or any health anomalies and operations connected therewith, carried out by the establishments expressed in that rule or by similar establishments (hospitalisation/admission)";

– "Similar establishments are considered, for the purposes of the said exemption, establishments, public or private, which diagnose and treat diseases or any other health anomaly, that is, establishments which effectively carry out operations of the nature of health services";

– "Whereas subparagraph b) - which corresponds to n.º 2 of article 9.º of the VAT Code - exempts the provision of assistance services provided in the hospital environment, including closely connected operations, subparagraph c) - which corresponds to n.º 1 of article 9.º of the VAT Code - is intended to exempt the provision of services of a medical and paramedical character provided outside those places, whether in the private home of the provider, whether in the patient's home, whether in any other place";

– "The collection of samples to be analysed was carried out, as a rule, at the central laboratory or at one of the various collection units, and could also occur at the patient's home or in the installations of the respective employer entity. Subsequently, the processing of the samples to be analysed was carried out and the relevant analysis report was issued. A… also proceeded with the processing of samples collected at collection points of other entities, in particular related entities, when its services were subcontracted";

– "In no case did the services provided involve the hospitalisation or admission of patients, and, as stated in the preceding paragraph, it is evident that they were not provided in a hospital environment".

– the Claimant "cannot consider the activity exercised in the field of Clinical Analyses exempt from tax by classification in n.º 2 of article 9.º of the VAT Code, but only by invocation of the provisions of n.º 1 of the same article";

– "Consequently, being classified in n.º 1 of article 9.º of the VAT Code, the taxpayer could not waive the exemption, due to the absence of a legal provision permitting it to do so, since the waiver of exemption provided for in subparagraph b) of article 12.º, n.º 1 of the VAT Code only applies to the exemption of n.º 2 of article 9.º of the VAT Code".

The contentious regime provided for in the LFTA is one of mere legality, aiming only at the declaration of illegality of acts of the types provided for in subparagraphs a) and b) of article 2.º, n.º 1.

Therefore, the lawfulness of the impugned acts must be assessed as they were carried out, with the reasoning used in them, it being irrelevant whether other possible grounds could serve as support for other acts, with decision-making content totally or partially coinciding with the act carried out. Thus, grounds invoked a posteriori, after the end of the tax procedure in which the act whose illegality is claimed was carried out, are irrelevant, including those advanced in the jurisdictional proceedings.

Thus, the Tribunal cannot, upon discovering the invocation of an unlawful ground as support for the administrative decision, assess whether its action could be based on other grounds and refrain from declaring the illegality of the concrete act carried out, by, eventually, the existence of the abstract possibility of a hypothetical act with decision-making content totally or partially identical, with other reasoning, which would be lawful, but was not carried out.

In these terms, the question to be assessed consists, in the first place, in ascertaining whether the position adopted by the Tax and Customs Authority is correct in considering that only activity carried out in a hospital environment falls within n.º 2 of article 9.º and that the activity of the Claimant is not carried out in that environment, being developed in its own or partnership installations, without the services provided having involved the hospitalisation or admission of patients.

That is, it is irrelevant for assessing the lawfulness of the corrections carried out what the Tax and Customs Authority states in its Reply and in the arguments presented in these proceedings, concerning, in the case of understanding that the situation of the Claimant falls within n.º 2 of article 9.º, the need to assess whether it is possible to waive the exemption in light of the principle of neutrality, "a situation which was not assessed by the AT since it was prejudiced by the classification of the Claimant's activity" (article 82.º and following of the Reply). In fact, the grounds which the Tax and Customs Authority did not assess when carrying out the act are not grounds of the act carried out, and their invocation constitutes a posteriori reasoning.

Therefore, only the reasoning contemporary to the act being relevant, if it is concluded that the situation of the Claimant falls within that article 9.º, n.º 2, of the VAT Code, it will be necessary to conclude that the act is unlawful due to error regarding the legal prerequisites.

4.2. Applicable Legal Regime

Articles 9.º and 12.º of the VAT Code establish the following, insofar as relevant here:

Article 9.º

Exemptions in domestic operations

The following are exempt from tax:

1. Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions;

2. Medical and health services and operations closely connected therewith provided by hospital establishments, clinics, dispensaries and similar establishments;

(...)

Article 12.º

Waiver of exemption

1 - The following may waive the exemption, choosing the application of tax to their operations:

(...)

b) Hospital establishments, clinics, dispensaries and similar establishments, not belonging to legal entities under public law or to private institutions integrated in the national health system, which provide medical and health services and operations closely connected therewith;

(...)

2 - The right of option is exercised by submitting, at any tax office or other legally authorised location, a declaration of commencement or of changes, as the case may be, taking effect from the date of its submission.

3 - Having exercised the right of option in accordance with the preceding numbers, the taxpayer is obliged to remain in the regime chosen for a period of at least five years, and must, after such period, in the case of wishing to return to the exemption regime:

a) Submit, during the month of January in one of the years following that in which the period of the chosen regime has been completed, the declaration referred to in article 32.º, which takes effect from 1 January of the year of its submission;

b) Subject to taxation the remaining inventories and proceed, in accordance with n.º 5 of article 24.º, to regularise the deduction for fixed asset goods.

These exemptions are connected with article 132.º of Directive n.º 2006/112/EC, of 28-11-2006, which establishes the following, insofar as relevant here:

1. Member States shall exempt the following operations:

(...)

b) Hospital care and medical care, as well as operations closely linked thereto, provided by public law bodies or, under conditions of social assistance comparable to those for public bodies, by hospital establishments, centres for medical assistance and diagnosis and other establishments of the same nature, duly recognised;

c) Services of a medical or paramedical nature provided in the exercise of professions defined by the Member State in question;

4.3. Possibility of Waiver of Exemption

The said subparagraph b) of article 12.º, n.º 1 of the VAT Code permits the waiver of VAT exemption to "hospital establishments, clinics, dispensaries and similar establishments, not belonging to legal entities under public law or to private institutions integrated in the national health system, which provide medical and health services and operations closely connected therewith".

Article 9.º, n.º 2) of the VAT Code provides for the exemption of "medical and health services and operations closely connected therewith provided by hospital establishments, clinics, dispensaries and similar establishments", therefore, in light of the textual correspondence, it must be concluded that only these entities classified in this n.º 2) can waive the exemption and not also those benefiting from the exemption under n.º 1).

The Tax and Customs Authority understood that the fields of application of subparagraphs b) and c) of article 132.º of Directive n.º 2006/112/EC correspond to the fields of application of n.ºs 2) and 1), respectively, of article 9.º of the VAT Code.

With that premise, following the case law of the CJEU regarding the field of application of the provision of subparagraphs b) and c) of article 13º-A, n.º 1, of the Sixth Directive [literally corresponding to subparagraphs b) and c) of article 132.º of Directive n.º 2006/112/EC], it understood that subparagraph c) and, consequently, n.º 1 of article 9.º of the VAT Code, covers the provision of health services by legal entities and that subparagraph b) - which corresponds to n.º 2 of article 9.º of the VAT Code - exempts the provision of assistance services provided in a hospital environment, including closely connected operations, subparagraph c) - which corresponds to n.º 1 of article 9.º of the VAT Code - is intended to exempt the provision of services of a medical and paramedical character provided outside those places, whether in the private home of the provider, whether in the patient's home, whether in any other place.

However, the CJEU, in the L.u.P. judgment, subsequent to the Kügler judgment, clarified that

"Article 13.º, A, n.º 1, subparagraph b), of the Sixth Directive 77/388/EEC of the Council, of 17 May 1977, (…) should be interpreted as meaning that clinical analyses designed to observe and examine patients by way of prevention, which are carried out, as are those at issue in the main proceedings, by a private law laboratory external to a medical assistance establishment under the prescription of general practitioners, are capable of being covered by the exemption provided for by that provision as medical care provided by another".

In this L.u.P. judgment, the CJEU understood that "since clinical analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in article 13.º, A, n.º 1, subparagraph b), of the Sixth Directive, a laboratory such as that at issue in the main proceedings must be considered an establishment of 'the same nature' as the 'hospital establishments' and the 'centres for medical assistance and diagnosis' within the meaning of that provision" (point 35).

In a recent judgment, the CJEU reaffirmed "that a private law laboratory which carries out clinical analyses must be considered an establishment 'of the same nature' as the 'hospital establishments' and the 'centres for medical assistance and diagnosis' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in the said provision (point 35 of the De Fruytier judgment, of 02-07-2015, delivered in Case n.º C-334/14, citing the L.u.P. judgments, C-106/05, points 18 and 35 and CopyGene, C-262/08, point 60).

Therefore, it must be concluded that, in light of the case law of the CJEU, the exemption provided for in subparagraph b) of article 132.º covers the services provided by entities of the types provided by the Claimant, despite whether the provision occurs or not in a hospital environment, an interpretation which is in manifest harmony with the text of this provision, by making reference to the exemption of operations closely related to hospital care and medical care provided by "centres for medical assistance and diagnosis".

Concerning article 9.º of the VAT Code, the text of its n.º 2), also does not provide explicit support for the thesis defended by the Tax and Customs Authority that only activity carried out in a hospital environment falls within it and, in particular, that outside its scope is the provision of clinical analysis and diagnostic services connected with hospital activities.

In fact, in this n.º 2) of article 9.º, reference is made, in addition to hospital establishments, also to "clinics, dispensaries and similar establishments".

The reference to "dispensaries" unequivocally covers the provision of health services outside that hospital environment, as the meaning of "dispensary" is "a charity establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines" or "an establishment for providing, free of charge, care and medicines to poor patients who can be treated at home".

On the other hand, the reference to "similar establishments", interpreted in consonance with the parallel provision of subparagraph c) of article 132.º of Directive n.º 2006/112/EC, which makes reference to "centres for medical assistance and diagnosis and other establishments of the same nature", permits the conclusion that entities of the type of the Claimant also fall within that concept, which provide clinical analysis and diagnostic health services in connection with hospital establishments.

Thus, the thesis defended by the Tax and Customs Authority that the exemption applicable to establishments of the type of the Claimant is not provided for in n.º 2 of article 9.º of the VAT Code has no textual support.

Therefore, the Claimant was entitled to the exemption under this provision and, consequently, was entitled to waive it, in accordance with article 12.º, n.º 1, subparagraph b), of the VAT Code.

Concerning the preliminary reference which the Tax and Customs Authority intends (in its Reply), no indication is given as to which question of interpretation of norms of European Union law it wishes to have clarified and only regarding questions of this type is there a possibility of reference, as derives from article 267.º, subparagraphs a) and b) of the Treaty on the Functioning of the European Union. In the case in question, in addition to the existence of recent case law, which was cited, regarding the interpretation of norms of Union law, the question arises of the interpretation of subparagraphs a) and b) of article 9.º of the VAT Code, different from those norms, whose interpretation does not fall within the scope of that article 267.º.

Therefore, we are not in a situation in which a preliminary reference is justified.

The assessments of compensatory interest have as their prerequisite the VAT assessments, in which they are integrated (article 25.º, n.º 8 of the LGT), therefore they are affected by the same defect.

Therefore, it is concluded that the impugned assessments are affected by a defect of violation of law, due to error regarding the legal prerequisites, which justifies their annulment.

4.4. Questions Barred from Consideration

Resulting from the foregoing the declaration of illegality of the assessments which are the object of these proceedings, due to a defect that precludes the renewal of the acts, the consideration of the remaining defects imputed to them by the Claimants is barred, in particular that of the impossibility of disregarding the waiver of exemption with retroactive effect and the consequent reclassification of the taxpayer with retroactive effect.

In fact, article 124.º of the CPPT, subsidiarily applicable by force of the provision of article 29.º, n.º 1, of the LFTA, in establishing an order of consideration of defects, presupposes that, having judged one defect well-founded which ensures the effective protection of the rights of the challengers, it is not necessary to consider the remaining ones, as, if it were always necessary to assess all defects imputed to the impugned act, the order of their consideration would be irrelevant.

Therefore, consideration is not given to the remaining defects imputed by the Claimant to the impugned assessments.

5. Refund of the Amount Paid and Indemnificatory Interest

The Claimant also requests that the Tax and Customs Authority be condemned to refund it the amount paid, plus indemnificatory interest.

In accordance with the provisions of subparagraph b) of article 24.º of the LFTA, the arbitral decision on the merits of the claim from which no appeal or challenge is available binds the tax administration from the end of the period provided for an appeal or challenge, this administration being obliged, in the exact terms of the success of the arbitral decision in favour of the taxpayer and until the end of the period provided for spontaneous execution of decisions of tax judicial courts, to "restore the situation which would exist if the tax act that was the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose", which is in harmony with what is provided for in article 100.º of the LGT [applicable by force of the provision of subparagraph a) of article 29.º, n.º 1 of the LFTA] which establishes that "the tax administration is obliged, in case of total or partial success of a claim, judicial challenge or appeal in favour of the taxpayer, to immediately and fully restore the lawfulness of the act or situation that was the object of the dispute, comprising the payment of indemnificatory interest, if applicable, from the end of the period of execution of the decision".

Although article 2.º, n.º 1, subparagraphs a) and b), of the LFTA uses the expression "declaration of illegality" to define the jurisdiction of the arbitral tribunals functioning at CAAD, not making reference to condemnatory decisions, it should be understood that the powers attributed in judicial challenge proceedings to tax courts fall within its jurisdiction, this being the interpretation which is in harmony with the meaning of the legislative authorisation on which the Government based itself to approve the LFTA, in which the first directive proclaims that "the tax arbitral process must constitute an alternative procedural means to judicial challenge proceedings and to the action for recognition of a right or legitimate interest in tax matters".

The judicial challenge procedure, although essentially a procedure for annulment of tax acts, permits the condemnation of the Tax Administration to the payment of indemnificatory interest, as may be inferred from article 43.º, n.º 1, of the LGT, in which it is established that "indemnificatory interest is due when it is determined, in a gracious claim or judicial challenge, that there has been an error attributable to the services from which results payment of the tax debt in an amount higher than legally due" and from article 61.º, n.º 4 of the CPPT (in the wording given by Law n.º 55-A/2010, of 31 December, which corresponds to n.º 2 in the original wording), which states that "if the decision recognising the right to indemnificatory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".

Thus, n.º 5 of article 24.º of the LFTA, in stating that "payment of interest, regardless of its nature, is due, in accordance with what is provided for in general tax law and in the Tax Procedure and Process Code", should be understood as permitting the recognition of the right to indemnificatory interest in arbitral proceedings, as well as the refund of the amount paid, which is the prerequisite for the existence of such interest.

It is therefore necessary to assess the request for refund of the amount improperly paid of € 556,957.24, plus indemnificatory interest.

In the case in question, it is manifest that, as a result of the illegality of the assessment act, there is grounds for refund of the tax, by force of the said articles 24.º, n.º 1, subparagraph b), of the LFTA and 100.º of the LGT, as this is essential to "restore the situation which would exist if the tax act that was the object of the arbitral decision had not been carried out".

Concerning indemnificatory interest, it is also clear that the illegality of the VAT assessment acts is attributable to the Tax Administration, which, on its own initiative, carried them out based on an incorrect interpretation of the law.

There is a defect of violation of substantive law, consisting of error regarding the legal prerequisites, attributable to the Tax Administration.

Consequently, the Claimant is entitled to indemnificatory interest, in accordance with article 43.º, n.º 1, of the LGT and 61.º of the CPPT, calculated on the amount of € 556,957.24 and counted from 24-03-2015, until the full refund of the said amount.

Interest is due at the supplementary legal rate, in accordance with articles 43.º, n.ºs 1 and 4, and 35.º, n.º 10, of the LGT, article 559.º of the Civil Code and Ordinance n.º 291/2003, of 8 April.

6. Decision

In these terms, this Arbitral Tribunal agrees to:

1. Judge as well-founded the main request for arbitral decision and annul the following VAT and compensatory interest assessments:

1. Judge as unfounded the exception of lack of jurisdiction of the Arbitral Tribunal raised by the Tax and Customs Authority;

2. Judge as well-founded the requests for refund of the amounts paid, in the total amount of € 556,957.24, and for payment of indemnificatory interest on this amount, calculated at the supplementary legal rate, from 24-03-2015, until full refund of those amounts, and condemn the Tax and Customs Authority to effect these payments.

7. Value of the Case

In accordance with the provision of article 306.º, n.º 2, of the CPC, 97.º-A, n.º 1, subparagraph a), of the CPPT and 3.º, n.º 2, of the Costs Regulation in Tax Arbitration Proceedings, the case is assigned a value of € 556,957.24.

8. Costs

In accordance with article 22.º, n.º 4, of the LFTA, the amount of costs is fixed at € 8,568.00, in accordance with Table I attached to the Costs Regulation in Tax Arbitration Proceedings, payable by the Tax and Customs Authority.

Lisbon, 18-11-2015

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Magda Feliciano)

(Armando Tavares)