VAT Deduction Rights for SGPS Holding Companies: Arbitral Tribunal Competence Ruling

ARBITRAL DECISION

The Arbitrators Dr. Jorge Lopes de Sousa (arbitrator-president), Dr. Paulo Lourenço and Dr. Cláudia Rodrigues (arbitrator-rapporteurs), designated by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Court, constituted on 07-08-2015, agree as follows:

ARBITRAL DECISION

1. Report

A..., SGPS, S.A., legal entity no. ..., with registered office at Rua..., no. ..., ...-... Lisbon (hereinafter briefly designated as "Applicant"), requested, under the terms of Articles 2, no. 1, paragraph a), 3, no. 1, and 10, no. 1, paragraphs a) and no. 2, of Decree-Law no. 10/2011, of 20 January (Legal Regime for Tax Arbitration, hereinafter designated as "LRTA"), the constitution of an Arbitral Court, aimed at the declaration of illegality and annulment of the decision on the amicable reclamation no. ...2014... and the following VAT assessments, interest assessments and account adjustment statements:

(i) Assessments of Value Added Tax (VAT) no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. 2013 ... and no. 2013 ... referring to the tax periods from January to December 2011 (Documents nos. 2 to 13 attached with the request for arbitral decision);

(ii) corresponding acts of assessment of compensatory interest no. …, no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. ..., no. 2014 ... and no. 2014 ... (Documents nos. 14 to 25 attached with the request for arbitral decision); and,

(iii) account adjustment statements no. 2014..., no. 2014..., no. 2014 ... and no. 2014..., relating to VAT and compensatory interest for the periods of November and December 2011 (Documents nos. 26 to 29 attached with the request for arbitral decision).

The Applicant further requests compensation for damages resulting from the provision of undue security for the suspension of the tax enforcement proceeding no. ...2014... and appendices, which is pending at the Tax Authority of Lisbon –....

In accordance with the provisions of paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.

On 23-07-2015, the Parties were notified of this designation, and did not manifest their intention to refuse the designation of the arbitrators, in accordance with Article 11, no. 1, paragraphs a) and b) of the LRTA and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of paragraph c) of no. 1 of Article 11 of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral court was constituted on 07-08-2015.

The Tax and Customs Authority submitted a response in which it raised an exception of material incompetence to assess the legality of the account adjustment statements, as these are acts that effected compensations, and, as regards the remainder, the Tax and Customs Authority argued that the request for arbitral decision should be judged unfounded.

The Applicant submitted a written response to the exception, arguing, in summary, that the improperly designated "account adjustment statements" do not effect compensations, merely referring to the VAT assessments and compensatory interest assessments and determining the deadline for voluntary payment, and that, if there is incompetence, there will only be grounds for partial dismissal of the claim.

On 17-11-2015, a hearing took place in which witness evidence was produced, and it was agreed that the proceedings would continue with written submissions.

The Parties submitted their arguments.

The Arbitral Court was regularly constituted and a partial exception of material incompetence is raised.

The parties have legal personality and capacity, are legitimate and are duly represented (Articles 4 and 10, no. 2, of the same statute and 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from any nullities.

2. Exception of Material Incompetence

The Tax and Customs Authority raised the exception of material incompetence of this Arbitral Court to assess the legality of the account adjustment statements, as these are acts that effected compensations.

The Applicant argues that the "account adjustment statements" do not effect compensations, merely referring to the VAT assessments and compensatory interest assessments and determining the deadline for voluntary payment, and that, if there is incompetence, there will only be grounds for partial dismissal of the claim.

Examining the "account adjustment statements" contained in documents nos. 26 to 29 attached with the request for arbitral decision, it appears that, as the Applicant states, no compensation operations with any other credit are effected in any of them, whereby we are not dealing with any account adjustments whatsoever.

In any case, in the final part of its request for arbitral decision, in which it formulates its claim, the Applicant does not even make any reference to those "account adjustment statements", limiting itself to requesting the declaration of illegality of the VAT assessment acts and compensatory interest assessments and requesting compensation for undue security.

Thus, the object of the proceedings is defined as the assessment of the illegalities attributed to the VAT assessments and compensatory interest assessments and possible award of compensation for undue security, in relation to which the Arbitral Court is competent, in light of Articles 2, no. 1, paragraph a), of the LRTA and 171 of the Code of Tax Procedure.

On these grounds, as the proceedings do not concern the assessment of the illegality of any compensation act, the exception of incompetence is unfounded.

3. Facts of the Case

3.1. Facts Proven

The following facts are considered proven:

a) The Applicant is a commercial company with registered office in national territory, which exercises activity in the field of "Activities of Managers of Non-Financial Equity Participations" (CAE 64202).

b) In parallel with the exercise of such activity, the Applicant engages in other operations, namely the provision of financing to its subsidiary companies, as well as the provision of administration and management services;

c) For VAT purposes, the Applicant is classified under the normal regime with monthly periodicity, under the terms of paragraph a) of no. 1 of Article 41 of the VAT Code;

d) The Tax and Customs Authority conducted an external tax inspection procedure of general scope, relating to the financial year 2011, conducted under Service Order no. OI2013...;

e) In that inspection action, the Tax and Customs Authority prepared the Tax Inspection Report, a copy of which is contained in document no. 30 attached with the request for arbitral decision, the contents of which are given as reproduced, in which the following is stated, among other matters:

III.2 – CORRECTIONS TO THE CALCULATION OF TAX

III.2.1 – UNDER VAT

III.2.1.1 Under VAT – Improper Deduction of Tax: € 415,896.10

(A) Description of the Facts Practiced by the Inspected Taxpayer

From the analysis of the periodic VAT declarations, relating to the period of 2011 and the accounting records (account "2432 – Deductible VAT") of the same period, it was found that the taxpayer registered values of tax to be deducted, which originated from tax that was charged on acquisitions of fixed assets and other goods and services, in the total amount of € 835,344.03 (sum of fields 20 and 24 of the periodic VAT declarations, relating to the months of January to December 2011), a value which corresponds entirely to the Tax incurred on those operations.

In response to the notification made on 2013-08-13, to provide some information and clarifications, regarding the VAT deducted by the company and the allocation keys used in the attribution of expenses to service provision, supplied on 2013-09-10, the taxpayer stated that: "The right to deduct the VAT supported with general expenses stems from the very activity developed by A...Holding, given that it is a mixed Holding, which exercises not only activities that do not confer the right to deduct VAT (by way of example, the management of equity participations) but also activities that confer such a right (for example, provision of services subject to VAT) (...) whereby the general expenses supported by A...Holding occur mainly due to the provision of services activity, which confers the right to deduct VAT relating to the expenses incurred with its implementation (...) "

Observing the origin of the tax, it is found that the total deducted by the taxpayer, through the VAT declarations, results from the following operations:

• € 132,623.15, relating to the acquisition of fixed assets;

• € 702,720.88, relating to the acquisition of other goods and services.

With a view to understanding the legitimacy of the deduction of VAT supported in the period of 2011, it seems necessary to conduct an analysis of the active operations, which permitted the deduction of the tax, with the respective tax treatment, in light of the provisions of the VAT Code, Directive 2006/112/CE of the Council, of 28 November 2006 (designated as "VAT Directive"), the determination by national and community jurisprudence and also by doctrine, after which we will assess the legitimacy of the tax deduction.

(B) Interpretation of the Norms:

(B1) Of Article 20 of the VAT Code

Article 168 of the VAT Directive establishes that the right to deduct tax shall exist whenever the goods and services acquired by the upstream taxpayer are used by this taxpayer in operations carried out downstream that are subject to tax, or those which, although exempt, nonetheless confer the right to deduction. Excluded are thus exempt operations that do not confer the right to deduction, as well as those that do not fall within the scope of VAT.

It follows from the wording of Article 20, in its no. 1, that with respect to resources directly attributable and/or related to the practice of activities subject to VAT, only the Tax that has "been charged on goods and services acquired, imported or used by the taxpayer for the purposes of" implementation, namely of "supplies of goods and provision of services subject to Tax or not exempt from it", or which, not giving rise to taxation, are expressly provided as conferring the right to deduction.

It is thus derived that the right to deduction, resulting from the combination of Articles 19 and 20 of the VAT Code, is exercised immediately in relation to the entirety of the tax charged on operations carried out upstream, but in order for the VAT to be deductible, the operations carried out upstream must present a direct and immediate nexus with operations downstream subject and not exempt from tax.

This allows us to conclude that the VAT supported with the acquisition of goods and services, used solely in the realization of activities not subject to tax and operations subject, but exempt from it, is not susceptible to recovery.

(B2) Of Article 23 of the VAT Code

"The right to deduction is an integral part of the VAT mechanism, which cannot, in principle, be limited and which is exercised in relation to the entirety of the taxes charged on the taxable operations carried out upstream" (see § 24 of the judgment of the CJEU of 13 May 2008, Securenta, Case C-437/06 and respective references).

The Court of Justice of the European Union itself recognizes that "the provisions of the Sixth Directive do not comprise rules that have as their object the methods or criteria which Member States are obliged to apply, when these are provisions that permit an apportionment of the values of VAT paid upstream, depending on whether the corresponding expenses relate to economic activities or to non-economic activities.

In fact, as the Commission observed, the rules contained in Articles 17, no. 5, and 19 of the Sixth Directive, relate to upstream VAT that was charged on expenses exclusively related to economic activities, operating an apportionment, within these activities, between those which, being taxed, confer the right to deduction and those which, being exempt, do not confer such right", (see the aforementioned judgment, Securenta, Case C-437/06, § 33)

In this respect, the Court has held that, when the Sixth Directive does not contain the necessary indications for such precise calculations, Member States are obliged to exercise said power, having regard to the purpose and the spirit of this directive (see § 28 of the judgment of the CJEU of 14 September 2006, Woliny, Case C-72/05).

In these conditions and so that taxpayers can make the necessary calculations, it is incumbent upon Member States to establish the appropriate methods and criteria for this purpose, in respect of the principles underlying the common VAT system. (see the aforementioned judgment, Securenta, Case C-437/06, § 34}

In this sense, Article 23 of the VAT Code comes to establish, in the case of taxpayers who, in the exercise of their activity, carry out operations that confer the right to deduction and operations that do not confer this right, "the deduction of the tax supported on the acquisition of goods and services, which are used in the realization of both types of operations is determined as follows:

a) In the case of a good or service partially used for the realization of operations not arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of Article 2 [of the VAT Code], the tax fixed deductible as a result of this partial use is determined in accordance with no. 2:

b) Without prejudice to the provision in the previous paragraph, in the case of a good or service used for the realization of operations arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of Article 2 [of the VAT Code], part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the amount of annual operations that give rise to deduction.

Thus, the application of Article 23 "restricts the determination of the deductible tax relating to goods and/or services of mixed use, that is, goods and/or services used jointly in activities that confer the right to deduction and in activities that do not confer this right. In fact, in the case of goods or services exclusively used for operations with the right to deduct tax, presenting a direct and immediate relationship with these operations, the respective tax is subject to full deduction, under Article 20 of the VAT Code".

We thus have that, in the case of goods or services exclusively used for operations subject to tax, but exempt without the right to deduction, or to operations which, although encompassed by the concept of economic activity, are outside the VAT incidence rules, or further to operations not arising from an economic activity, the respective VAT supported cannot be subject to deduction.

(C) The Economic Activity of Equity Participation Management Companies (SGPS)

Assuming the analyzed taxpayer has the nature of an SGPS, and as will be verified further on, this reality is not shown to be irrelevant and cannot be dissociable from the analysis underway, the legal framework applicable to these companies is brought here, which is provided for and regulated in Decree-Law no. 495/88, of 30 December (Official Journal, 1st series-A, no. 301, of 30 December 1988), with the subsequent amendments introduced by Decree-Law no. 318/94, of 24 December, by Decree-Law no. 378/98, of 27 November, and by Law no. 109-B/2001, of 27 December.

The logic of the constitution of SGPS, which are endowed not only with economic advantages, such as the possibility of transferring funds between companies and countries, in order to finance their own projects, achieving good solvency ratios, and financing themselves where money costs less to the group, but also with tax advantages concerning their main activity, namely, through certain conditions established in Article 32 of the Statute of Tax Benefits, the gains and losses determined do not matter for income tax purposes, follows the need to create a more efficient and flexible instrument that would allow the centralized and specialized management of equity participations.

(C1) The Main Activity and the Accessory Activities

For simplicity of exposition, it can be stated that in the field of operation of SGPS, in accordance with the respective legal framework, specifically no. 1 of Article 1 of Decree-Law no. 495/88, these have as their sole contractual object, "the management of equity participations of other companies as an indirect form of the exercise of economic activity, thus the inputs for this activity are not directly related to an economic activity.

The main activity of the SGPS thus consists in the acquisition and holding for a period not less than one year, or that is not occasional, and with a lasting character, of securities (shares or quotas) of companies which become their subsidiaries, thus exercising, indirectly, an economic activity, either through control over the subsidiary company or an active presence and intervention, as shareholders of the subsidiary companies, not thus constituting the participations as mere capital investments.

It is within the scope of this regular activity that acquisitions and disposals of financial participations, liquidations of companies, possible exchanges, mergers or divisions are made, and for the taking of such decisions, there is necessarily to develop a set of operations and diligences, in the sense of managing the SGPS's resources adequately, and so as to create synergies, which allow to achieve the strategic objectives of the group, represented by it.

As it appears elucidating. It is indicated the doctrine contained in the Judgment of the Central Administrative Court of the South, of 2013-01-15, Case 01949/07, in the part of the analysis of legal questions, relating to the activities developed by an SGPS (entirely applicable to the concrete case, as we will see below), that such as A...SGPS, in addition to the main activity of management of participations (not subject to VAT) also carries out operations taxable in VAT.

SGPS fit within the general figure of holding companies, being companies constituted with the objective of intervening in the management of their subsidiaries, controlling their activity and exercising the social rights inherent to the respective equity participations. They have as their essential purpose participating in profits or receiving dividends, and also to collect income resulting from possible disposals of those equity participations.

In fact, under Article 1 of Decree-Law no. 495/88, of 30 December, in force at the date of the facts, SGPS have as their sole contractual object the management of equity participations of other companies, as an indirect form of exercise of economic activities (bold ours). This indirect participation must have a permanent character and be equal to or greater than 10%, directly or indirectly through other companies in which the SGPS is dominant, of the capital with voting rights of the participated company (Article 1, no. 2, of the same statute).

However, under Article 4, no. 1, of the aforementioned Decree-Law, it is permitted for SGPS to provide technical services of administration and management to all or some of the companies in which they hold participations of at least 10% of the capital, with voting rights, or, exceptionally, to companies in which they hold a participation of at least 10% with voting rights, or with which they have entered into "subordination contracts", and under no. 2 this provision of services must be reduced to writing, agreeing on the corresponding remuneration which cannot exceed the respective market value.

It can be said, therefore, that the law permits SGPS to develop economic-financial operations within the scope of the management of the portfolio of equity participations they hold and, obviously, to collect the corresponding revenues and, in addition, to generate profits through the provision of technical management and administration services provided to the participated companies, which must be subject to a written contract and their value must not exceed the normal market value.

In the concrete case, the challenger does not exercise only the activity of managing equity participations but also another, parallel, provision of technical services of administration and management to the participated companies.

And is the second complementary or accessory to the first or can it assume the nature of an "autonomous" activity?

Article 2 of the Commercial Code (CCom) provides a definition of a commercial act, which encompasses any legal effect produced in mercantile activity, encompassing all facts, unilateral or bilateral, isolated or in chain, whether they are natural, involuntary or voluntary, lawful or unlawful.

However, Article 230 of this statute reduces the scope for purposes of qualifying a company as commercial, as it considers that "commercial shall be the individual or collective enterprises" that propose to exercise one of the activities it enumerates, in which the activity of managing equity participations is not counted.

However, not only can this rule not be regarded (especially today) as an exhaustive exemplification, but also Article 463, no. 5, of the same statute considers as commercial acts the purchase and sale of equity shares or shares.

Therefore, there can be no doubt that the activity of managing equity participations has a commercial nature. But will that mean that this activity could be had as an economic activity within the meaning of Article 4, no. 2, of Directive 77/388/EEC of the Council, of 17 May 1977 (Sixth Directive), in the sense that is usually received by the jurisprudence of the CJEU?

The answer must be negative. The legal concept of commercial act embodied in Article 2 of the CCom is a restrictive concept when compared with the notion of economic activity contained in Article 9, no. 1, of the cited Directive, which in turn is also less broad than the notion of economic activity in economic sciences, which define it as being that which is developed by economic agents, designating the set of tasks and relationships they develop, namely production, distribution, consumption, etc., with a view to obtaining the goods necessary to satisfy their needs through the rational and efficient use of available productive resources.

In this light, the main activity of the challenger cannot be had as economic: and that is why the aforementioned Article 1 of Decree-Law no. 495/88 qualifies it as "an indirect form of the exercise of economic activities". That is, the management of equity participations in itself considered is not an economic activity in the normal sense of the concept; what is (possibly) are the activities developed by the subsidiaries. Hence it can be concluded that the activities of support for the management of the participation portfolio, and therefore, exclusively for the benefit of the SGPS, follow the regime of the supported activity and, consequently, also cannot be considered economic activities.

If, however, the SGPS provides technical services of administration and management to its subsidiaries under Article 4, no. 1, of the aforementioned Decree-Law, then it is exercising an economic activity, since it is intervening in the market in a regime of competition and parity with other economic subjects who may provide the same type of service (underlined ours).

We thus have that the provision of technical services of administration and management to the subsidiaries, although not an activity that can be dissociated from the main activity, insofar as it is exercised in the direct interest of the latter but also by convenience of the first, obviously committed to deriving indirect advantages from this activity, is an economic activity for purposes of the tax on turnover".

In the same sense, the vast jurisprudence of the Court of Justice has been unanimous in considering that "the mere acquisition and holding of equity participations should not be considered an economic activity, within the meaning of the Sixth Directive, which confers on its author the quality of a taxpayer. The simple taking of financial participations in other companies does not constitute an exploitation of an asset with the purpose of obtaining income with a permanent character, because the possible dividend, fruit of this participation, results from the simple ownership of the asset (see § 32 of the judgment of the CJEU of 6 September 2012, Portugal Telecom, Case C-496/11 and respective references), that is, the exploitation of capital with the objective of deriving income from it, whether in the form of dividends or interest, which result from the simple ownership of the asset, refers the activity of management of equity participations, outside the field of incidence of the value added tax.

"Subjection to VAT presupposes that this activity be carried out within the scope of a business objective or with a commercial purpose, characterized in particular by a concern for the profitability of invested capital". Under this jurisprudence, "economic activity must thus be understood as an activity capable of being exercised by a private company in a market, organized within a professional framework and generally animated by the purpose of generating profits".

Under the specific legislation already mentioned, in complement and parallel to the main activity, it is permitted for SGPS, as an accessory activity:

• The provision, in certain circumstances, of technical services of administration and management to all or some of the participated companies, under the terms and conditions provided for in Article 4, and possibly still under certain restrictions imposed by paragraph f) of no. 1 of Article 5 of the same statute;

• Granting credit to companies in which it has participations.

The secondary or accessory activity thus consists of an activity producing goods or services for third parties, different and not more important than the main activity of the unit, but in connection with this, involving the provision of technical services of administration and management of all or some of the participated companies, namely, reorganization studies, legal and tax advice, auditing and other services; and, also, in the granting of credit to the participated companies.

The operations embodied in the provision of services are economic activities under the VAT Code, subject to tax and not exempt from it, and as such, the respective VAT supported on goods and services acquired and used in the pursuit of these activities, provided the remaining requirements are met and not including in the operations of Article 21 of the VAT Code, confers the right to deduction under Articles 19 and 25 of the VAT Code.

As regards the activity of granting financing to participated companies, we are here faced with an economic activity within the scope of VAT subjection, however exempt under no. 27 of Article 9 of the VAT Code. In the case of an exemption not provided for in the exclusions of paragraph b) of no. 1 of Article 20 of the same Code, the tax supported on the acquisition of goods and services intended for the pursuit of this activity does not confer the right to deduction (incomplete exemption).

(D) From the analysis carried out;

(D1) The Activity of A...SGPS, SA

A... qualifies as a public limited company, whose corporate purpose consists of the activity of management of a portfolio of equity participations in other companies, to which the National Institute of Statistics (INE) attributed the main CAE 6420233.

The companies of the A... group develop activities in various sectors, namely in the cement industry, in the ready concrete industry, in the extractive industry, in the transport sector, among others.

Each of the business areas of the A... group operates according to principles of management autonomy, namely for matters of current and operational management, within the framework of a planning and control system conducted by A... Holding.

A..., as a manager of participations, equipped itself with a material and human structure that allows it to actively manage participations organized in the business areas referred to above.

For the exercise of its functions, as a shareholder and in support of the management of the group companies, A... Holding has a set of functional structures, in support of the management of the group and each of its business areas, identified in the following diagram:

[Diagram reference]

Verifying the presence of a set of organs, it becomes legitimate to conclude the existence of centralized management of the group, having no bearing on the reality of A... to consider that the totality of the resources and the organizational structure of the company, has as its sole purpose the simple provision of technical services of administration and management to the subsidiaries.

Besides, as indicated by the taxpayer itself, in response to our notification of 2013-08-13: "...) if the company functioned only as a "pure Holding", its structure of expenses would be smaller, contemplating the costs of the activity inherent to the legal structure of a parent company, such as the organization of general assemblies and the costs relating to the company's obligations regarding the presentation of accounts (...)"

Thus, it is understood that "management of equity participations" deals not only with "mere acquisition and holding", because, as easily understood, such would not involve having a structure such as that evidenced in the above organigram.

The activity of managing equity participations equally implies the assumption of certain charges, which are inevitably expenses of a Holding, namely advisory and/or audit services related to potential acquisition of strategic participation; advice for the evaluation of investment opportunities; advice within the scope of the evaluation of participated company (direct or indirectly); economic-financial evaluations in order to assess the acquisition of a given equity participation; studies of new opportunities and strategic partnerships; prospecting of potential investors; actions aimed at studying projects for development and internationalization of the group; analysis of competition issues and the corporate structure of potentially incorporable groups; analysis of tax implications of possible acquisitions of equity participations, or corporate restructuring operations; analytical review of corporate structure, financing and reportable tax losses for tax purposes; studies regarding the possibility of listing on the stock exchange, among others.

Thus, it becomes natural that the taxpayer incurs in the acquisition of a large number of services, which, as can be inferred, is justified by the necessity of providing the decision-making organs with a set of relevant information and options necessary for decision-making, in order to make adequate and centralized management of the Holding's resources, and so as to create synergies that allow to achieve the strategic objectives of the group.

It is concluded that there is a structure, which involves an important set of employees of A..., which develops worthily an effective activity of support to the management, control and protection of the assets of the company, which implies a consumption of resources burdened with VAT, essential in order to assist in decision-making, by its management organs.

Furthermore, such effect is quite evident in the allocation that the taxpayer indicates in the determination of the cost of services provided, under transfer pricing.

Finally, and no less importantly, it is important to mention that the fulfillment of the obligations assumed by A..., depends almost exclusively on the cash-flows generated by its activities, directly or indirectly developed, of management of the participations, insofar as the possible fruits of that holding (and management) translate into the possible receipt of dividends distributed by the subsidiaries, the receipt of interest on loans granted, the reimbursement of those loans and other cash-flows generated by those subsidiaries.

And in the concrete case under analysis, it was verified that as a result of the acts of management of the participations, the income determined materialized in the period of 2011, for example, in the receipt, by A..., of capital participation dividends, in the total amount of 120.612 million euros35.

A... as a Holding manages an important set of participations and the analysis made to the various activities exercised, led to the decomposition, through the accounting of the revenue account of the financial year, which is expressed in the following table:

[Table reference]

It is observed then that the turnover generated by the provision of technical management and administration services represents less than 4% of the income declared in the financial year, also contributing with less than 4% to the net result (before taxes) determined by A....

On the opposite side, we have "income and gains in subsidiaries", resulting from the accounting appropriation of results of the subsidiaries, by the use of the equity method in the valuation of capital shares, has a greater weight or contribution to the formation of income in the period, contributing with about 87% of the total declared.

It is recalled that, in cash terms, the taxpayer obtained an actual gain with the participations, which translated into the receipt of dividends in the amount of € 120,611,721.20.

This analysis serves to conclude that it is possible to clearly distinguish the activity of managing equity participations as the one of greater importance, insofar as it shows itself as the most preponderant in terms of turnover, constituting itself thus as the main activity, and consequently the remaining activities developed, namely the provision of technical services of management and administration to its subsidiaries, are understood as being of an accessory character.

We thus have that for the purposes of VAT classification, the taxpayer is classified as what is commonly come to be designated as a "mixed taxpayer", or rather, "partial taxpayer", with a main activity (the management of equity participations) which does not constitute an economic activity for VAT purposes and, as such does not confer the right to deduct Tax supported on its inputs, but which simultaneously exercises operations encompassed in the concept of economic activity, such as the provision of services (which confers the right to deduction) and the granting of credit to its subsidiaries (an exempt operation).

According to the National Institute of Statistics, in the Portuguese Classification of Economic Activities – Rev. 3, "main activity" is considered as the corresponding to "the activity that represents the greatest importance in the set of activities exercised by a unit of statistical observation".

However, due to practical difficulties associated with the use of value added as a weighting factor of the main activity, considered as the ideal variable, they lead to the need to find alternative variables, and in this context the variable turnover was identified as a substitute for value added.

Identified as this is the main activity of the taxpayer, it is observed that in addition to the management of equity participations, it also exercises economic activities, qualified as accessory - credit granting to subsidiaries and provision of technical services to subsidiaries – which present different frameworks under VAT, being both subject to that tax (the first exempt and the second taxed), which are interconnected with the main activity, due to the limitations on the activity exercised by SGPS, since if there were no equity participations, the technical services could not be provided or loans granted.

It is thus observed that, in addition to the management of equity participations, the taxpayer also exercises economic activities previously qualified as accessory, of which one is subject to VAT and another exempt from it.

As previously mentioned, it is permitted for SGPS, as an accessory activity, the provision, in certain circumstances, of technical services of administration and management, to all or some of its participated companies. The taxpayer provides technical services to the companies; B..., C..., D... and E..., in which it holds a participation of 100% in each one.

In accordance with the documentation provided by the taxpayer, it was verified that it entered into service provision contracts with those subsidiaries, which provide for the supply of services of a diverse nature, related to "support to management and administration".

Constituting the provision of technical services an economic activity subject to VAT and not exempt from it, it is the understanding of the taxpayer that the VAT supported with general expenses, stems from the very activity developed by A...Holding, given that it is a mixed Holding, whereby the general expenses supported, occur mainly due to the activity of provision of services, taking it therefore as main, thus permitting itself to deduct the tax supported on the acquisitions of goods and services considered as general costs.

However, as previously mentioned, the human and material structure of A..., is not exclusively allocated to the activity taxable in VAT.

The jurisprudence of the Court of Justice goes in the direction that: "the existence of the right to deduction is determined in function of the downstream operations, to which the upstream operations are allocated. Thus, said right exists, in the case of the upstream operation subject to VAT, to present a direct and immediate relationship with one or several downstream operations that confer the right to deduction. If not, it must be examined whether the expenses incurred for the acquisition of goods or services upstream, form part of the general expenses linked to the set of economic activity of the taxpayer. In one or the other case, and the existence of a direct and immediate relationship, presupposes that the price of the upstream provisions is incorporated, respectively, in the prices of particular downstream operations or in the prices of goods or services supplied by the taxpayer in the scope of his economic activities" (v. § 60 of the judgment of the CJEU, of 29 October 2009, SKF, Case C-29/08).

In the analysis carried out, it is verified that the taxpayer equipped itself with a material and human structure that allows it to manage, not only equity participations, but also to grant loans and provide technical services to the subsidiaries.

In that sense, consider the description of a set of Departments that make up the Holding and whose functions center on the activity of shareholder, such as:

"Department of Strategy and Development:

• Technically supports the definition and implementation of the Group's Development Strategy;

• Advises the Executive Commission on the implementation of processes for the acquisition and sale of companies or equity participations, of specific assets, the realization of business partnerships and merger processes;

• Develops and coordinates the economic and financial evaluation of investment projects related to the installation of new manufacturing units and increases in the capacity of existing ones;

• Coordinates the implementation of corporate restructuring actions associated with the Group's international presence.

Department of Planning and Control;

• Supports the Executive Commission in the exercise of Planning and Management Control;

• Drives, coordinates and controls the execution of the business plan and budget of the Business Areas and the Group and subsequently carries out Management control;

• Supervises, monitors, and tracks the results of projects of strategic scope at the group level, as well as operational,

Finance Department;

• Manages the financial assets and liabilities of the Group, in direct dependence of the Executive Commission, guaranteeing access, in the best conditions, to the financial resources necessary for the expansion of the Group and its current operation;

• Controls the financial situation of the Group and of the companies that compose it through the centralization of information on their respective resources and financial availabilities.

Internal Audit Department:

• Coordinates internal audit activity, throughout the Group, in the financial, asset and operational areas, through the examination and evaluation of the levels of adequacy and effectiveness of internal control systems and the quality of their performance. Regardless of its hierarchical dependence on the Executive Commission of A..., this Department reports functionally to the Supervisory Board."

(D2) Shareholder Costs / Expenses Supported for the Benefit of the Main Activity

Xavier de Basto and Odete Oliveira write that: "(...) the right to deduct tax that has been supported for the realization of operations subject to VAT only exists. If the goods relate to operations not subject because they are not encompassed by incidence norms, because they are, as is the case with dividends, operations outside the field of application of the tax, there is no deduction right whatsoever. These operations will have to be segregated from the remaining for the purposes of the right to deduction, since no right to deduct asserts them.

The situation that fits here to analyze is to identify within the set of operations contracted by A...SGPS, which ones under VAT fall outside the concept of economic activity, in order to assess the limits to the deduction of VAT supported.

As already mentioned previously, the form of exercise of the activity of "management of equity participations" adopted by A..., requires a considerable consumption of resources, resulting from the activity of management and administration of investments in participations (in what has been qualified as the assets of the company), which can translate as a "cost" resulting from the "shareholder activity".

In this respect, the OECD Report of 1979 is cited, in its § 176, when it states that "charges clearly supported by the parent company in its capacity as shareholder cannot be attributed to affiliates since, by definition, they are incurred in the exclusive interest of the parent company."

The OECD Report of 1984, in its § 33 to 43, in turn addresses the issue of "shareholder activities" characterizing them as activities linked to the management, control and protection of the investment represented by participations of the parent company.

In the same sense, the European Commission, within the scope of the "EU Joint Transfer Pricing Forum", listed a set of charges that it identifies as "shareholder expenses" (free translation), among which the costs of management and control activities (monitoring) related to the management and protection of investments in participations stand out.

It thus becomes natural, for the processes of acquisition or disposal of capital shares, or restructuring of chains of participations, and in the absence of own means, that the taxpayer relies on financial, legal or other advisory services, which it acquires externally, and which prove necessary in the various areas preponderant for decision-making by the administration, within the scope of its holding functions.

Depending on the sectors in which they fit (or intend to fit) and the internal constraints (available resources, management options, among others) and external (market, competition, specific legislation), such objective can be achieved in varied forms, with the realization of consultancies, studies and opinions that assess their adequacy and the expected repercussions being preponderant, so that the decisions to be made, allow the levels of effectiveness and efficiency expected, in the face of the strategic objectives set, and which are expected to translate into an increase in the profitability of investments, either through participation in the results of the subsidiaries (dividends) or in obtaining gains with the disposal.

Thus, in the absence of own means, the taxpayer will have to resort to third parties for the provision of services that prove indispensable, and this implies the assumption of charges that are inevitably expenses of the operation of a Holding, among which we identify the following:

a) Shareholder costs – related to the operation of A... Holding itself, with relations and meetings of its shareholders, definition of lines of action, presentation of accounts, consolidation and budgets, relating to interest on financing supported;

b) Direct costs – related to Group insurance, among others, which were subject to re-billing to the beneficiary entities.

c) Indirect costs – inherent to the activity of provision of services by A... Holding to its subsidiaries, subject to contract, which include costs with personnel and other sub-contracted structure costs.

Shareholder Costs:

During the inspection action, the taxpayer was requested in the notification made on 2013-08-13, to justify the reason why shareholder costs were allocated to the service provision realized to the participated entities, as indicated on page 30 of the transfer pricing file (DPT).

In the first response provided by A... SGPS on 2013-09-10, it informed that: "(...) A... Holding develops not only activities that do not confer the right to deduct VAT (...) but also activities that confer such a right (...) being that it incurs in expenses qualified as "shareholder costs", which are necessary for any of the activities exercised by A... Holding, whereby we have also allocated such expenses to the cost basis attributable to the activity of provision of services (...)"

In the second response to the aforementioned notification, sent on 2013-09-26, the taxpayer further informs that: "(...) the procedure instituted to determine the cost basis for the computation of the price of services provided to subsidiary entities, involves a phase 2 consisting of purging from the cost basis "the operational costs that do not contribute to the provision of services", such as the "costs of the company itself, that is, costs that were not supported for the benefit of customers", namely the costs known as shareholder costs (...) it was found that, by omission, "shareholder costs" in the amount of € 331,579.54, referred to in the transfer pricing file, were not purged(...)"

It further states that: '(...) the mention of these costs in the DPT, aimed to indicate that the same would be excluded under the light of the procedure instituted for the computation of the cost basis (which by omission did not happen). Notwithstanding, such fact does not invalidate that the VAT incurred with the same cannot be recovered. In fact, for VAT purposes, what determines the capacity to deduct the tax incurred with a given expense, is the fact that the same is, or is not, related to operations that confer the right to deduction, which is the case, since the costs in question (although shareholder costs) were incurred considering also the essence of the activity of provision of services of A....

As regards the arguments brought by the taxpayer, it is important to state from now on that the same cannot be accepted, as per the detailed reasoning expounded below.

Examined some invoices (Annex VII), whose VAT was deducted in full by the taxpayer, the following was verified:

[Table reference]

It is thus understood the consumption of these resources, as resulting from the management and control activities, related to the management and protection of investments in participations, which can translate as a "expense" resulting from the "shareholder activity", in accordance indeed with what was indicated by the taxpayer itself, in the table sent (Annex VIII), in which it refers as shareholder costs: the provision of services of the Company's Secretary, certification of accounts, GMTN program, provision of services of the Supervisory Board, maintenance of shares on the stock exchange, General Assembly, among others.

This necessity becomes more evident if we observe, in the organigram in annex, the diversity of participations of A..., and which constitutes its assets (Annex III).

It is thus understood that it is not sufficient to justify the deduction of VAT supported on the acquisition of such services the alleged inclusion of costs in question in the test of the price of service provision, as to the verification of the principle of full competition, namely due to the fact that such activities cannot be qualified as intra-group service provisions, regarding shareholder costs. Thus, as there is no relationship whatsoever between the services acquired and an economic activity for VAT purposes, the tax supported with their acquisition is not deductible under the terms of no. 1 of Article 20 of the VAT Code.

As the CJEU had enunciated in relation to the factuality in question in the Cibo Participations judgment (§ 33), the costs related to services acquired from third parties by an SGPS, within the framework of participations in its affiliates, form part of the general expenses of the taxpayer, having, therefore, a direct and immediate relationship with the set of economic activity of the taxpayer, and not only with possible taxed operations that it might carry out. However, when such occurs, the mere expedient of debiting in full [note that A... indicates, without demonstrating, that "the fees charged are determined (...) so as to cover all expenses (...)] the general expenses to one or more participated companies could not be, by itself, a decisive factor to conclude in the sense that an SGPS is in conditions to deduct the entirety of VAT supported on the acquisition of services from third parties".

Demonstrated that, in the sphere of the taxpayer, the management of equity participations is not an economic activity within the meaning of no. 2 of Article 4 of the "VAT Directive", we have that as regards the documents analyzed, related to the acquisition of goods and services identified, if consider as shareholder expenses, thus exclusively allocated to the realization of operations not arising from economic activity, since for which no direct and immediate relationship was established with the services billed downstream.

Other Charges Peculiar to the SGPS:

There are still other charges, whose invoices (Annex VII) are listed in the table below, not included in the definition of shareholder costs referred to above, but which in the same way, do not have an effective connection with the taxed activity of provision of services, on the contrary, what are at issue are charges of the exclusive interest of A... SGPS:

[Table reference]

As referred to above in point (B) above, when interpreting the norms, in order to be deductible, VAT supported on the acquisitions of goods and services, these must have a direct and immediate relationship, with downstream operations that confer this right.

Thus, the tax supported on the acquisition of such goods or services, being exclusively allocated to the use of A... SGPS itself, configure operations that under VAT do not fit into the exercise of economic activities, whereby the VAT supported in the same, is not deductible.

The right to deduction of VAT, which was charged on the charges identified above, presupposes that operations carried out upstream, must present a direct and immediate nexus with downstream operations with the right to deduction. Thus, the right to deduction of VAT which bears on the acquisition of goods or services upstream, presupposes that the expenses incurred with their acquisition, form part of the constituent elements of the price of the taxed downstream operations with the right to deduction (v. Cibo Participations judgment, already referred to, § 31; judgments of 26 May 2005, Kretztechnik, C-465/03, Colet, p. I-4357, § 35, of 8 February 2007, Investrand, C-435/05, Colet, p. I-1315, § 23; and judgments, already referred to, Securenta, § 27, and SKF, § 57).

However, it is equally admitted a right to deduction in favor of the taxpayer, even in the absence of a direct and immediate nexus between a determined upstream operation and one or several 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 effect, a direct and immediate nexus with the set of economic activity of the taxpayer (v., namely, judgments, already referred to, Kretztechnik, § 36, Investrand, § 24, and SKF, § 58).

In the same sense, the Court of Justice further adds that "a taxpayer cannot deduct in full the value added tax that was charged on upstream services when these have been used not for the realization of an operation with the right to deduction, but rather within the framework of activities that are merely a consequence thereof, except when the taxpayer demonstrates, through objective elements, that the expenses related to the acquisition of these services form part of the cost of the various constituent elements of the price of the downstream operation" (v, judgment, already referred to, Midland Bank, § 33).

Analyzed the nature of the operations identified, it is considered that the expenses relate to the company itself and happened in its exclusive interest, because they influence the decision-making regarding investments and management of participations and internal operation, not being able to establish a relationship of use, that is, a direct and immediate nexus, upstream, with the acquisition of these services from third parties and its effects downstream, produced in the legal sphere of the subsidiaries. In fact, these expenses only produce results in the main activity, although they may generate reflexive effects in the accessory activity.

The invoices issued by the taxpayer, downstream, within the scope of the remunerated activity do not specify concretely the services rendered, containing in the description the generic designation of "provision of technical services of administration and management", which makes it difficult to establish a correlation with the diversity of charges regarding which the taxpayer understands to be legitimately deducting the tax supported.

However, in order that no limitations cannot be imposed on the deduction of VAT supported on the acquisition of services, it is not enough to note that such services were subsequently billed. It also proves necessary, in order that there is no limitation of the deductible VAT [as A... SGPS also intends] that the services in question present, in a comprehensive and exclusive manner, a direct, immediate and unequivocal nexus, with the taxed service provision realized downstream, that is, that they be exclusively and comprehensively imputable, to the provision of complementary services of a technical character of administration and management, effected to the participated companies.

This means that, in order to confer the right to deduction, it is required that the services acquired not only have economic substance, but also that an effective interrelation and dependence can be established between the inputs and outputs, on the presupposition that the price of the downstream operations, which are embodied in the provision of administration and management services, incorporates the charge incurred upstream.

During the inspection action, A... SGPS presented the following breakdown by nature, of the indirect costs supported in the period of 2011, discriminated by the respective structures of the company:

[Table reference]

As regards the development of the service provision activity of A... Holding, these operational costs, according to information from the taxpayer, are individualized by functional organs, based on an estimate of allocation of resources spent by each department, in the exercise of the activity of provision of services, as follows, as per the map supplied by the company:

[Table reference]

It is thus more than evident that the company itself considers that only part of the expenses supported (according to its calculations about 38%) that it recorded in the accounts with codes 62 and 63 are allocated to the activity of provision of services, that is, a substantial part of the company's expenses are allocated to the remaining activities it exercises.

Observed in the light of community jurisprudence, that the right to deduction exists provided that there is a direct and immediate nexus between the upstream economic operations and the downstream ones, which provably does not occur in the present situation.

"For VAT to be deductible, the operations carried out upstream must present a direct and immediate nexus with downstream operations with the right to deduction. Thus, the right to deduction of VAT that bears on the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition form part of the constituent elements of the price of the taxed downstream operations with the right to deduction.

However, a right to deduction is equally admitted in favor of the taxpayer, even in the absence of a direct and immediate nexus between a given upstream operation and one or several 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 effect, a direct and immediate nexus with the set of economic activity of the taxpayer" (v, judgment, already referred to, Portugal..., Case C-496/11, § 36 and 37),

However, the VAT charged upstream on the expenses supported by a taxpayer cannot confer the right to deduction insofar as it concerns activities which, having regard to their non-economic character, do not fall within the scope of application of the VAT Directive, whereby the right to deduction of the tax supported, depends on the demonstration, case by case, of the connection existing between the acquisitions of goods and services inputs and the services provided in the exercise of an activity subject and not exempt, accessory to the main activity.

It is thus considered that the services identified previously, relate to the company itself and do not depend at all on the realization of economic operations for the purposes of the VAT tax, given that by their nature these expenses do not present a direct and immediate relationship with the taxable activities, i.e., these would be incurred anyway even if the taxpayer did not provide any accessory service. Equally, it was demonstrated that the charges incurred upstream did not burden the price of the operations practiced downstream.

In summary;

From the analysis carried out, no evidence resulted that the VAT deducted by the taxpayer related to services which, in a comprehensive and exclusive manner, presented a direct, immediate and unequivocal nexus with the taxed service provision effected upstream, constituting itself thus as general costs, and as such constitutive of the price of services provided.

In light of the foregoing, having concluded that these charges, as well as the shareholder expenses, identified in point D2 of the present report, are not directly related to the activity of A... SGPS taxed in VAT, that is, the provision of services to the participated companies, it is our understanding that the taxpayer improperly deducted the VAT supported on the acquisition of these services, peculiar to it and of its exclusive interest, which translates into the violation of the provision of Article 20, no. 1 of the VAT Code, with the following corrections being in order, by period:

[Table reference]

(D3) Tax Supported in the Exercise of Mixed Activity

The tax inspection procedure aimed to determine the existence of connection of each resource to the various active operations of the taxpayer, which made it obligatory to define objective criteria, which would enable the attribution of the expense incurred to the different activities exercised by the taxpayer, allowing proportional deduction of the Tax in function of the application of an allocation key, as a result of not accepting the understanding of the taxpayer, which sustains the full deduction of VAT and the non-necessity of resorting to a real allocation of inputs, to the different activities.

As regards goods and services, used by the taxpayer to carry out both operations with the right to deduction, as operations without the right to deduction, deduction is only admitted as regards the part of the VAT proportional to the amount relating to the first category of operations (Articles 173 of Directive no. 2006/112/CE and 23, nos. 1 and 2 of the VAT Code).

From the set of operations analyzed and which, in the view of A... SGPS, justify the deduction of VAT supported on the acquisition of other goods and services, in the amount of € 702,720.88, it was demonstrated in the previous point, that VAT was improperly deducted in the value of € 48,471.19, relating to goods and services acquired, exclusively for use of the non-VAT taxable activity of management of equity participations.

Thus, it remains for us to determine, for the remainder of the services acquired analyzed and to which it was not possible to proceed to full allocation to one of the company's activities, and which for this reason fall within the scope of expenses common to the different activities of the company, what part of the tax supported on their acquisition is allocated to the activity of service provision and therefore the right to deduction is verified.

Given the end to which they are intended, common to the various activities, and here are identified the expenses with rents, condominiums, maintenance and cleaning, fixed assets and administrative equipment, it is recommended that the calculation of the deduction of VAT supported be based on the real allocation, albeit based on criteria or allocation keys that permit the deduction of VAT supported, on the acquisition of goods and services in the proportion of the use of these in the taxable activity.

It is recalled that the taxpayer, considered that no part of general costs had use in its activity of managing equity participations (not subject to VAT as he acknowledged in elements presented in the Inspection), namely goods which at first sight would be undisputedly considered as general and used jointly in the realization of all its activities, namely the expenses of operation of the company itself relating to the use of space, such as, for example, rents and condominiums.

The determination of criteria or allocation keys, should result from the knowledge that the company has of its business and should be adapted to the situation and organization of the taxpayer, to the nature of the operations it carries out, in the context of the global activity exercised and to the goods or services acquired for the needs of all operations.

Considering the quality of partial taxpayer, which A... as has already been demonstrated possesses, implies that the deduction of VAT supported on goods and services of mixed use, is not comprehensive, but rather in the measure of the connection of each charge with the subject activity that confers the right to deduction, under penalty of permitting an unjustified inequality in the system.

To avoid this injustice, the Tax Administration followed the jurisprudence given by the Court of Justice of the European Union, which refers to the adoption of the method of real allocation, taking into account that the criterion of apportionment of the amounts of value added tax paid upstream, between economic activities and non-economic activities, must objectively reflect the part of real attribution of upstream expenses, to each of these two activities.

Thus, "the most indicated criteria for implementing the method of real allocation (...) should take into consideration, namely, the resources in goods and services that would always be necessary to the normal performance of the main activity in the event that the said companies chose to not complementarily practice taxed operations".

"In this context, the identification of the most adequate criteria to determine the real allocation of goods and services must take into account, namely the principles of neutrality and non-distortion of competition underlying the common VAT system, with the objective of not permitting possible situations of unjustified inequality between pure holdings, which proceed only to the management of equity participations, and mixed holdings which, in addition, complementarily dedicate themselves to the provision of accessory technical services to the participated companies".

In the same sense, see the judgment of the CJEU of 13 March 2008, rendered in Case C-437/06, relating to a company, which such as A... exercised three types of activities: namely: first, non-economic activities, which do not fall within the scope of application of the Sixth VAT Directive, secondly, economic activities (...), which are exempt from VAT, and, thirdly, economic activities taxed".

In this decision the Court clearly indicated that "VAT charged upstream on expenses supported by a taxpayer cannot confer the right to deduction insofar as it concerns activities which, having regard to their non-economic character, do not fall within the scope of application of the Sixth Directive." (v. the aforementioned judgment, Securenta, § 30).

As regards the limitation in the deduction of the tax, in the same judgment, "the determination of the methods and criteria for apportioning the amounts of value added tax paid upstream between economic activities and non-economic activities (...) falls within the power of appreciation of Member States, which, in the exercise of this power, must take into account the purpose and the spirit of this Directive and, to that end, provide a method of calculation that objectively reflects the part of real attribution in the upstream expenses to each of these two activities",

Within the scope of the exercise of the power of appreciation by Member States, they "are enabled to apply (...), either an allocation key according to the nature of the investment, either an allocation key according to the nature of the operation, or still any other adequate key, without being obligated to limit themselves to a single one of these methods" (v. the aforementioned judgment, Securenta, § 38).

(D4) The Allocation Key or Attribution

For the definition of an allocation key, the Office-Circular no. 30103, of 23 April 2008, of the Tax Management Area – VAT, comes to establish that in the case of goods or 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 (...), and must obligatorily use real allocation based on the actual use (...) through objective criteria (...)".

"Consequently, the degree, proportion or intensity of the use of each good or service in operations arising from VAT-subject economic activity and operations that do not arise, must be determined through objective criteria, which may be referred to merely indicatively, the following:

a) The area occupied;

b) The number of personnel elements of personnel employed;

c) Payroll mass;

d) Machine-hours;

e) Man-hours; (bold ours)(...)"

"In any case, the determination of these objective criteria must be adapted to the situation and concrete organization of the taxpayer, to the nature of its operations in the context of the global activity exercised and to the goods or services acquired for the needs of all operations, integrated or not in the concept of relevant economic activity".

In the case at hand, having the taxpayer indicated to the Tax Administration the allocation key that translates, in its interpretation, the proportion of expenses incurred with the only activity exercised that is subject to VAT and not exempt, it was chosen to consider this proportion in the determination of expenses whose supported VAT can be deductible.

As previously referred to, A... SGPS recorded in its accounts and entered in the VAT declarations for the period of 2011, the total amount of € 702,720.88, relating to VAT deducted on the acquisition of other goods and services, to which corresponds the total taxable basis of € 3,069,827.57.

The aforementioned taxable basis, is in turn, represented in 87% by acquisitions of other goods and services, accounted for in the various Supplies and External Services (SES) accounts, the most representative sub-account (about 78%), being that of Specialized Services, which will be analyzed below.

Analysis of the Supplies and External Services – Specialized Services Sub-account:

In order to identify the operations that gave rise to that tax deducted, starting from the accounts of recording in the accounts, of the VAT supported in the period of 2011, an analysis of the SES sub-account, relating to specialized services, was carried out according to value relevance criteria and which is set out below, taking into account that the VAT deducted in this account totaled € 554,679.60, which corresponds to a taxable basis of € 2,416,676.94.

In accordance with the maps supplied by the taxpayer, the expenses with specialized services, allocated to service provision, were € 1,137,747.57, according to allocation keys applied to this sub-account:

[Table reference]

It was verified that this sub-account recorded in the period of 2011, the total amount of € 3,406,209.20, of which € 403,608.27, were expenses re-billed to the participated companies, as these were the true beneficiaries of those goods or services, acquired by A... SGPS, having the taxpayer deducted VAT, in the amount of € 12,479.80.

These re-billings carried out by A... SGPS, relate mainly to services paid to company P... (exempt from VAT), for the services rendered by this, relating to the lease of an airplane, to the service of the various companies of the A... group and which the Holding subsequently re-billed to these same companies.

In the analysis to some invoices provided by the taxpayer (Annex VII), expenses accounted for in this account were identified, in the total amount of € 200,170.59, whose VAT deducted was € 23,905.79 and which are directly allocated to the provision of services realized by A... SGPS in the year 2011, such as the following operations;

i. Services provided by company Q..., headquartered in the United Kingdom, in the amount of € 97,746.90, relating to studies related to company R..., SA, participated in by B... and which are included in the service provision contract between A... Holding and B..., according to information from the taxpayer, whose VAT supported in the amount of € 22,481.79, was assessed and deducted, under the terms of the VAT Code;

ii. Service provision by company S... (S...), headquartered in Switzerland, in the total amount of € 94,923.69, relating to the remuneration of studies related to sustainable development, falling within the scope of the support services for management and administration provided by A...Holding to D..., the same being exempt from VAT;

iii. Fees for legal services provided by the Law Firm T...(T... and Associates), to B..., relating to the period of 2002-12-30 to 2003-10-28, in the amount of € 7,500.00, whose VAT was deducted by the taxpayer in the year 2011, in the amount of € 1,425.00 at the normal rate of 19%, as it is an invoice issued in the period of 2004 (for this reason, this VAT is not deductible, under the terms of Article 19 of the VAT Code, as set forth in point III.2.12 of the present report).

It was further verified that the taxpayer accounted for in this sub-account expenses with provision of services, which do not have an effective connection with the taxed activity of provision of services which A... SGPS provides to its subsidiaries, on the contrary, what are at issue are charges of the company itself and of its exclusive interest, or are shareholder costs, as per invoices analyzed in point D2 of the present report and which total € 113,323.00, whose VAT deducted was € 26,064.29.

Note that the remaining operations analyzed in that point of the report, are not accounted for in account 622 – Specialized Services.

Thus, based on the elements provided and the analysis carried out above, it is concluded that the basis of the remaining costs, allocated to service provision, regarding specialized services, is what is demonstrated in the summary in the table below (see Annex IX):

[Table reference]

Constituting the remaining costs allocated to service provision, 30.65% of the total specialized services (removing the re-billed costs, those allocated 100% to service provision and those 100% allocated to the main activity of the SGPS), and applying the same ratio to the VAT deducted on general costs, we arrive at the amounts of deductible VAT under the terms of Articles 19 and 20 of the VAT Code, relating to goods or services acquired by the taxpayer, for the realization of service provision subject to tax and not exempt:

[Table reference]

In summary:

Resulting from the analysis of the sub-account of supplies and external services – specialized services and taking into account the proportion of these expenses, which the company indicates are related to the activity of provision of services, we have that VAT was improperly deducted, corresponding to the proportional part to the computation of economic activity, not taxed in VAT, in the total activity of A... SGPS, not deductible under the terms of no. 1 of Article 20 of the VAT Code, by application of paragraph a) of no. 1 of Article 23 of the same statute.

(E) Conclusion:

The grounds presented, lead to our conclusion that the taxpayer improperly deducted the VAT supported on the acquisition of various goods and services, which were not used in the activity of provision of technical services of administration and management, subject to VAT and not exempt from it, which translates into the violation of the provision of Article 20, no. 1 of the VAT Code,

In summary, it is considered demonstrated that:

1. The taxpayer qualifies as an SGPS, whose main object consists of the management of equity participations as an indirect form of the exercise of economic activity (no. 1 of Decree-Law no. 495/88, of 30 December) which assumes a nature non-economic in the VAT perspective (§ 32 of the judgment of the CJEU of 6 September 2012, Portugal Telecom, Case C-496/11 and respective references);

2. Accessorily, the taxpayer provides remunerated technical services of administration and management to the companies it participates in, which is embodied in an economic activity subject to VAT, also granting loans, for which it receives interest, constituting this the exercise of an exempt economic activity;

3. Now, being at issue the simultaneous exercise, by the same company, of operations outside the scope of VAT, of operations subject to VAT that confer the right to deduction (Article 20, no. 1, of the VAT Code), and others subject but exempt (Article 9, no. 27, paragraph a), of the VAT Code), the deduction of VAT supported on the acquisition of goods and services is not comprehensive;

4. The VAT incurred with the resources consumed, relating to other goods and services, which the taxpayer allocated entirely to the economic activity of provision of technical services, was fully deducted by it, in the amount of € 702,720.88;

5. It is not contested here the fact that the taxpayer can deduct the supported VAT, but given the set of all operations carried out by the taxpayer, to determine, from the totality of the tax supported on the acquisition of goods and services, the amount that is deductible;

6. For the exercise of the activity of managing equity participations, the taxpayer equipped itself with a human and material structure consuming resources, which find justification in a framework of support for the activity of managing equity participations, which represents 87.29% of the total income declared in the financial year;

7. The company consumed resources resulting from management and control activities, related to the management and protection of investments in participations, translated as "shareholder costs", as well as other expenses which it was demonstrated to be of the exclusive interest of the Holding, and as such do not present a direct and immediate nexus with the taxable operations downstream, that is, do not form part of the constituent elements of the price of the technical services provided by the taxpayer, whose VAT deducted in the total amount of € 48,471.19, is non-deductible under the terms of Article 20, no. 1 of the VAT Code;

8. The taxpayer determined allocation keys of costs allocated to service provision, based on estimates of the allocation of resources, that is, expenses with personnel, that each department allocates to the activity of provision of services;

9. From the analysis to the accounts of "Supplies and External Services – Specialized Services" and "Deductible VAT from other goods and services", and taking as a basis the information provided by the company, throughout this inspection, it is noted that;

• Part of the balance of this SES sub-account, corresponds to re-billings made to companies in the group in the value of € 403,608.26, regarding which VAT was deducted in the value of €12,479.50;

• Part of the balance of this SES sub-account, corresponds to expenses considered 100% allocated to service provision, in the value of € 200,170.59, regarding which VAT was deducted in the value of € 23,306.79;

• Part of the balance of this SES sub-account, corresponds to expenses 100% allocated to the main activity of the SGPS, in the amount of € 113,323.00, having deducted VAT in the amount of € 26,064.29;

• Finally, part of the balance of this SES sub-account, in the value of € 804,416.61, corresponds to the proportion of general costs allocated to the activity of Service Provision, regarding which VAT was deducted in the value of € 150,868.10.

Concluding, it thus results that, from the total VAT supported on the acquisitions of goods and services, relating to specialized services, which the taxpayer deducted in the financial year, and which was subject to analysis, given the arguments adduced in this report, a correction will be made in the total amount of €367,424.91, under the terms of Articles 19, 20 and 23 of the VAT Code, as per the following table:

[Table reference]

In light of the foregoing, the corrections to be made to the VAT deducted in the year 2011, by tax periods, will be:

[Table reference]

Under the terms of no. 1 of Article 96 of the VAT Code, "whenever, due to a fact attributable to the taxpayer, the assessment of tax is delayed or having received a refund greater than due, compensatory interest accrues to the amount of the tax under the terms of Article 35 of the General Tax Law".

III.2.1.2 – VAT Improperly Deducted – Article 19, no. 1 of the VAT Code: € 1,425.00

A... Holding, deducted in the periodic VAT declaration relating to November 2011, VAT in the amount of € 1,425.00, having presented as a supporting document, invoice no. 1287/2004 of 2004-04-30, issued by the Law Firm T... (T... and Associates), as per Annex VII – page 30.

The tax considered deductible by the company, corresponds to the application of the normal rate of 19%, in force on the date of issue of the invoice, to the value of the service indicated in that document. It should be noted from the outset that the invoice indicates in the field relating to VAT assessed the value of zero.

As already referred to and which is evident from the consultation of the invoice issued by the supplier T..., whose copy is attached and which supports the deduction of VAT in the amount of € 1,425.00, this does not present the indication of the VAT assessed in the operation, or the reason for a possible exemption, whereby that invoice fails to comply with no. 5 of Article 36 of the VAT Code and, for this reason, cannot be considered as "issued in the legally required form".

Thus, the deduction of any VAT based on this document, is undue because the condition of paragraph a) of no. 2 of Article 19 of the VAT Code is not verified.

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