Process: 317/2016-T

Date: January 6, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 317/2016-T) addresses the conditions for VAT credit regularization on uncollectible debts under Article 78 of the Portuguese VAT Code. The claimant, a motor vehicle sales company, contested a VAT assessment of €264,486.57 related to December 2011 regularizations for uncollectible credits. The central dispute concerned whether the taxpayer properly complied with Article 78(7)(a) requirements when deducting VAT on credits deemed uncollectible. The claimant argued that enforcement proceedings against debtor companies had been extinguished due to insufficient seizable assets before the regularization date, satisfying legal requirements. Although official certificates were issued after the regularization, the claimant maintained that prior notification from the enforcement agent constituted sufficient proof of uncollectibility. Additionally, the claimant invoked Article 78(11), arguing that notification to debtors was unnecessary because all debtor companies had ceased their VAT activities by December 2011, meaning they no longer qualified as taxable persons under Article 2 of the VAT Code. The tax authority failed to demonstrate these companies remained active taxable persons after submitting cessation declarations. The case highlights critical procedural requirements for VAT regularization on bad debts, including timing of evidence, sufficiency of documentation, and the status of debtor entities. The claimant relied on binding tax information confirming that once activity ceases under Article 34, economic operators are no longer considered taxable persons. CAAD arbitration provided specialized resolution for this complex VAT regularization matter, allowing expert arbiters to examine technical requirements under Articles 78(7) and 78(11), clarifying whether formal certificates must precede regularization or if prior notification suffices, and whether ceased entities require notification under bad debt provisions.

Full Decision

ARBITRATION DECISION

The Arbiters José Pedro Carvalho (Presiding Arbiter), Nuno Cunha Rodrigues and Luís Ricardo Farinha Sequeira, designated by the Deontological Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, agree:

I – REPORT

On 09 June 2016, A…, UNIPERSONAL LIMITED LIABILITY COMPANY, LDA., with registered office at Building …, …, …, registered with the Commercial Registry Office of Cascais under the sole registration number and legal entity number …, filed a request for the establishment of an arbitral tribunal, under the combined provisions of Articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the VAT assessment act no. 2016…, relating to the period of December 2011, as well as the compensatory interest assessment act no. 2016…, in the amount of €264,486.57.

To support its request, the Claimant alleges, in summary, that:

i. At the date of the regularisation carried out by the Claimant, the enforcement proceedings instituted against companies B…, Lda. and C… Lda., had already been extinguished by virtue of the provision of Article 832(3) of the Code of Civil Procedure, in the wording in force at that date, given the insufficiency of seizable assets;

ii. By proving the uncollectibility of credits at a time prior to the exercise of the right to regularise the tax, such right cannot be questioned or denied by the Respondent;

iii. It is further proven in the proceedings that the Claimant was notified of the extinction of said enforcement proceedings, by reason of the insufficiency of seizable assets, at a time prior to the date of the regularisation carried out;

iv. The fact that the certificates presented were issued at a later date is irrelevant, nor is this required by law, especially when, at the date of the regularisation, the Claimant was, in fact, in possession of a notification issued by the Enforcement Agent intended to give notice that the enforcement had been extinguished due to the insufficiency of seizable assets;

v. Therefore, the regularisations carried out by the Claimant, following the uncollectibility of the credits held against companies B…, Lda. and C… Lda., complied with the requirement provided for in Article 78(7)(a) of the VAT Code;

vi. With regard to the VAT regularisation in favour of the Claimant relating to uncollectible credits held against companies B…, Lda., C… Lda., D… Unipersonal, Lda., and E… Lda., under Article 78(11) of the VAT Code, the VAT regularisation under Article 78(7) of the VAT Code need only be communicated to the acquirer when the latter is a taxable person;

vii. At the date when the Claimant regularised the tax in its favour, all the above-mentioned companies had already ceased their VAT activities, and therefore could not be qualified as VAT taxable persons;

viii. At no time did the Respondent succeed in demonstrating that the companies in question, as of December 2011, actually met the requirements provided for in Article 2 of the VAT Code, or that, notwithstanding the submission of the activity cessation declaration, the requirements provided for in Article 34 of the VAT Code were not met;

ix. According to the Binding Information issued in case no. …, with Dispatch of 2 June 2010, once activity has ceased, under Article 34 of the VAT Code, economic operators cease to be considered as taxable persons;

x. On the foregoing basis, it must be concluded that the VAT assessment, as well as the respective compensatory interest assessment, now disputed, are illegal, in that the VAT regularisation carried out by the Claimant complied with all the requirements provided for in Article 78 of the VAT Code, and therefore the assessments in question should be annulled.

On 14-06-2016, the request for establishment of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to nominate an arbiter, therefore, under Article 6(2)(a) and Article 11(1)(a) of the RJAT, the President of the Deontological Council of the CAAD designated the signatories as arbiters of the collective arbitral tribunal, who communicated acceptance of the assignment within the applicable time limit.

On 16-08-2016, the parties were notified of these designations and expressed no wish to object to any of them.

In accordance with Article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 31-08-2016.

On 07-10-2016, the Respondent, duly notified for that purpose, submitted its response defending itself solely by way of objection.

Under Articles 16(c) and 19 of the RJAT, as well as the principles of procedural economy and prohibition of useless acts, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

Having been granted a time limit for the submission of written arguments, these were presented by the parties, addressing the evidence produced and reiterating and developing their respective legal positions.

A time limit of 30 days was set for the issuance of the final decision, after the submission of arguments by the Tax Authority, which time limit was extended for an equal period.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2(1)(a), 5 and 6(1) of the RJAT.

The parties have legal capacity and standing, are entitled to sue and be sued and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order no. 112-A/2011, of 22 March.

The proceedings are not affected by any nullities.

Thus, there is no obstacle to the consideration of the merits of the case.

Having considered all of the foregoing, it is necessary to decide as follows:

II. DECISION

A. FACTS

A.1. Facts Established as Proven

  1. The Claimant is registered for the exercise of the principal activity of "Sale of other motor vehicles", CAE…, being a unipersonal company whose share capital of €1,050,000.00 is solely held by F… SA (see p. 8 of the RIT).

  2. The Claimant is a non-exempt VAT taxable person, under Article 2(1)(a) of the VAT Code, and is classified, for the purposes of this tax, under the monthly periodicity regime.

  3. In the course of the tax inspection procedure carried out by the Finance Directorate of Lisbon, the Tax Authority verified that the taxable person declared in "Field 40 - Regularisations in favour of the taxable person" the amounts detailed below:

Field 40 - Regularisations in favour of the taxable person

Period Amount Period Amount

201101 80,649.14 € 201107 68,845.10 €

201102 31,202.05 € 201108 44,678.40 €

201103 18,264.37 € 201109 12,698.53 €

201104 12,717.72 € 201110 33,614.11 €

201105 38,399.91 € 201111 15,580.39 €

201106 29,718.18 € 201112 251,241.72 €

Total 637,609.62 €

  1. With regard to the month of December 2011, the Tax Inspection considered that the documents of significant amount are related to uncollectible credits.

  2. The inspection services considered that the cumulative requirements for VAT regularisation were not met, and therefore the tax deducted in the amount of €229,174.75 could not, in their view, be fiscally accepted.

  3. From the RIT, the following also appears:

"Now, as set out in the legal and tax framework, the VAT Code allows VAT to be deducted with respect to credits considered uncollectible when:

i. The enforcement proceeding is extinguished for lack of seizable assets; or,

ii. Insolvency is decreed.

And provided that in both situations, the cancellation, in whole or in part, of the tax previously deducted by them is communicated to the acquirers of the goods and services (customers).

From the analysis of the elements provided, it is found that the cumulative requirements previously referred to are not met".

  1. The Tax Authority considered that the cumulative requirements provided for in Article 78 of the VAT Code were not met with respect to uncollectible credits owed by the Claimant's customers, according to the following table:

  2. With regard to the VAT regularisation relating to uncollectible credits owed by company D… – Unipersonal, Lda., in the amount of €483.86, it is stated in the Report of Conclusions of the Tax Inspection Action that the amount in question cannot be accepted for tax purposes because the requirement provided for in Article 78(11) of the VAT Code is not met (communication to the acquirer of the good or service, who is a VAT taxable person, of the total or partial cancellation of the tax for the purpose of correcting the deduction initially made).

  3. The company D… – Unipersonal, Lda. ceased its VAT activities on 30 September 2011.

  4. In the Report of Conclusions of the Tax Inspection Action, it was also understood that the requirement provided for in Article 78(11) of the VAT Code was not met with regard to the VAT regularisation in favour of the Claimant relating to uncollectible credits against company E…, Lda., at the time it proceeded to regularise the VAT in its favour in the amount of €978.89.

  5. In December 2011, company E…, Lda. had already ceased its VAT activities.

  6. With regard to company B…, Lda., it is stated in the Report of Conclusions of the Tax Inspection Action that the VAT regularisation carried out by the Claimant in its favour, in the amount of €226,339.59, did not meet the requirements provided for in Articles 78(7) and 78(11) of the VAT Code.

  7. At that date, it was not informatically possible to insert, in the computerised record of enforcement proceedings, the extinction of the enforcement proceeding instituted by the Claimant against the said company, for collection of the credit to which the VAT in question relates, due to the absence of assets, since the computerised system displayed the information "User without access to the Enforcement Register", a situation that remained at the date of the institution of the present tax arbitration action.

  8. The Claimant presented, during the inspection procedure, a certificate from the 2nd Civil Court of the Judicial Court of ..., dated 3 August 2011, relating to case …/08…. T…, instituted against company B…, Lda., for collection of the credit to which the aforementioned VAT relates, which states that in that Court those enforcement proceedings were pending, the amount of the debt and the certification that, until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed.

  9. Since the Tax Authority did not accept the certificate in question for the purpose of demonstrating the extinction of the proceeding due to insufficiency or absence of assets, the Claimant submitted, during the Right to a Hearing exercised in the course of the inspection, a new certificate, issued by the enforcement agent in those proceedings, dated 07-12-2015, which states that until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed and that the enforcement proceeding was, at that date, extinguished by virtue of Article 832(3) of the Code of Civil Procedure, in the wording in force at the date of the facts.

  10. A new certificate was issued by the Enforcement Agent, dated 7 June 2016, which states that he "FURTHER CERTIFIES that it does not appear from the proceedings, up to the present date, that the creditor has received any amount for total or partial payment of the amount owed, the present enforcement proceeding being extinguished by virtue of Article 832(3) of the Code of Civil Procedure, in the wording resulting from the amendments introduced by Decree-Law no. 226/2008, of 20 November. The parties were duly notified for that purpose on 13-07-2011".

  11. A new certificate was also issued by the 2nd Civil Court of the Judicial Court of ..., dated 09 June 2016, always relating to case …/08…. T…, which states that in that Court those enforcement proceedings were pending, the amount of the debt, the certification that, until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed, as well as that the enforcement proceeding had been extinguished by virtue of Article 832(3) of the Code of Civil Procedure, in the wording in force at the date of the facts, on 13-07-2011.

  12. Company B…, Lda. ceased its VAT activities on 31 December 2010.

  13. With regard to company C…, Lda., it was understood in the Report of Conclusions of the Tax Inspection Action that the VAT regularisation carried out by the Claimant in its favour, in the amount of €1,372.41, did not meet the requirements provided for in Articles 78(7) and 78(11) of the VAT Code.

  14. In the course of the inspection procedure, with the intention of demonstrating the uncollectibility of credits held against company C…, Lda., the Claimant presented a certificate from the 4th Civil Court of the Judicial Court of …, dated 17 August 2011, relating to the enforcement proceeding no. …/11….T…, instituted against company C…, Lda., for collection of the credit to which the aforementioned VAT relates, which states that in the said Court those enforcement proceedings were pending, the amount of the debt and the certification that, until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed.

  15. The Claimant submitted, during the Right to a Hearing exercised in the course of the inspection procedure, a new certificate, but issued by the Enforcement Agent in those proceedings, dated 07-12-2015, which states that until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed and that the enforcement proceeding had been extinguished by virtue of Article 832(3) of the Code of Civil Procedure, in force at that time.

  16. The Claimant submitted a new judicial certificate, issued on 16 December 2015, which states that "the enforcement proceeding was extinguished by virtue of Article 832(3) of the Code of Civil Procedure, given the lack/absence of assets, no seizure of assets of the Defendant having occurred, extinction which was notified on 21/07/2011".

  17. Company C…, Lda. ceased its VAT activities on 22 March 2011.

  18. The extinction of enforcement proceeding no. …/11….T…, due to the absence of seizable assets, does not appear in the computerised record of enforcement proceedings, the same situation referred to in point 13 being verified.

  19. The Claimant was notified of such corrections, for the purpose of exercising the right to a hearing, on 25 November 2015, by means of Official Notice no. …, of the Dispatch of the Honourable Deputy Finance Director (the "Draft Report"), issued by delegation of authority, under which various corrections were proposed regarding Corporate Income Tax and VAT.

  20. The Claimant submitted, on 9 December 2015, its Right to a Hearing request.

  21. Subsequently, the Claimant was notified of the final conclusions of the Tax Inspection Report, which maintained the position that the Claimant improperly deducted VAT in the amount of €229,174.75.

  22. As a consequence of the corrections made by the Tax Authority, the Claimant was notified of the VAT assessment no. 2016…, resulting from the Statement of Account Adjustment no. 2016…, tax payable in the amount of €229,174.83.

  23. The Claimant was further notified of the respective compensatory interest assessment no. 2016…, resulting from the Statement of Account Adjustment no. 2016…, interest payable in the amount of €35,311.74.

  24. The Claimant paid the aforementioned amounts on 11 March 2016.

A.2. Facts Established as Not Proven

There are no facts of relevance to the decision that should be considered as not proven.

A.3. Justification of the Facts Proven and Not Proven

With regard to the facts, the Tribunal does not need to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish the facts proven from those not proven (see Article 123(2) of the Tax Procedure Code and Article 607(3) of the Code of Civil Procedure, applicable by virtue of Article 29(1)(a) and (e) of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and selected according to their legal relevance, which is established having regard to the various plausible solutions of the legal question(s) (see former Article 511(1) of the Code of Civil Procedure, corresponding to current Article 596, applicable by virtue of Article 29(1)(e) of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110(7) of the Tax Procedure Code, the documentary evidence and the proceedings joined to the file, the above-listed facts were considered proven, with relevance to the decision.

In particular, point 11 of the facts established as proven was repeatedly reaffirmed by the Claimant, from the inspection procedure until the present arbitration action, and was not, at any time, challenged by the Tax Authority, which notoriously has the means to easily confirm or refute such fact, therefore, under the aforementioned Article 110(7) of the Tax Procedure Code, it is considered as proven.

B. LAW

As results from point 7 of the facts established as proven, and from the table inserted therein, which appears at p. 31 of the RIT, the present proceedings involve VAT regularisations carried out by the Claimant, on the basis of uncollectibility of credits, with respect to its customers B… Lda., D… Unipersonal Lda, C… Lda. and E… Lda., the Tax Authority having considered that, with respect to all of them, the requirement of Article 78(11) of the VAT Code applicable was not met, and that, with respect to the first and third, the requirement of Article 78(7) of the same article was also not met.

The following is the content of the relevant rules:

"7 — Taxable persons may further deduct the tax relating to credits considered uncollectible:

a) In an enforcement proceeding, after the registration referred to in Article 806(2)(c) of the Code of Civil Procedure;

b) In an insolvency proceeding when the same is decreed.

c) Under an agreement obtained in an out-of-court conciliation procedure, in accordance with Decree-Law no. 316/98, of 20 October, amended by Decree-Law no. 201/2004, of 18 August. (...)

11 — In the case provided for in number 7 and in letter d) of number 8, the acquirer of the good or service, who is a VAT taxable person, is notified of the total or partial cancellation of the tax, for the purpose of correcting the deduction initially made."

With regard to compliance with the provision of number 11 of Article 78 of the applicable VAT Code, set out above, the Claimant understands that this requirement is not met, arguing, in summary, that since the acquirers of the goods or services underlying the VAT it regularised had, at the date of the regularisation, ceased their VAT activities, they did not, on that same date, have the status of VAT taxable persons, and therefore the communication prescribed therein would not be imperative.

As appears from the established facts, it is indeed verified that, in the period in which the Claimant carried out the regularisations, all the debtors in question had already ceased their VAT activities (see points 9, 11, 18 and 23 of the facts established as proven).

Now, while respecting other views, it is considered that, in this respect, the Claimant is correct.

While not calling into question that the rule of Article 78(11) of the applicable VAT Code only establishes the obligation of communication there provided to acquirers of goods or services who are taxable persons of the tax in question[1], the Tax Authority argues that the cessation of VAT activities does not result in the loss of the status of VAT taxable person.

Thus, the Tax Authority argues that:

  • The cessation of VAT activities does not determine the extinction of the company, which only occurs at the moment of closure of the liquidation that precedes its dissolution, which means that the company maintains its legal personality and, to that extent, is obliged to comply with the different tax obligations;

  • Under Article 19(6) of the General Tax Law, legal entities that cease activity must appoint a legal representative for tax purposes, this obligation deriving from the fact that the cessation of activity does not alter the qualification of an entity as a taxable person, within the meaning given by Article 2 of the VAT Code and Article 9 of Directive 2006/112/EC, a qualification necessarily prior to the situation of subjection to declarative obligations.

While repeating the respect due, it is considered that the arguments presented are incapable of supporting the conclusion advocated by the Respondent.

Indeed, the fact that a company is not extinct, maintains its legal personality, has a tax representative and maintains (some) declarative obligations does not mean that it has activity.

On the contrary, the submission of a declaration of cessation of activity by a company, accepted by the Tax Authority, indicates that it has ceased to exercise any activity.

Now, as stated in the quotation of Professor Xavier de Basto, made by the Respondent itself at point 63 of its response, "'Taxable person', within the meaning of the directive, thus encompasses those persons who, by exercising an economic activity, carry out, and probably on a continuing basis, taxable operations." (emphasis ours).

Now, as stated, the submission of a declaration of cessation of activity, duly accepted by the Tax Authority, indicates that the person in question has ceased to exercise any economic activity, and has ceased to carry out, precisely, taxable operations, and is therefore not a taxable person, within the meaning of both the VAT Directive and the VAT Code, regardless of either the non-extinction of the company, or the maintenance of legal personality, or the existence of a tax representative, or the maintenance of (some) declarative obligations.

And, if it is true, as the Tax Authority states, that the Court of Justice of the European Union has held that Article 4(1) to (3) of the Sixth Directive is to be interpreted to the effect that a person who has ceased a commercial activity but continues to exercise some form of activity is considered a taxable person within the meaning of that article, the fact is that, in the case, apart from the declaration of cessation of activity, and its acceptance by the Tax Authority, nothing more is found, and therefore, if the Tax Authority, in order to base the correction it made, intended to sustain the obligation of the Claimant to comply with the provision of Article 78(11) of the VAT Code, should have demonstrated that, notwithstanding the cessation of VAT activities of the Claimant's customers, these continued to exercise some type of activity (such as, for example, paying rents or other charges relating to the premises that served for the exercise of their activity).

What is referred to above does not prevent (out of context) reference to the Judgment of the Supreme Administrative Court, of 20-01-2010, issued in case no. 0974/09, made by the Respondent, since what is there at issue is the status of taxable person, assumed in an invoice, a prerequisite of the deduction of the tax contained therein, the Supreme Administrative Court asserting, in that judgment, that the status of taxable person derives from any of the circumstances described in Article 2 of the VAT Code, and that, in the present case, none of those circumstances is demonstrated, which would always have been necessary, given the declarations of cessation of activity, and their acceptance by the Tax Authority.

Nor does the decision in the Judgment of the Supreme Administrative Court of 25-06-2015, issued in case 0288/14, also invoked by the Respondent, prevent the conclusion reached, since in that case, unlike the present, it is not proven that the insolvent debtor has ceased VAT activities, which fully justifies the conclusion of that Supreme Court, according to which the communication referred to in Article 78(11) of the VAT Code should have been made to the insolvency administrator.

Also, the argument, limited to the situation of the Claimant's customer "E…, Lda", according to which the process of liquidation of the company inherently entails the realisation of operations falling within the scope of VAT, namely the sale of company assets, subject to tax by virtue of the provision of Article 1(1)(a) and Article 3 of the respective Code, does not hold in the case, given, once again, the proven cessation of activity, since no element was gathered to the effect that, in fact, such operations took place.

Moreover, and although this statement is not subscribed to, as will be seen below, the Respondent itself states, at point 52 of its Response, "Article 78 of the VAT Code and the formal requirements provided therein are indeed intended, in accordance with the neutrality principle, to project the effects of the cancellation of credits/debts in the sphere of the creditor and the debtor, allowing, in particular, the acquirer of the good to cancel the tax, in whole or in part, for the purpose of correcting the deduction initially made". Now, a taxpayer, as is the case with the Claimant's customers now in question, whose activity has ceased for VAT purposes is prevented, by force of that same cessation, from obtaining any effects from the communication that would have been sent to him, "in particular (...) the total or partial cancellation of the tax, for the purpose of correcting the deduction initially made", and therefore the legislative intent identified by the Respondent in the rule in question is demonstrably not realised in the case.

In this way, by basing the corrections made, and now contested by the Claimant, on the obligation of the latter to comply with the provision of Article 78(11) of the applicable VAT Code, without demonstrating the prerequisites of such rule, namely that the acquirers of the goods or services were, at the date of the regularisation, VAT taxable persons, the tax act subject of the present tax arbitration action erred in its factual premises, and consequent error of law, and should therefore be annulled.

With regard to the Claimant's customers B… Lda. and C… Lda., the corrections made and here contested by the Claimant are further based on the violation of the provision of Article 78(7) of the applicable VAT Code, also set out above.

Before proceeding, it should be noted that the understanding set out in the RIT (see point 6 of the facts established as proven), and not subsequently challenged by the Respondent, is subscribed to, according to which the substantive requirement presupposed by Article 78(7)(a) referred to is that the enforcement proceeding be extinguished for lack of seizable assets, the reference to "the registration referred to in Article 806(2)(c) of the Code of Civil Procedure" corresponding to a form of proof of the extinction of the enforcement proceeding, perhaps deemed by the legislator as the simplest to obtain and confirm, but without prejudice to other ways of demonstrating it, it being well known that registers are essentially forms of publicity of facts and legal acts.

Equally subscribed to is the Respondent's understanding, contained in point 31 of its Response in the proceedings, according to which the legislator, with "the possibility of deducting the tax relating to uncollectible credits in an enforcement proceeding, (...) intended to ensure that the patrimonial insufficiency of the defendant in the enforcement proceeding remained demonstrated in the enforcement proceeding, proving the impossibility of payment of the credits of the creditor."

In order to attempt such a demonstration, the Claimant initially presented two certificates issued in 2011, which state that enforcement proceedings were pending in those courts, the amount of the debt and the certification that, until that date, it did not appear from those proceedings that the creditor had received any amount for total or partial payment of the amount owed.

As the Tax Authority understood, it is considered that such certificates are insufficient to achieve the demonstration that burdened the Claimant, that is, that the enforcement proceeding had been extinguished for lack of seizable assets, verifying the impossibility of payment of the creditor's claims, since they contain nothing to that effect.

Given this, the Respondent understands, with respect to the two situations in question, that the Claimant will not be able to assert the right it exercised, "since the verification of the requirements of Article 78 of the VAT Code must be prior to the exercise of the right regulated therein."

While repeating the respect due, such understanding cannot be ratified.

Indeed, one thing is the fact on which the legitimacy of the exercise of the right depends, and another will be the means of proof of such fact. Now, the right of the Claimant, as the Respondent itself recognises and was seen, is conditioned on the fact that the enforcement proceeding had been extinguished for lack of seizable assets, verifying the impossibility of payment of the creditor's claims.

Now, such a fact has occurred, as the successive certificates presented by the Claimant unquestionably attest, and, given the facts established as proven, it is unquestionable that the relevant enforcement proceedings were extinguished on 13 and 21 July 2011, for lack of seizable assets, without the Claimant having been paid any amount.

In view of such proof, no other conclusion can be reached than the legitimacy of the exercise by the Claimant of its right to regularise VAT for uncollectible credits.

Indeed, unlike the right to deduction, with respect to which the VAT Code and the Directive separate the moment of birth of the right from the moment of its exercise (see Articles 22(1) to (3) of the VAT Code and Articles 167 and 178 of the Directive), this does not occur with respect to regularisation for uncollectibility of credits, where the right to regularisation arises with the verification of its prerequisites, and can be exercised by its holder when it sees fit, provided it proves those prerequisites, and one cannot, as has been said, confuse the verification of such prerequisites (which conditions the arising of the right itself) with its proof (which deals, merely, with demonstrating the legitimacy of the exercise thereof).

Moreover, such occurs, contrary to what both parties argue and what happens, for example, with the mechanism of deduction of upstream tax, given that the regime in question is not a consequence of the principle of neutrality of VAT, as provided for in Article 90 of the VAT Directive:

"1. In the case of cancellation, rescission, resolution, non-payment in whole or in part, or reduction of price after the operation has been carried out, the taxable amount is reduced accordingly, under the conditions laid down by the Member States.

  1. In the case of non-payment in whole or in part, Member States may derogate from the provisions of paragraph 1."

From this Article of the Directive it follows that in the case of total or partial non-payment of the price, Member States may not reduce the taxable amount, that is, in short, refuse the refund of VAT relating to uncollectible credits.

This was not the option of the Portuguese legislator, but this does not prevent, rather reinforces, that in the mechanism of VAT regularisation for uncollectibility of credits, referred to in Article 78(7) of the VAT Code, what is not at issue is the neutrality of VAT, since if it were, it would not be allowed for Member States to fail to reduce or eliminate the taxable amount, in cases of partial or non-payment of the price.

The faculty conferred by the Directive on Member States will be explained by the fact that, in the situations in question, it will be merely a matter of defining whether it is the State or the issuer of the invoice who bears the loss of the uncollectibility of the invoiced tax, since such invoiced but uncollected tax will have been (in a normal framework) the subject of deduction by (or even refund to) the defaulting debtor of the invoice, and therefore, whether the State or the issuer of the invoice, there will always, ultimately, be a person prejudiced by the uncollectibility of the credit and the respective tax.

It cannot therefore be lost from sight that VAT regularisation for uncollectibility of credits is intended solely to return to the taxable person the tax that was invoiced but which it was not possible for him to collect, a situation that results from a choice made in that sense by the Portuguese State (perhaps justified by the burden that taxable persons already bear in the VAT assessment and collection mechanism), and therefore will be merely a matter of the Tax Authority assuring itself, with the necessary certainty, that the credit has indeed become uncollectible, at the date on which the taxable person made the regularisation.

In the case, and as has been said, given the facts proven, there is no doubt that the enforcement proceedings for collection of the credits underlying the regularised tax, relating to the Claimant's customers B… Lda. and C… Lda, were extinguished on 13 and 21 July 2011, for lack of seizable assets, without the Claimant having been paid any amount.

In this way, the conclusion must be that the regularisations in question are legal, and that the corrections that set them aside are illegal, and must be annulled, and the arbitral request succeeds on this point as well.

Given what has been decided, the consideration of the defect of lack of justification, raised incidentally by the Claimant in its allegations, is foreclosed.

The Claimant combines, with the request to annul the tax acts subject of the present proceedings, the request for condemning the Tax Authority to pay compensatory interest.

Given the success of the annulment request, the amounts which, with respect to the tax acts annulled, are verified as having been paid by the Claimant, should be refunded, if necessary in execution of judgment.

In the case at hand, however, it cannot be stated that the illegality of the assessment acts, whose amount the Claimant has paid, relating to regularised VAT is entirely attributable to the Respondent.

Indeed, as pointed out above, the certificates initially presented by the Claimant did not properly document the prerequisites of the regularisations carried out by it with respect to customers B… Lda. and C… Lda, it being only after the assessment acts were made that the Claimant obtained and presented certificates evidencing that, at the time of such regularisations, the enforcement proceedings of the underlying credits had been filed for non-existence of seizable assets.

In this way, only partially is the illegality of the assessment acts attributable to the Respondent, specifically with respect to the tax relating to the Claimant's customers D… Unipersonal Lda, and E… Lda..

Consequently, the Claimant is, in that respect, entitled to compensatory interest, under Articles 43(1) of the General Tax Law and 61 of the Tax Procedure Code. Compensatory interest is due from the date of the payments that prove to have been made, and calculated based on the respective amount, until its full refund to the Claimant, at the legal rate, under Articles 43(1) and (4), and 35(10) of the General Tax Law, Article 61 of the Tax Procedure Code, Article 559 of the Civil Code, and Order no. 291/2003, of 8 April (without prejudice to any subsequent amendments to the legal rate).

The Respondent must comply with this decision, in accordance with Article 24(1) of the RJAT, determining the amount to be refunded to the Claimant and calculating the respective compensatory interest, at the supplementary legal rate for civil debts, under Articles 35(10), and 43(1) and (5) of the General Tax Law, Article 61 of the Tax Procedure Code, Article 559 of the Civil Code, and Order no. 291/2003, of 8 April (or the diploma or diplomas that succeed it).

Compensatory interest is due from the date of the improperly made payment, until the processing of the credit note, in which they are included.

C. DECISION

For these reasons, this Arbitral Tribunal decides to uphold the arbitral request filed and, accordingly:

a) Annuls the VAT assessment act no. 2016…, relating to the period of December 2011, as well as the compensatory interest assessment act no. 2016…, in the amount of €264,486.57;

b) Condemns the Respondent to refund to the Claimant the amounts improperly paid by force of the annulled assessment acts, plus the compensatory interest due, counted from the date of payment, on the amount of €1,462.75, without prejudice to what is provided for in Article 43(3)(b) of the General Tax Law, with respect to the remainder;

c) Condemns the Respondent for the costs of the proceedings, in the amount fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €264,486.57, under Article 97-A(1)(a) of the Tax Procedure and Process Code, applicable by force of Articles 29(1)(a) and (b) of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €4,896.00, under Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was entirely successful, under Articles 12(2) and 22(4), both of the RJAT, and Article 4(4) of the aforementioned Regulation.

Let notification be made.

Lisbon 6 January 2017

The Presiding Arbiter

(José Pedro Carvalho - Reporter)

The Arbiter Member

(Nuno Cunha Rodrigues)

The Arbiter Member

(Luís Ricardo Farinha Sequeira)

[1] See, in the sense that the "duty of notification to the acquirer who is a VAT taxable person" is restricted, the Judgment of the Supreme Administrative Court of 25-06-2015, issued in case 0288/14, cited by both parties.

Frequently Asked Questions

Automatically Created

What are the conditions for VAT regularization on uncollectable credits under Article 78(7) of the Portuguese VAT Code?
Under Article 78(7)(a) of the Portuguese VAT Code, taxpayers may regularize VAT on uncollectible credits when enforcement proceedings are extinguished due to insufficient seizable assets or when insolvency is decreed. The taxpayer must prove the credit is uncollectible at the time of regularization. While formal certificates are typically required, this decision examined whether prior notification from enforcement agents suffices if certificates are issued later. Additionally, when the debtor is a taxable person, Article 78(11) requires notification to the acquirer, but this obligation may not apply if the debtor has ceased VAT activities and no longer qualifies as a taxable person under Article 2 of the VAT Code.
Can the Portuguese tax authority deny a VAT credit regularization if insolvency certificates were issued after the regularization date?
The tax authority cannot automatically deny VAT credit regularization solely because official certificates were issued after the regularization date, provided the taxpayer can demonstrate actual knowledge of the enforcement extinction prior to regularization. In this case, the claimant argued that notification from the enforcement agent about the extinction of proceedings due to insufficient assets, received before the December 2011 regularization, constituted sufficient proof of uncollectibility. The law does not explicitly require that certificates be issued before regularization if the taxpayer can otherwise prove the credit was uncollectible at the relevant time. The key factor is whether uncollectibility was established and known to the taxpayer when exercising the right to regularize.
How does the extinction of enforcement proceedings due to insufficient assets affect VAT credit recovery in Portugal?
The extinction of enforcement proceedings due to insufficient seizable assets is one of the primary conditions allowing VAT credit recovery under Article 78(7)(a) of the VAT Code. This extinction evidences that the credit cannot be collected through legal means, satisfying the uncollectibility requirement. When a court or enforcement agent declares enforcement proceedings extinguished for lack of seizable assets, the creditor-taxpayer may regularize the VAT previously deducted on the supply. However, proper documentation and timing are critical. The taxpayer must demonstrate that the enforcement extinction occurred before or contemporaneously with the VAT regularization, ensuring the right to recover is exercised based on proven uncollectibility rather than mere expectation.
What role does CAAD arbitration play in resolving disputes over IVA regularization of bad debts?
The Administrative Arbitration Centre (CAAD) provides specialized arbitration for tax disputes, including IVA regularization controversies involving bad debts. CAAD offers an alternative to judicial courts, with arbiters experienced in tax law examining complex technical requirements under the VAT Code. In this case, a three-arbiter panel was constituted to determine whether the taxpayer complied with Articles 78(7) and 78(11) requirements. CAAD arbitration allows for faster resolution than traditional litigation, with proceedings governed by the Legal Regime for Arbitration in Tax Matters (RJAT). The tribunal reviews both factual evidence and legal interpretation, providing binding decisions on the legality of tax assessments, offering taxpayers an effective mechanism to challenge tax authority determinations on VAT regularization matters.
What evidence is required to prove credit uncollectability for VAT adjustment purposes under Portuguese tax law?
To prove credit uncollectability for VAT adjustment purposes, Portuguese tax law requires documentary evidence demonstrating either: (a) extinction of enforcement proceedings due to insufficient seizable assets under Article 832(3) of the Code of Civil Procedure, or (b) insolvency decree. Typically, this includes certificates from enforcement agents or court documents confirming the proceeding's extinction or insolvency declaration. However, this case questioned whether prior notification from enforcement agents, even if formal certificates are issued later, constitutes sufficient evidence. Additionally, taxpayers must demonstrate the temporal relationship between uncollectibility and regularization. When invoking Article 78(11), evidence may also include documentation showing the debtor ceased VAT activities and no longer qualifies as a taxable person under Articles 2 and 34 of the VAT Code, potentially affecting notification requirements.