VAT Exemption on Property Leasing and Arbitral Tribunal...

Process: 324/2015-T

Date: November 24, 2015

Tax Type: IVA

Summary

This arbitral decision (Process 324/2015-T) addresses the VAT exemption regime applicable to property leasing under Portuguese tax law. The claimant, a real estate investment fund, challenged VAT assessment acts totaling €996,145.78 arising from the Tax Authority's rejection of a €860,000 VAT reimbursement request for Q4 2013. The core dispute centers on whether the fund's leasing activities qualify for VAT exemption under article 9(29) of the Portuguese VAT Code (CIVA). The claimant operated two distinct property portfolios: (1) buildings leased as 'bare walls' without additional services, which it classified as VAT-exempt rental; and (2) a converted factory complex offering comprehensive business services and infrastructure, which it treated as taxable with full VAT deduction rights. As a mixed taxable person with real allocation, the fund did not deduct VAT on inputs for exempt activities but fully deducted VAT on the serviced business complex operations. The Tax Authority raised preliminary objections including prescription of the annulment claim and material incompetence of the CAAD Arbitral Tribunal to review reimbursement denial acts. The tribunal was constituted as a collective arbitral panel under Decree-Law 10/2011 (RJAT), with arbitrators appointed by both parties and a presiding arbitrator selected by mutual agreement. The proceedings included witness testimony and written submissions. This case illustrates the critical distinction in Portuguese VAT law between simple property leasing (potentially exempt under article 9(29) CIVA) and complex service provision involving real estate (taxable operations), with significant implications for VAT recovery rights and reimbursement claims in the real estate investment sector.

Full Decision

ARBITRAL DECISION

The Arbitrators Counsellor Jorge Lopes de Sousa (appointed by the other Arbitrators), Dr. João Espanha and Prof. Dr. Clotilde Celorico Palma, appointed respectively by the Claimant and the Respondent, to form the Arbitral Tribunal, constituted on 14-08-2015, agree as follows:

1. Report

A…, with the collective person identification number …, managed and represented by the respective management company B…, S.A., taxpayer no. …, with registered office at Praça…, no. …,... …-… Lisbon, came, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter referred to as RJAT) to request CONSTITUTION OF A COLLECTIVE ARBITRAL TRIBUNAL WITH APPOINTMENT OF ARBITRATOR BY THE PARTY AND REQUEST FOR ARBITRAL DECISION (article 6, no. 2, paragraph b) and article 10, no. 2, paragraph g) of Decree-Law no. 10/2011, of 20 January), with a view to declaring the illegality of the VAT assessment acts nos. …, …, …, …, … and …, in the total amount of € 990,691.58 (Document 1), of compensatory interest nos. …, …, …, …, … and … (Document 2), in the amount of € 4,577.35, and of default interest no. … (Document 3), in the amount of € 876.85, totalling the global amount of € 996,145.78, which resulted from the total dismissal of the reimbursement request submitted by the Claimant in the 4th quarter of 2013, in the amount of € 860,000.00 (Document 4), the offsetting of the excess VAT to be carried forward determined in the 4th quarter of 2013, in the amount of € 1,228.07 and the issuance of VAT assessment statements and account settlement statements requesting additional payment of tax in the amount of € 129,463.51 (Document 5).

The Claimant seeks the annulment of the VAT assessment tax acts and compensatory interest acts, the condemnation of the Tax Authority to refund to the Claimant the non-reimbursed VAT, in the amount of € 860,000, plus the respective indemnatory interest, the condemnation of the Tax Authority to restore to its current account the VAT to be carried forward subject to offsetting in the 4th quarter of 2013, in the amount of € 1,228.07, the condemnation of the Tax Authority to terminate the executive and administrative offence proceedings underlying the annulled assessment acts.

The Respondent is the TAX AND CUSTOMS AUTHORITY (AT).

The Claimant appointed Dr. João Espanha as Arbitrator, pursuant to the provisions of article 6, no. 2, paragraph b) of RJAT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 08-06-2015.

Pursuant to the provisions of paragraph b) of no. 2 of article 6 and no. 3 of RJAT, and within the time limit provided for in no. 1 of article 13 of RJAT, the highest official of the Tax Administration service appointed as Arbitrator Prof. Dr. Clotilde Celorico Palma.

The Arbitrators appointed by the Parties agreed to appoint Counsellor Jorge Lopes de Sousa as presiding arbitrator, who accepted the appointment.

Pursuant to and for the purposes of the provisions of no. 7 of article 11 of RJAT, the President of CAAD informed the Parties of this appointment on 29-07-2015.

Thus, in accordance with the provisions of no. 7 of article 11 of RJAT, upon expiration of the time limit provided for in no. 1 of article 13 of RJAT without the Parties having anything further to say, the Collective Arbitral Tribunal was constituted on 14-08-2015.

The Tax and Customs Authority submitted a Response, raising the exceptions of prescription of the right of action regarding the request for annulment of the act dismissing the VAT reimbursement request and the material incompetence of the Arbitral Tribunal to assess the legality of such act and defending the lack of merit of the request for arbitral decision.

On 28-10-2015, the meeting provided for in article 18 of RJAT was held in which witness testimony was produced and it was decided that the proceedings would continue with successive written submissions.

The Parties submitted written submissions.

The Arbitral Tribunal has been duly constituted and is competent.

The parties have legal personality and capacity and are properly qualified (articles 4 and 10, no. 2, of the same decree and article 1 of Ordinance no. 112-A/2011, of 22 March) and are duly represented.

The proceedings do not contain any nullities.

2. Statement of Facts

2.1. Proven Facts

a) The Claimant A…(TIN: …) is classified for the main activity of "Trusts, Funds and Similar Financial Entities" (CAE: …);

b) The Claimant commenced activities on 03-03-2010 being classified under the Normal Regime with quarterly periodicity for VAT purposes, qualifying as a mixed taxable person with real allocation of all assets;

c) The Claimant is a real estate fund that develops its activities in the lease market for commerce and services;

d) The management entity of the Fund is C …SA" (TIN:…);

e) The Claimant is the owner of a set of urban buildings in the municipality of ..., specifically the following, which it considers to be subject to the following VAT regimes:

a) Buildings integrated in the ... of Industries …(hereinafter referred to as "…"), which the Claimant considers to be allocated to a rental activity without any additional or complementary service provision, exempt from VAT pursuant to no. 29 of article 9 of the VAT Code;

b) Buildings integrated in the ... Factory …(hereinafter referred to as "…"), subsequently deactivated and converted into a business complex, which the Claimant considers to be "allocated to the activity of providing space for the development of commercial, service and warehousing activities, in which the owner assumes the provision of a broad set of other services and support infrastructure for the activities developed by the space users, subject to the general VAT rules, with the right to deduct tax";

f) In the years 2012 and 2013, the Claimant was classified, pursuant to article 2, no. 1, paragraph a) of the VAT Code ("CIVA"), as a taxable person under the normal regime with quarterly periodicity, simultaneously performing taxable operations that confer the right to deduction and exempt operations that do not confer the right to deduction, characterizing itself as a mixed taxable person with full real allocation, which resulted in the adoption of the following procedures in recovering the VAT incurred:

i) Non-deduction of any tax incurred in the acquisition of goods and services allocated to the …, as they constitute inputs of exempt activities without the right to deduction;

ii) Full deduction of the tax incurred in the acquisition of goods and services allocated to the activity carried out in the Factory …, as they are directly related to the performance of taxable operations;

g) The activity developed by the Claimant in the properties of the … is restricted to rental, through its passive placement at the disposal of tenants - "bare walls" – without the provision of any additional services;

h) The buildings that comprise the … do not have support infrastructure for the development of activities and there are no common areas, common expenses, nor condominium regulations or common space usage regulations;

i) The activity developed regarding the properties of the … is limited to their mere passive rental, bare walls, with the Claimant having no other intervention in the operation, management or promotion of these spaces, which are administered autonomously by …, as tenant and sole user of the ...;

j) The Claimant acquired on 03-03-2010, the urban buildings that constitute the complex of the Factory …, which were the former installations of the … factory, deactivated in 2006, and which were vacant;

k) The previous owner had already commenced studies for the rehabilitation and conversion of the space into a business condominium, having for this purpose concluded a real estate management and promotion service provision contract that was transferred to the Claimant's sphere;

l) In these installations of the building… ("Factory …") infrastructure and support services for the activities of the space users are made available;

m) The Claimant makes the common spaces of the Factory … available several times for the organization of events in collaboration with the space users or with other public and private entities, as well as for actions related to the activities of the space users themselves, which are relevant to the promotion of the activities developed by them in the Factory …;

n) In these installations of the Factory … the Claimant, in addition to ensuring the management of the entire commercial space, provides permanent surveillance services, during 24 hours a day, as well as free wireless internet service, free parking, sanitary services, air conditioning, cleaning and electricity in common areas and maintenance;

o) The Claimant also ensures the maintenance of an informatic page for the disclosure of the commercial space Factory …, with advertising of the events held there («www...»);

p) In the periodic VAT declaration relating to the 4th quarter of 2013, submitted on 30-01-2014, the Claimant formulated a request for VAT reimbursement in the amount of € 860,000.00;

q) Following the reimbursement request, the Tax and Customs Authority issued internal Service Order no. OI2014…, relating to the 2013 tax year, supplemented by Service Order no. OI2014…, relating to the 2012 tax year, for a tax inspection procedure to be conducted on the Claimant, regarding VAT;

r) In this inspection, the Tax Inspection Report was prepared which is contained in the administrative file, whose content is hereby reproduced, in which the following is mentioned, among other matters:

III – Description of facts and grounds of merely arithmetic corrections to the taxable matter

Following the reimbursement request submitted by the taxpayer, the latter was notified to send information through our office n° … of 13-02-2014, which were sent on 24-02-2014 and are attached (Annex no. 1)

The reimbursement request was requested in the periodic declaration relating to the last quarter of 2013, however the credit was formed since the period 201209T.

III.1 - According to the clarifications provided by the taxpayer, it is verified that the latter is a real estate fund constituted in accordance with Decree-Law no. 13/2005, of 7 January and other legislation and supervised by the Securities Market Commission (CMVM), which develops its activity in the lease market for commerce and services.

Having consulted the real estate matrix, it is verified that the taxpayer is the owner of some urban articles located in the municipality of ..., which can be grouped into two sets of properties with the following designations: "Building …- Place of…" and "Building …– ... at…".

III.2 - The rental activity is generally exempt pursuant to no. 29 of article 9 of CIVA. It is verified that in these cases it is possible for the taxpayer to waive the exemption and opt for the application of tax to its operations, when certain requirements are met, in accordance with article 12 of CIVA.

Regarding the building "…- Place of…" and according to the clarifications provided by the taxpayer and the rental contracts sent, this took advantage of the exemption in no. 29 of article 9 of CIVA, not having waived the exemption, for which reason it presents in field 9 of all declarations submitted in the period under analysis (from 2012/… to 2013/…) declared values relating to rents paid, which have had a decreasing evolution: Eur 149,191.70 (201309T), Eur 128,024.13 (201212T), Eur 83,454.45 (201303T), Eur 53,709.04 (201306T), Eur 53,705.39 (201309T) and Eur 56,658.21 (201312T).

The contracts that were sent to us relating to this building are entitled "Non-residential lease contract with fixed term" and hereinafter their main clauses are summarized:

a) The leased location is intended exclusively for the development of the tenants' activities, is in good state of conservation and in conditions of functionality for the purpose intended;

b) Tenants may not sublet, lend or transfer, in whole or in part, in any form or transaction, the rights or positions arising from the contract, except with express authorization from A…;

c) The works that tenants may have to undertake that prove strictly necessary for adaptation of the leased location to the purposes intended are authorized by A…, and are at their exclusive responsibility, with improvements becoming part of the leased location, with no reimbursement or compensation of incurred charges;

d) Tenants are responsible for obtaining the plans, authorizations and licenses necessary for carrying out the works;

e) Tenants are obliged to maintain the leased location in good state of conservation and cleanliness;

f) The charges relating to services or expenses for installation and consumption of water, electricity or heating, gas, telephone, air conditioning, fire network, reception, security, cleaning, maintenance and conservation of equipment installed in the leased location, remain the responsibility of the tenant, as well as any other services or supplies that the same wish to contract regarding the leased location;

g) The charges corresponding to services or expenses with the common areas of the building of which the leased location is an integral part, shall be the responsibility of the tenant, which also undertakes to comply and ensure compliance at all times, if applicable, with the condominium regulations and the regulations for the use and enjoyment of common spaces regarding circulation, parking, loading and unloading, entry and exit of vehicles and personnel;

h) The tenant is responsible from the date of execution of the contract for all risks inherent to the holding and use of the leased location, obliging itself to contract and maintain fully valid the respective insurance contracts.

From the list of invoices issued by the taxpayer relating to 2013, in which the exemption was invoked for VAT purposes pursuant to no. 29 of article 9 of CIVA, and communicated to AT under Decree-Law no. 198/2012 of 24 August (e-invoice), we verified that there were 3 users of the spaces: " D…SA" (TIN: …), "E…SA" (TIN:…) and " F " (TIN:…). These 3 space users were notified to respond to some questions regarding the use of spaces based on the contracts. Annex no. 2 contains an example of the letters sent.

III.3 – In annex no. 3 are the responses from 2 users ("D…" and "E…, SA"), which are hereinafter summarized:

a. The reason for choosing the buildings was their locations near other facilities already used by the tenants;

b. The buildings do not have infrastructure to support the development of activities;

c. Both buildings were suitable for the development of the respective activities;

d. The charges incurred with the use of spaces are exclusively the monthly rent value;

e. There are no common areas, no common expenses, nor condominium regulations or regulations for the enjoyment of common spaces

III.4 – A… was contacted in order to send us the plans of both buildings - Building …- Place of…" and "Building … – ... at …". (Our letter no. … of 22-08-2014).

Regarding the "Building…", it is verified that in the plan of the "D… SA" the following spaces are evident:

a. Area of shops and warehouses of the "….";

b. Space intended for "…";

c. Space reserved for mobile displays;

d. Space reserved for Stand "…";

e. Space reserved for "…";

f. Space designated "Common Area" which has support sanitary facilities;

g. Approximately 29 parking spaces.

III.5 - Regarding the "Building …– …"it is, according to the clarifications of the taxpayer, a business complex resulting from the recovery of an old factory, and is composed of areas of commerce, warehouses and services, without autonomous and independent use. Having analyzed the clauses of the contracts entered into between the taxpayer and the space users that were sent to us together with the clarifications provided for analysis of the reimbursement request, we can summarize the following aspects:

a) The contracts are designated "business center space use contracts" and indicate which activity is to be carried out in the space "…with express exclusion of any other";

b) The contracts have as their object the use of properly identified spaces, which are delivered raw and empty, without internal and façade finishings, the finishing of which depends on a project to be submitted to "A…". These finishings are the responsibility of the taxpayer's clients, as well as compliance with all legal formalities inherent to them, in particular municipal licenses and civil liability insurance;

c) The contract provides for the payment of two amounts: one specific for the use of the space proper, and a second, relating to the quota-share in common expenses of the ..., such as security, cleaning and maintenance of common areas. The monthly remuneration is set for the entire duration of the contract. Regarding the quota-share of common expenses, the same is indexed to the area of the contracted space. Although the amounts are individualized in the contract, constituting independent clauses, it is verified that in the tenth clause, the individuality of both is eliminated by referring that they are indissoluble: "All prices and performances set out in this contract, regardless of their nature, …, are indissoluble from each other, constituting the non-payment of any of them grounds for termination of the entire contract …";

d) The contract requires that space users be responsible for the "… propriety, discipline, correctness, presentation and behavior of their personnel …". If " … the behavior is incompatible with the internal order, discipline, image and proper functioning of the "Factory…" the taxpayer "…may require the replacement of personnel…" in service to its clients;

e) Insurance against the risks of holding and use of the space is the responsibility of the taxpayer's clients;

f) The contract does not provide for the possibility, on penalty of termination: of ceding, in whole or in part, temporarily or permanently, the operation of the enterprise or of the space subject to the contract, or its operation free of charge or for consideration; the use, in whole or in part, temporary or permanent, of the space by any other person or entity and, ceding free of charge or for consideration, in whole or in part, its position in this contract.

III.6 - In the clarifications provided by the taxpayer regarding this building, the same states that " … the property has areas for commerce, warehouses and services, without autonomous and independent use, constituting the enterprise a "Business Center" in the area of Office Services and a "Commercial Center" for the area of Commerce. A…, in addition to the rental proper, provides complementary services to the tenants, such as physical security of the space, supply of water, gas, electricity, common use of sanitary facilities and others, services which are included monthly as Common Charges in receipts to tenants."

The same concludes that "Given the characteristics of the property and the type of use, the exemption provided for in no. 29) of article 9 of the VAT Code is not applicable to the operation in question, being thus subject and not exempt from VAT."

III.7 – From the clarifications provided by the taxpayer and indicated in the previous point (III.4), as well as from the wording present in the contracts, it can be understood that the taxpayer intends to assimilate these contracts to "shop use contracts in a commercial center". The qualification of space use contracts in commercial centers is thoroughly analyzed in various judgments of which we indicate as examples the following from the Supreme Court of Justice (STJ) nos.: 2357/07 of 11-4-2013, 07A2107 of 05-07-2007 and 2431/09 of 24-10-2013.

From the analysis of available doctrine and the opinion no. 51/2005, of 9 June of the Tax Studies Center, it is verified that the commercial reality of commercial centers, is based on a space structured for a particular clientele and whose selection of space users is consistent with this entire conceptualization. This is thus a business center in which the enjoyment of the space is accompanied by a plurality of services of common interest to the commercial center such as: security, advertising, entertainment venues, operating conditions, cleaning services, consultancy and access to common areas. To the managing entity falls the duty to monitor various aspects related to the performance of activities by space users: compliance with operating hours, line of business, commercial denomination, monitoring of the sales values achieved by access to accounting records. In parallel, the managing company is given remuneration, which normally constitutes a percentage of revenues obtained, restrictions are applied to the assignee regarding the decoration and denomination of the space, as well as the impossibility of ceding its position to others, either by transfer or by temporary assignment.

All these characteristics previously listed lead to the conclusion that the integrated management of the space by the managing entity, implies constraints and restrictions on the conduct of commercial space users, and has as counterparts, the provision of various services, selection of clientele with consequences on the revenues resulting from the activities developed. Therefore, activities that do not generate revenue are not compatible with a commercial center, since that revenue is part of the remuneration of the managing entity, on the one hand, and is the result of the vision and impact of the overall activity of the commercial center to the general public, on the other hand.

III.8 - In accordance with article 1022 of the Civil Code (CC), "Lease is the contract whereby one of the parties undertakes to provide the other with the temporary enjoyment of a thing, by means of retribution." Still in the same normative (article 1038) it is stated that the obligations of the lessee, among others, are: not to apply the leased thing to a purpose other than those for which it is intended, not to make an imprudent use of it and not to provide to others the total or partial enjoyment of the thing through cession for consideration or free of charge of its legal position, sublease or loan, except if the law permits it or the lessor authorizes it.

III.9 - The case law of the Court of Justice of the European Union (CJEU), in various judgments, understands the concept of "lease of immovable property" as situations in which a lessor confers upon a lessee, for an agreed period and in return for remuneration, the right to occupy an immovable property as if it were its owner, to the exclusion of any other person from the benefit of that right (e.g., judgments C-409/98, C-236/99, C-269/00 and C-275/01).

III.10 - The Tax Authority (AT) understands "… the lease of immovable property as bare walls in the case of urban buildings or urban part in mixed buildings, or only the land in the case of rustic buildings". (Circular Letter no. 30022 of 16-06-2000 of the VAT Services Department).

III.11 – From the list of invoices issued by the taxpayer relating to 2013, with VAT charged, and communicated to AT (e-invoice), 19 users of commercial spaces of the "Factory …" were selected. The criterion that presided over their choice refers to those for which documents were issued during all or a large part of 2013. The space users who were selected are: "…" (TIN:…), "…" (TIN:…), "…, LDA" (TIN:…), "…" (TIN:…),"…" (TIN:…), "…, LDA" (TIN:…), "…" (TIN:…), "…, Sole Proprietor, LDA" (TIN:….), "…" (TIN:…), "…LDA" (TIN:…), "…, LDA" (TIN:…), "…LDA" (TIN:…), "…, LDA" (TIN:…), "…–…LDA" (TIN:…), "…"(TIN:…), "…" (TIN:…), "…" (TIN:…), "…SA" (TIN:…) and "…Sole Proprietor LDA" (TIN:…).

The space users previously referred to were notified to respond to some questions relating to the space "Factory…", in particular to its operation and the way in which their condition as space users developed, in order to verify whether the contractual clauses established had adherence to the practice verified. The questionnaire was elaborated based on the wording of the contracts signed between the parties and everything that is referred to in opinion no. 51/2005, of 9 June of the Tax Studies Center regarding the "contract for use of shop in a commercial center". Annex no. 4 contains an example of the letters sent.

III.12 – The responses sent relating to 14 space users comprise annex no. 5. Hereinafter the main conclusions drawn from them are summarized:

a. The reasons that presided over the choice of the "Building …" for the installation of commercial spaces were: central location of the space in the city of ... (roadway and proximity to railway station), existence of covered and free parking, security conditions and amount paid for the use of the space;

b. The support infrastructure for the development of activities in particular and the "Factory …" in general are, in addition to covered and free parking and security, sanitary facilities for common use, free internet and cleaning of common spaces;

c. The space use contracts refer that regarding them there is a prior plan of the commerce, services, industry and warehousing activities that "A…" considered appropriate to integrate the space. Upon execution of the contract, only one user states that the said plan was presented to him, with the majority not considering the existence of the same relevant for the choice of that location for the exercise of his activity. Similarly, at the time of execution of the contract, all space users were informed of the spaces already being used, but few had knowledge of the activities already being carried out;

d. When questioned about the commercial viability of the "Factory…" building, the space users, in their majority, only point to the characteristics inherent to its location (proximity to the railway line and roads) and its size, as important points for its maintenance in the medium/long term. For many the commercial viability of the building was not a question considered;

e. When questioned about the manner in which the space had been delivered to them, the vast majority of space users stated that the space was delivered raw and empty, without finishings.

The works that were carried out, in some cases were borne by the users without compensation at the end of the contract, and in other cases, there was compensation by "A…" in the form of a grace period of the consideration paid or part of it. Some users stated that they received the space with the finishings left by the previous user;

f. Regarding the charges incurred with the space, in addition to the amount paid to "A…", the majority of space users indicated incurring charges with electricity for the space and in some situations, as already mentioned, with installation works;

g. All space users stated that the management of the space in no way influenced/influences the development of their activities;

h. Regarding common spaces, there is the existence of 24-hour security (security cameras), cleaning of bathrooms, corridors and others and fire extinguishers;

i. "A…" did not influence the choice of commercial denominations of the various spaces;

j. "A…" does not control the business volume of each space user and never consulted their accounting elements relating to the activity developed.

Consequently, there was never the existence of any type of remuneration indexed to the product of the activity;

k. Notwithstanding what is stipulated in the contract, "A…" never conditioned the decoration of any of the commercial spaces. There were situations where the only constraint was pre-existing decoration, resulting from previous users;

l. "A…" has keys to the commercial spaces for emergency situations, in sealed envelopes, to be used with the authorization of the space users;

m. All space users indicated that the enjoyment of the spaces was carried out with total autonomy and that they never refrained from performing acts that could in any way prevented or diminished the enjoyment of the space;

n. From the various responses obtained, it was frequently that space users indicated that the amounts paid to "A…" were divided into rent and condominium (corresponding to the quota share in common costs).

III.13 – The analysis of the plans sent by the taxpayer allows verification that the "Building…" is constituted by the following spaces:

a. It is constituted by a single building that is divided into 3 floors: Floor -1, Floor 1 and Floor 2;

b. Floor -1 is composed of: 92 parking spaces, sanitary facilities, water reservoir area, loading and unloading areas and common circulation areas;

c. Floor 1 is composed of: areas of shops and offices (of varying dimensions), sanitary facilities, areas supporting administration, boiler room and air conditioning ducts and circulation corridors;

d. Floor 2 is composed of: boiler room and air conditioning ducts, circulation corridors, sanitary facilities and other common areas.

III.14 – Considered, essentially the clarifications sent by space users and what was observed in the plans sent by the taxpayer, with the understandings of AT, the CJEU, the SCJ, the provisions of the civil code and the contracts referred to in point III.5, we can conclude that the building "Factory…" does not constitute a space identical to a "commercial center".

Indeed, having analyzed the conclusions drawn from the responses sent by space users, it is verified that what was provided for in the contracts was very close to the clauses present in the contracts of space users in commercial centers.

However, the manner of operation of the building, reflected in the clarifications given by space users, indicates that what effectively results from the contracts is that those like them aim for "… a main purpose or a predominant component, in relation to which the other elements present a nexus of subordination, the rule of absorption is to be applied, leaving the contract, in principle, in its entirety, subject to the regime that applies to the purpose considered main." What is evident from the plans sent, is that the "Building …" is a building of considerable size (3 floors), in which shops and offices are distributed essentially by floor 1. Given the size of this floor and its format, the layout of the spaces is dispersed throughout it, there appearing to be no synergy and connection of action between the various spaces and activities developed.

From the set of contractualized arrangements, space and services of common use, what has economic preponderance is the lease of spaces, so the other services provided associated with the contracts in question, do not make it disregard the nature of lease inherent to the contracts, they function as a complement inherent and inseparable from the type of property subject to the contracts. In this regard, Rui Laires states "… when the cleaning or surveillance of the said spaces, together with the supply of water, gas or electricity, ensured by the lessor, constitute as non-autonomous and inseparable elements of the lease, it is not to be overlooked the possible framing of the operation, as a whole, in the VAT exemption covering the lease of immovable property." And adds "A different reality is the lease of immovable property, or of parts thereof, for offices, surgeries, studios, workshops, etc., which – supplemented or not by goods or services mentioned above linked to immovable property or its use – is accompanied by goods or services whose nature or purpose has no relevant link with the immovable property proper, but which relate to the professional activities carried out in those locations." In these cases "… it is incumbent to determine whether these latter should be subject to autonomization or whether such contract should be submitted, in its entirety, to taxation for VAT purposes." [2] Indeed, having analyzed the services indicated in the contract, it is verified that they are not specific to each of the activities developed in the spaces and do not constitute for space users an end in itself, but a means of benefiting in the best conditions from the main service that "A…" can provide to them which is: use of commercial spaces, in a building well located in the city of ..., with roads and railway nearby, at favorable prices.

Given the discretion made of the building indicated in point III.13, it is verified that common areas compared to shop and office areas are superior, as they consist of the entire floor -1, almost all of floor 2 and part of floor 1.

Comparing the totality of common area and the services that the taxpayer indicates are provided to space users, with the amounts charged, it is concluded that the same are irrelevant, as we have too many services and area of common spaces for a very reduced consideration. On the other hand, regarding the building used by "D…, SA" and referred to in point III.4, in which identical services are offered, in proportion to the scale of the building, such as parking, sanitary facilities and common areas, no amounts are charged beyond the space rents. It is thus verified that the taxpayer treats identical realities differently. To reinforce note that, as already mentioned, the contracts indicate that the amounts are indissoluble and proof of this are the invoices issued, which indicate and quantify the service as a whole and which refer to it as "rents". By way of example, invoice no. RC 2013/… is attached. (Annex no. 6)

III.15 – In conclusion, we verified that from the analysis of the contracts sent by the taxpayer regarding the "Building…" they refer essentially to the lease of commercial spaces (shops and offices), and complementarily to the provision of accessory and inseparable services from the immovable property, such as cleaning and security of common spaces. The provision of services with economic preponderance is the lease of spaces, which is exempt pursuant to no. 30 of article 9 of CIVA.

The physical structure of the "Building…" which is verified by observation of its plans, makes evident a building dispersed over 3 floors, regarding which shops and offices occupy essentially one of the floors, which accentuates the reduced value that is charged for the use of common space and for the services that the taxpayer indicates it offers to space users. Comparing this space with the "Building…", in which identical services are offered, it is verified that it has a different treatment relative to these: indeed no amount is charged for the use of common spaces and infrastructure.

Indeed considering the areas occupied by commercial spaces and the areas occupied by common spaces, it is verified that it is the taxpayer itself that attributes economic preponderance to the lease of spaces since: to commercial areas, which represent a smaller area, higher amounts are charged in relation to common areas, which on the other hand have a larger area and are remunerated for trivial amounts.

From this we conclude that buildings with physical similarities are treated differently for tax purposes.

III.16 - Therefore, the taxpayer should not have charged tax on the rents and consequently should not have deducted the tax incurred with the works and services acquired for the "Factory…" building since the operations are exempt and do not confer the right to deduction, the tax incurred is not deductible pursuant to article 20 of CIVA.

Regarding the outgoing operations evidenced in the declarations of the periods that contributed to the formation of the credit, the deducted tax is connected with the "Building …– at EN …", and refers, essentially, to tax deducted regarding fixed assets (field 20). Tax was also deducted regarding other goods and services (field 24) and residually, adjustments favorable to the taxpayer were verified (field 40).

Documents representative of approximately 17% of the tax deducted in 2012 and 2013 were analyzed, by means of sampling, and it was verified that the same refers to works of recovery of the ... (projects and works) and represents, in 2012 the total of Eur 12,682.65 and in 2013 the total of Eur 924,724.89.

Regarding the tax deducted as other goods and services, the documents analyzed represent 43% of the tax deducted in December and refer essentially to gas, cleaning, surveillance and electricity.

Regarding the tax regularized in favor of the taxpayer in the last quarter of 2013, the same relates to deductible tax relating to other goods and services, relating to the first quarter of 2013 and which in the corresponding periodic declaration only part was considered. However given that the same is connected with expenses incurred with the "Building …– ... at EN…", it was in the periodic declaration of the last quarter of 2013, considered the remaining value. The tax regularized in field 40 of declarations 2013… and 2013… relates to corrections of tax charged in duplicate.

III.17 - To be able to apply VAT to the rents, the taxpayer would have had to waive the exemption pursuant to no. 4 of article 12 of CIVA, which did not occur. Only in this case, would there be the right to deduction of VAT that the taxpayer exercised.

Thus, the corrections regarding VAT are as follows presented, by period:

2012… - € 12,682.65;
2012… - € 6,443.05;
2013… - € 83,168.44;
2013…- € 12,124.39;
2013… - € 12,262.80;
2013..- € 864,010.25

(...)

IX – Right to be heard. Grounds

Having the taxpayer been notified of the Draft Tax Inspection Report to, if it wishes, exercise the right to be heard, through our office letter no. … of 14-10-2014, the same came to exercise it in writing, on 31-10-2014, under entry number 2014….

In the submissions presented, the taxpayer indicates in point 5 of the exercise of the right to be heard that "The Petitioner will not contest specifically (within the scope of the prior right to be heard) the corrections proposed in the draft inspection report, which are based on the interpretation of Law, without prejudice to being in total disagreement with the tax framing proposed in the draft report regarding these corrections." And further adds in point 6 that "And does not contest the proposed corrections because, in its opinion, the prior hearing is not the proper forum for discussing tax legal-substantive framing and, therefore, reserves the right to contest them subsequently in the context of a gracious reclamation or judicial challenge, under the terms and conditions provided for by law."

In view of the taxpayer's submissions referred to above, it is our opinion that the corrections proposed in the Draft Report are to be maintained, and the same will be converted into Final Report to be notified to the taxpayer. For all the foregoing, the reimbursement request made by the taxpayer in the amount of Eur 860,000.00 shall be dismissed in its entirety."

s) By order of 06-12-2014, the Director of Reimbursements Services of the Tax and Customs Authority issued a decision dismissing the aforementioned request for VAT reimbursement (document contained in the administrative file, part 14);

t) The dismissal order referred to in the previous paragraph was notified to the Claimant by Letter no. …, of 2014-12-06, of the Reimbursements Department, in which the following is stated, among other matters:

«From the decision now notified, hierarchical appeal is available, within 30 days, gracious reclamation, within 120 days or judicial challenge, within 90 days, respectively, pursuant to articles 66, no. 2, 70, no. 1, and 102, no. 1, all of the Tax Procedure and Process Code, with the periods counted from the date of receipt of this notification» (document contained in the administrative file, part 14);

u) The aforementioned Letter notifying the act dismissing the reimbursement request was delivered in the Claimant's electronic postal box Via CTT on 11-12-2014 (document contained in the administrative file, part 14);

v) Following the inspection referred to, the Tax and Customs Authority issued the following additional VAT assessments and compensatory and default interest, in the total amount of € 996,145.78, dated 06-12-2014:

– of VAT no. …, relating to period 1209T, in the amount of € 6,576.72;

– of VAT no. …, relating to period 1212T, in the amount of € 4,280.87;

– of VAT no. …, relating to period 1303T, in the amount of € 7,862.47;

– of VAT no. …, relating to period 1306T, in the amount of € 5,387.39;

– of VAT no. …, relating to period 1309T, in the amount of € 4,950.80;

– of VAT no. …, relating to period 1312T, in the amount of € 960,405.26;

– of compensatory interest no. 2014…, in the amount of € 517.48;

– of compensatory interest no. 2014…, in the amount of € 293.67;

– of compensatory interest no. 2014…, in the amount of € 462.70;

– of compensatory interest no. 2014…, in the amount of € 262.13;

– of compensatory interest no. 2014…, in the amount of € 2,849.85;

– of default interest no. 2014…, in the amount of € 876.85;

w) The offsetting referred to, in the account settlement statements which constitute document no. 5 attached with the request for arbitral decision, whose content is hereby reproduced, having notified the Claimant to pay the total amount of € 129,463.51;

x) On 26-05-2015, the Claimant provided a bank guarantee to suspend the execution of the disputed assessments (document no. 24 attached with the request for arbitral decision, whose content is hereby reproduced);

y) On 21-05-2015, the Claimant submitted the request for constitution of the arbitral tribunal which gave rise to the present proceedings.

2.2. Facts Not Proven

It was not proven that the Claimant paid the assessed amounts.

2.3. Grounds for the Decision on the Statement of Facts

The decision on the statement of facts is based on the documents attached with the request for arbitral decision and on the administrative file, in addition to the testimony given at the hearing, regarding the activities and services provided in the commercial space Factory...

3. Exceptions

The Tax and Customs Authority raises the exceptions of prescription of the right of action regarding the request for annulment of the act dismissing the VAT reimbursement request and the material incompetence of this Arbitral Tribunal to assess the legality of such act.

The determination of the question of incompetence takes priority, by virtue of the provisions of article 13 of the Administrative Court Procedure Code of 2002, applicable to tax arbitration proceedings by virtue of the provisions of article 29, no. 1, paragraph c), of RJAT.

It is manifest that the Tax and Customs Authority is correct, as the competence of the arbitral tribunals operating in CAAD is restricted to acts of the types indicated in article 2 of RJAT, specifically to acts of assessment of taxes, self-assessment, withholding at source and payment on account and acts of determination of taxable matter, determination of collectable matter and determination of patrimonial values.

Therefore, without prejudice to any right to reimbursement that may result from the execution of a possible annulling judgment pursuant to no. 1 of article 24 of RJAT, it must be concluded that this Arbitral Tribunal lacks competence to assess the legality of the act dismissing the reimbursement request.

In these terms, this Arbitral Tribunal is declared materially incompetent to assess the reimbursement request, with which the determination of the question of timeliness which the Tax and Customs Authority raises regarding the challenge to the same request is prejudiced.

4. Substantive Law

As results from the Tax Inspection Report, the disputed assessments are based on the understanding of the Tax and Customs Authority that the contracts concluded by the Claimant with the space users provided in the so-called Factory Asa are essentially lease contracts, for the purposes of the exemption provided for in article 9, paragraph 29) of the Value Added Tax Code (CIVA) ( [1] ), not being, in particular, comparable to «contracts for the use of a shop in a commercial center», contracts which the Tax and Customs Authority defines by saying that «the commercial reality of commercial centers, is based on a space structured for a particular clientele and whose selection of space users is consistent with this entire conceptualization. This is thus a business center in which the enjoyment of the space is accompanied by a plurality of services of common interest to the commercial center such as: security, advertising, entertainment venues, operating conditions, cleaning services, consultancy and access to common areas».

The Tax and Customs Authority understood, based on the analysis of the contracts sent by the taxpayer regarding the "Building…", that «they refer essentially to the lease of commercial spaces (shops and offices), and complementarily to the provision of accessory and inseparable services from the immovable property, such as cleaning and security of common spaces. The provision of services with economic preponderance is the lease of spaces, which is exempt pursuant to no. 30 of article 9 of CIVA». Specifically, the Tax and Customs Authority concluded that «comparing the totality of the common area and the services that the taxpayer indicates are provided to space users, with the amounts charged, it is concluded that the same are irrelevant, as we have too many services and area of common spaces for a very reduced consideration».

Based on this understanding, the Tax and Customs Authority concluded that the Claimant could not have deducted VAT, pursuant to article 20 of CIVA.

The evidence produced, in particular the testimony given at the hearing, does not corroborate, but rather refutes, the conclusions on which the Tax and Customs Authority based the disputed assessments, as it was proven that the Factory … space has functionalities identical to those usually found in commercial centers, which far exceed in advantages for retailers, those resulting from mere lease of spaces and that the services provided.

In fact, it was proven that the Claimant, by itself or in collaboration with other entities, promotes events in the common spaces of the Factory…, appealing to the general public, and provides the visitors to the commercial space with several free services, such as parking and wireless network.

Moreover, it was also proven that the Claimant, in addition to ensuring the management of the entire commercial space of the Factory…, ensures all sanitary services, maintenance, electricity, air conditioning and cleaning services, as well as permanent security services, through specialized personnel, during 24 hours a day, which is a matter of common knowledge, as to the inherent charges, which is not comparable to the simple «security cameras» that the Tax and Customs Authority refers to in the Tax Inspection Report.

Specifically the holding of events appealing to the general public and the provision of free services to visitors cannot be considered as irrelevant for the promotion of the activities of retailers who lease the spaces.

In fact, it is manifest, in light of common experience, that the rental of an integrated space, as occurs in a commercial center, in which events are held and free services are made available, is not essentially identical to a mere rental outside of such a space, as those activities and services have the potential to make the business of retailers more profitable, as the proximity of visitors with the establishments transforms them into potential customers. Moreover, the gathering of several establishments in an integrated space has the potential to make the customers of each one of them possible customers of all others, through the proximity that access to each of the establishments by their respective clientele provides in relation to the others.

On the other hand, it was also proven that the services provided by the Claimant in the Factory …involve considerable charges, which is a matter of common knowledge as to the maintenance of permanent surveillance services.

Under these circumstances, it must be concluded that the disputed assessments are based on the incorrect premise that the contracts concluded by the Claimant with the retailers of the Factory …are essentially lease contracts and that the services provided should be considered irrelevant.

Therefore, there are not contracts of lease for the purposes of paragraph 29) of article 9 of CIVA.

Consequently, the Claimant could have deducted the VAT that it deducted, to which the disputed assessments relate, which therefore suffer from the vice of violation of law due to error regarding the factual and legal premises, which justifies their annulment, pursuant to article 135 of the 1991 CPA, subsidiarily applicable by virtue of the provisions of article 2, paragraph c) of the LGT.

5. Indemnatory Interest

The Claimant makes a request for indemnatory interest.

Although the judicial challenge process is essentially a process of mere annulment (articles 99 and 124 of CPPT), a sentence condemning the tax administration to payment of indemnatory interest and compensation for undue guarantee can be issued therein.

In fact, although there is no express norm in that sense, it has been peacefully understood in the tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a request for condemnation to payment of indemnatory interest can be cumulated in a judicial challenge process with a request for annulment or declaration of nullity or non-existence of the act, as in those codes it is stated that the right to indemnatory interest arises when, in gracious reclamation or judicial process, the administration is convinced that there was an error of fact imputable to the services. This regime was later generalized in the Tax Procedure Code, which established in no. 1 of its article 24 that «there shall be a right to indemnatory interest in favor of the taxpayer when, in gracious reclamation or judicial process, it is determined that there was an error imputable to the services», then, in the LGT, in whose article 43, no. 1, it is established that «indemnatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was an error imputable to the services from which results payment of the tax debt in an amount superior to that legally due» and, finally, in the CPPT in which it was established, in no. 2 of article 61 (to which corresponds no. 4 in the wording given by Law no. 55-A/2010, of 31 December), that «if the decision recognizing the right to indemnatory interest is judicial, the payment period is counted from the beginning of the period of spontaneous execution».

On the other hand, with respect to arbitral tribunals, in accordance with the provisions of paragraph b) of article 24 of RJAT, the arbitral decision on the merits of the claim which is not subject to appeal or challenge binds the tax administration from the end of the period provided for the appeal or challenge, being required of it, in the exact terms of the acceptance of the arbitral decision in favor of the taxpayer and until the end of the period provided for the spontaneous execution of the sentences of the tax judicial tribunals, «to restore the situation that would have existed if the tax act subject to the arbitral decision had not been practiced, adopting the necessary acts and operations for that purpose», which is in line with the provision of article 100 of the LGT [applicable by virtue of the provisions of paragraph a) of no. 1 of article 29 of RJAT] which establishes that «the tax administration is obliged, in the event of full or partial acceptance of a reclamation, judicial challenge or appeal in favor of the taxpayer, to immediate and full reconstitution of the legality of the act or situation subject to the dispute, comprising the payment of indemnatory interest, if applicable, from the end of the period of execution of the decision».

Although article 2, no. 1, paragraphs a) and b), of RJAT uses the expression «declaration of illegality» to define the competence of arbitral tribunals operating in CAAD, making no reference to condemnatory decisions, it should be understood that it encompasses in its competences the powers that in the judicial challenge process are attributed to tax courts, this being the interpretation that accords with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which the first directive is proclaimed, that «the tax arbitration process should constitute an alternative procedural means to the judicial challenge process and to the action for the recognition of a right or legitimate interest in tax matters».

The judicial challenge process, although it is essentially a process of annulment of tax acts, admits condemnation of the Tax Administration to payment of indemnatory interest, as is evident from article 43, no. 1, of the LGT, in which it is established that «indemnatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was an error imputable to the services from which results payment of the tax debt in an amount superior to that legally due» and article 61, no. 4 of CPPT (in the wording given by Law no. 55-A/2010, of 31 December, to which corresponds no. 2 in the original wording), that «if the decision recognizing the right to indemnatory interest is judicial, the payment period is counted from the beginning of the period of spontaneous execution».

Therefore, no. 5 of article 24 of RJAT in stating that «payment of interest, regardless of its nature, is due, as provided for in the general tax law and in the Tax Procedure and Process Code» should be understood as permitting the recognition of the right to indemnatory interest in the arbitration process.

However, as results from the foregoing, only in this type of contentious process of annulment of assessment acts, can condemnation to indemnatory interest be made in the cases provided for in no. 1 of article 43 of the LGT.

The Claimant, as stated in article 183 of the request for arbitral decision, did not pay the amount assessed resulting from the offsets made by the Tax and Customs Authority, following the issuance of the disputed assessments.

Article 43, no. 1, of the LGT establishes that «indemnatory interest is due when it is determined, in gracious reclamation or judicial challenge, that there was an error imputable to the services from which results payment of the tax debt in an amount superior to that legally due».

Therefore, regarding the amounts assessed following the offsets made by the Tax and Customs Authority, there is no place for indemnatory interest, as payment was not made.

Therefore, only the right to indemnatory interest derived from the dismissal of the reimbursement request can be at issue, pursuant to paragraph a) of no. 1 of the same article 43, which establishes that indemnatory interest is also due «when the legal period for official restitution of taxes is not complied with», a right which, if the dismissal were illegal, would precede the offsets made.

But, as referred to, it is outside the competence of this Arbitral Tribunal to assess the legality of the act dismissing the reimbursement request, so it cannot also in the present process determine the consequences derived from it, in particular the right to indemnatory interest, without prejudice to, in execution of the judgment, pursuant to article 24 of RJAT, this right may come to be recognized.

However, the definition of the terms in which the present judgment should be executed, falls, in the first place, to the Tax and Customs Authority, as results from no. 1 of article 24 of RJAT.

Therefore, although it is not to be ruled out that the Claimant may have a right to indemnatory interest as to the amounts that were subject to offset, the request cannot be assessed in the present process.

4. Decision

In accordance with the foregoing, the arbitrators in this Tribunal agree to:

a) Judge the request for arbitral decision admissible in so far as the annulment of the following VAT assessment acts and compensatory and default interest is requested: