Process: 335/2018-T

Date: December 4, 2020

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 335/2018-T) addresses VAT deduction rights for a financial leasing company challenging self-assessment for December 2013. The core issue involves the pro rata method for calculating VAT deductions on mixed-use expenses - resources used both for exempt financial leasing activities and taxable vehicle provision services. The claimant sought to recover €334,047.66 in allegedly overpaid VAT through an official review request (revisão oficiosa), which was initially dismissed by the Tax Authority. The arbitral tribunal's original 2018 decision partially annulled the self-assessment, but the Supreme Administrative Court remanded the case in 2020, ordering factual expansion to determine whether mixed-use goods and services were primarily employed for financing/managing leasing contracts (exempt) or vehicle provision (taxable). This distinction is critical for proper pro rata calculation under Portuguese VAT law. The tribunal reconstituted in 2020 to gather additional evidence on expense allocation, including testimonial proof regarding operational activities. The case illustrates the complexity of VAT deduction methodology for financial institutions engaged in mixed operations, the procedural requirements for official review requests, and CAAD's jurisdiction over self-assessment disputes. It demonstrates how circular interpretations by the Tax Authority regarding pro rata calculations can be challenged through arbitration, and establishes precedent for evidential requirements when determining primary business use of shared resources in financial leasing contexts under Portuguese tax law.

Full Decision

ARBITRAL DECISION

The arbitrators Counselor Jorge Lopes de Sousa (arbitrator-president), Professor Doctor Clotilde Celorico Palma and Professor Doctor Regina de Almeida Monteiro (arbitrator members) appointed by the Deontological Council of the Administrative Arbitration Center to form the Arbitral Tribunal, constituted on 25-09-2018, agree as follows:

1. Report

A..., S.A., hereinafter designated as "Claimant", with tax identification number ... and registered office at Rua ..., n.º..., ..., ..., ..., in Lisbon, P, came, in accordance with the provisions of article 10 of Decree-Law no. 10/2011, of January 20 (hereinafter "RJAT"), to request the constitution of an Arbitral Tribunal, with a view to declaring unlawful the act of self-assessment of VAT for December 2013 and the consequent decision to dismiss the request for official review that it had submitted.

The Claimant further requests the reimbursement of the VAT that it considers it has overpaid, in the amount of € 334,047.66, with compensatory interest.

The respondent is the TAX AND CUSTOMS AUTHORITY.

The request to constitute the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 16-07-2018.

In accordance with the provisions of paragraph a) of article 2, n.º 2 and paragraph b) of n.º 1 of article 11 of RJAT, the Deontological Council appointed the signatories as arbitrators, who communicated acceptance of the appointment within the applicable period.

On 05-09-2018, the parties were duly notified of this appointment and did not express any intention to refuse the appointment of the arbitrators, in accordance with articles 11, n.º 1, paragraphs a) and b) of RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of n.º 1 of article 11 of RJAT, as amended by article 228 of Law no. 66-B/2012, of December 31, the collective arbitral tribunal was constituted on 25-09-2018.

The Tax and Customs Authority responded, raising the issue of the material incompetence of the Arbitral Tribunal on the grounds that the request for arbitral pronouncement had been formulated following the dismissal of a request for official review, and raised the issue of untimeliness of the request for official review and defended the inadmissibility of the claims.

By order of 27-10-2018, the meeting provided for in article 18 of RJAT was dispensed with and it was decided that the proceedings would continue with written submissions.

Only the Claimant presented submissions.

On 29-11-2018 an arbitral decision was delivered in which the exception raised by the Tax and Customs Authority was judged inadmissible and it was decided:

a) To uphold the claim for arbitral pronouncement as to the partial annulment of the self-assessment and the annulment of the decision on the request for official review;

b) To partially annul, with regard to the amount of € 334,047.06, the VAT self-assessment made in the periodic return relating to period 2013/12, with no. ..., as well as the order of 12-04-2018 that dismissed the request for official review;

c) To order the Tax and Customs Authority to reimburse the Claimant in the amount of € 334,047.06;

d) To judge the claim for compensatory interest as inadmissible and to acquit the Tax and Customs Authority of the respective claim.

The Tax and Customs Authority subsequently filed an appeal of the arbitral decision with the Supreme Administrative Court which, by judgment of 04-03-2020, decided, by majority, to grant the appeal and "to annul the arbitral decision, which should be replaced by another that decides, after broadening of the factual basis necessary for the application of law to the facts."

Following the transmission of the case to CAAD, the Arbitrators who delivered the appealed decision were notified of the Supreme Administrative Court's decision.

The Supreme Administrative Court's decision and the indication that the arbitral decision should be replaced by another that decides after broadening the factual basis necessary for the application of law to the facts raised some questions regarding the possibility of intervention by the Arbitrators who delivered the arbitral decision and regarding their powers of cognition concerning facts not pleaded, which were resolved by an interlocutory decision of 03-07-2020, which decided, in summary:

  • to consider the Arbitral Tribunal reconstituted;

  • to consider that the decision in the arbitral decision of 29-11-2018 on the violation of the principle of legality and constitutional norms was not the subject of an appeal to the Supreme Administrative Court;

  • to order the notification of the Parties to plead facts and present probative elements relating to them that they considered relevant for clarification of the question indicated in the Supreme Administrative Court's judgment of 04-03-2020 as to whether "the use of goods or services of mixed use by the Respondent was primarily determined by the financing and management of the financial leasing contracts entered into with its customers or, instead, by the provision of the vehicles";

The Claimant pleaded facts and presented probative documents within the set period for this purpose.

Following these submissions and production of evidence, the Tax Administration responded, challenged the facts and documents presented, invoked new facts, and presented documentary evidence through referral to places where they are made available, in addition to producing submissions on the law, including citations of dissenting opinions delivered in other proceedings.

The Claimant was notified of the request submitted by the Tax Administration and came, on 09-10-2020, to submit a new request, invoking the principle of due process, in which it pleads in defense of the probative value of the documents it presented and seeks to clarify what types of expenses refer to the amount incurred with mixed-use resources and their use, in addition to also pleading submissions on the law.

The Tax Administration came on 23-10-2020 to submit a request asking for the removal from the file of the request submitted by the taxpayer on 09-10-2020, which was dismissed by order of 29-10-2020, as it had been submitted untimely (beyond the general supplementary period of 10 days) and because it was understood that the Claimant had the right to respond as the Tax Administration had pleaded new facts and presented new probative elements through documents, by referral to the Internet sites where they are published.

In that order of 29-10-2020, it was decided to maintain in the proceedings both the requests submitted by the Tax Administration and those submitted by the Taxpayer, notwithstanding that they exceeded the scope defined in the order defined in the arbitral decision of 03-07-2020, the scope of which was thus reviewed in accordance with the principle of informality.

Following this order, a meeting was held at which testimonial evidence was produced and subsequently written submissions were made by the Parties.

The arbitral tribunal was regularly constituted, in accordance with the provisions of articles 2, n.º 1, paragraph a), and 10, n.º 1, of Decree-Law no. 10/2011, of January 20.

The Parties are duly represented, enjoy legal capacity and standing, are legitimate and are represented (articles 4 and 10, n.º 2, of the same decree and article 1 of Order no. 112-A/2011, of March 22).

The proceedings do not suffer from any defects.

2. Facts

2.1. Facts found to be proved in the arbitral decision of 29-11-2018

A. The Claimant is a commercial company with registered office in national territory that exercises, as its main activity, activity within the scope of "ACTIVITY OF FINANCIAL INSTITUTIONS" (CAE 64921);

B. For VAT purposes, the Claimant is configured as a taxable person in accordance with paragraph a) of n.º 1 of article 2 of the VAT Code, being classified in the normal regime of monthly periodicity, in accordance with paragraph a) of n.º 1 of article 41 of the same code;

C. Within the scope of its activity, the Claimant carries out certain operations that fall within the financial operations covered by n.º 27 of article 9 of the VAT Code, namely financing/granting of credit;

D. The Claimant submitted monthly throughout the year 2013 the periodic VAT returns for the various periods, determining the amount of VAT to be deducted provisionally, and proceeded with the corresponding adjustment/regularization of the VAT deducted in the return for the last period of the year in question, that is, December 2013 (13/12) (return no. ..., which appears in document no. 1 attached to the request for arbitral pronouncement, the content of which is reproduced);

E. With regard to situations in which the Claimant identified a direct and exclusive connection between certain acquisitions of goods and services (inputs) and active operations (outputs) carried out by it, the Claimant applied, for purposes of exercising the right to deduction, the method of direct allocation, which was the case with regard to the acquisition of goods that are the subject of financial leasing contracts, with respect to which the VAT incurred was deducted in full, by virtue of such goods being directly linked to taxed operations carried out downstream by the Claimant – financial leasing – which confer the right to deduction;

F. In acquisitions of goods and services used exclusively in the carrying out of operations that do not confer the right to deduction, the Claimant did not deduct any amount of VAT;

G. In situations where the Claimant identified a direct connection, but not exclusive, between certain acquisitions of goods and services (inputs) and active operations (outputs) carried out by it, and was able to determine objective criteria of the level/degree of actual use, it applied the method of real allocation, in accordance with the provisions of n.º 2 of article 23 of the VAT Code, which was the case with the charges specifically associated with the acquisition of Automatic Payment Terminals;

H. To determine the amount of VAT deductible with respect to the remaining acquisitions of goods and services, allocated indistinctly to the various operations developed (resources of "mixed use"), the Claimant applied the general and supplementary method of the deduction percentage, calculating a specific final allocation coefficient for the year 2013, in consonance with the provisions of point 9 of Circular Letter no. 30108, of 30-01-2009, of the VAT Management Area;

I. With the application of the specific final allocation coefficient determined in accordance with the provisions of point 9 of Circular Letter no. 30180, the Claimant, with regard to financial leasing operations, only considered, in calculating the deduction percentage, the annual amount corresponding to interest and other charges, excluding the capital amortization component contained in the financial leasing rents, not considering the financial amortizations relating to financial leasing contracts nor the values of disposal/write-off due to destruction of the leased assets;

J. On 07-02-2014, in the return for the period of December 2013, in which it self-assessed VAT, in accordance with document no. 1 attached to the request for arbitral pronouncement, the content of which is reproduced, excluding from the calculation of the final deduction percentage the amount of financial amortizations relating to financial leasing contracts (leasing and ALD);

K. With the application of this regime, the Claimant determined a final deduction percentage for the year 2013 of 7%, which when applied to the total VAT incurred in the mixed-use resources acquired in that year (in the amount of € 1,590,700.29), resulted in the amount of € 111,349.02 of deductible VAT;

L. If the Claimant in the self-assessment in question had proceeded to include the financial amortizations of financial leasing in the calculation of the deduction percentage mentioned above, the percentage of 28% would have been determined, being entitled to deduct VAT in the amount of € 445,396.08, the difference between the amounts found with the application of those percentages being € 334,047.06;

M. On 29-12-2017, the Claimant submitted a request for official review of the self-assessment mentioned, arguing that the solution advocated by the Tax Administration in the mentioned Circular Letter no. 30108 is unlawful, since it not only imposes the application of the method of real allocation when the legal prerequisites for such "authoritarian imposition" are not met, but also, without presenting any legal basis, the tax administration purges from the calculation of the said percentage the amount of financial amortizations, violating the provisions of n.ºs 4 and 5 of article 23 of the VAT Code, read in conjunction with articles 173 and 174 of the VAT Directive (summary of the request for official review contained in point 26 of the opinion on which the decision to dismiss the official review was based);

N. The request for official review was dismissed by order of 12-04-2018, issued by the Head of Division of the Large Taxpayers Unit, which appears in document no. 2 attached to the request for arbitral pronouncement, the content of which is reproduced, which refers to the reasoning of an opinion in which the following is mentioned, among others:

V.1.3 - Assessment

V.1.3.1 - Preliminary Issue: Timeliness and Adequacy as a Procedural Means of the Request for Official Review

  1. With regard to the susceptibility and timeliness of recourse to the procedure of Official Review, although the Claimant discourses at length on the error in the self-assessment and its imputability to the Tax Administration, by virtue of the provisions of n.º 1 of article 78 of the General Tax Code, read in conjunction with n.º 1 of article 98 of the VAT Code, it does not appear that the Claimant has grounds for what is claimed.

  2. Official Review constitutes a guarantee for taxpayers/citizens, embodied in an administrative means of correcting acts of tax assessment, aimed at the total or partial annulment of an act that has already produced effects in the legal order, on the grounds of error attributable to the services, serious or manifest injustice, or duplication of collection, in accordance with the provisions of article 78 of the General Tax Code.

  3. Such mechanism is likewise applicable when acts relating to VAT are at issue, as follows from the provisions of article 98 of the VAT Code, which establishes that "When, for reasons attributable to the services, a tax has been assessed in excess, official review shall be carried out in accordance with the provisions of article 78 of the general tax law."

  4. Now, with regard to the susceptibility of application to the specific case of the provisions of n.º 2 of article 98 of the VAT Code, where it is determined that "Without prejudice to special provisions, the right to deduction or repayment of excess tax paid can only be exercised up to four years after the birth of the right to deduction or payment of excess tax, respectively, it is important to clarify that we are here within the scope of the right to deduction and not the right to regularization of VAT.

  5. However, the applicability of this guarantee enshrined in law for taxpayers, with a view to the annulment of a tax act and its replacement by the practice of another supported by the elements found in the course of the review procedure, cannot be contrary to the specificities of operation of the tax, as they are determined in the VAT Code itself.

  6. In fact, the provisions of the General Tax Code, endowed with a general character, must yield to the special and imperative provisions of the VAT Code. For which reason, although errors of self-assessment committed in VAT may be subject to Official Review, by virtue of n.º 2 of article 78 of the General Tax Code, the truth is that such mechanism cannot prejudice the imperviousness of the special provisions provided in that normative (VAT Code), which establish special rules for the exercise of the right to deduction.

  7. In fact, the right to deduction has reflexes in the determination and payment of the tax of the period to which the periodic return refers, based on the accounting record of the documents that served as its support. From that moment on, any correction to the deduction (whether arising from accounting records, periodic return, invoices, etc.) that may be carried out will constitute a regularization of the tax.

  8. As João Canelhas Duro states, "also n.º 2 of article 98 institutes a period for deduction of tax, being applicable to those uncommon situations in which the recording of operations does not occur at the moment provided for in n.º 1 of article 48 or in which there is a great lapse of time between the date of the operations and the receipt of the invoice, allowing the recording to be made and deduction to be carried out within four years. In cases, for example, due to a fact attributable to the provider, seller or third party, the documents supporting the deduction are not timely made available to the taxable person, the right to deduction can be exercised within four years. In these terms, the four-year period provided therein is not manifestly applicable to claims for regularization of tax, safeguarding only situations of late deduction of tax due to the also late receipt of the document that confers the right or due to inadvertent omission in the accounting record, with the charge not being found recorded at the time of the self-assessment of tax." (bold and underlined ours).

  9. Moreover, such understanding as to the scope of application of n.º 2 of article 98 VAT Code, and the distinction between the right to deduction and regularization follows from the above-mentioned Circular Letter no. 30082/2005, of November 17, issued by the VAT Management Services, in particular from point 82 thereof, and also follows from the decision delivered by the Supreme Administrative Court in the context of case no. 0966/10, of May 18, 2011, which although not directly addressing the question at issue in these proceedings, determines the correct interpretation of n.º 2 of article 98 of the VAT Code.

  10. The VAT Code regulates the regularization of tax in n.º 6 of article 23, in articles 24 to 26 and 78 to 78-D.

  11. Now, in light of the reality of the facts described by the Claimant, it can be concluded that we are dealing with a possible situation of error in the calculation of the pro rata deduction.

  12. In accordance with Circular Letter no. 30082/2005, of November 17, cases such as the present one are not susceptible to being classified in the cases of regularization provided for in article 78 of the VAT Code, identifying n.º 8 of the mentioned administrative instruction the situations that are excluded from its scope, not because they could not be included, but because their regulation is provided for in other legal provisions, such as articles 23 to 25 of the VAT Code.

  13. The same understanding was conveyed in the opinion of the Center for Tax Studies (CEF) no. 41/2013, of 2013-10-04, authored by Dr. Cidália Lança, with the agreeing decision of the Director of CEF of 2013-10-08, which expressly states: "corrections to the calculation of the deduction percentage should be made at the end of the year in question and should also be reflected in the return for the last period of the year in question (...)" being not possible "to proceed with corrections to the calculation of the final deduction percentage determined in a given year on the grounds of article 78 of the VAT Code."

  14. Indeed, where the calculation of the deduction percentage is concerned, these must be regularizable exclusively through the mechanism provided for in n.º 6 of article 23 of the VAT Code, that is, in the last return of the period to which it relates.

  15. Nevertheless, in those circumstances, the possibility of correcting the said error is not excluded through the presentation of a gracious claim provided for in article 131 of the Administrative Procedure Code, or by means of submission of judicial challenge, with the period being counted from the date of submission of the periodic return.

  16. This regime results from the provisions of n.ºs 2 and 5 of article 97 of the VAT Code, which although only mentions article 78 of the VAT Code, should be interpreted in the sense of covering all types of regularizations, including that provided for in n.º 6 of article 23 of the VAT Code.

  17. It follows from article 184 of the VAT Directive, and from EU case law, the establishment of a general right of taxable persons to the regularization of the tax initially carried out, which, being subject to the regulation laid down by each Member State, cannot fail to be carried out within a reasonable period, it being understood that with the regime defined above this guarantee is safeguarded.

  18. The right to regularization, like the right to deduction, are not absolute, being subject to certain requirements, in particular temporal ones, which means they must be exercised within the periods provided for by law, which are imposed by virtue of the principle of legal certainty and security.

  19. In that measure, the application of n.º 6 of article 23 to regularizations of the pro rata constitutes one of the special provisions to which the beginning of n.º 2 of article 98 of the VAT Code refers, excluding the application of the four-year period.

  20. Consequently, even if it were considered that the mentioned article was applicable, given that there is a special rule defining the temporal limit for the correction of errors of this type, it is that rule that should be considered, without prejudice to, as already mentioned, there being the possibility of taxable persons submitting a gracious claim or judicial challenge.

  21. Indeed, in the case of special and imperative provisions contained in the VAT Code that enshrine specific rules for the exercise of the right to deduction and its regularization, this means that they must prevail over provisions of a general character, under penalty of those being deprived of practical content, as there would always be room for the application of the four-year period provided for in article 98 of the VAT Code.

  22. In truth, the said legal provision does not have the scope of granting the taxable person the freedom to choose any moment to carry out the deduction within that period, but rather of fixing a maximum limit from which the right to deduction can no longer be exercised.

  23. In accordance with the understanding established, that time limit will only be applicable, given its general character, when there is no provision of a special character that sets a lower or higher time limit, under penalty of these provisions being deprived of practical content, as if this were not the case, the four-year period provided for in article 98 of the VAT Code would always apply.

  24. In this way, the concurrence established between these two provisions proves to be merely apparent, existing between them, in reality, a relationship of speciality, since the general provision contained in n.º 2 of article 98 (four-year period) sees its applicability excluded in concrete situations that fall within the provision of the special norm contained in the VAT Code.

  25. It happens that, given that the situation under analysis does not appear to be susceptible to being classified in accordance with the provisions of article 98 of the VAT Code, with even greater reason, the provisions of article 78 of the General Tax Code to which it refers are not applicable.

  26. Furthermore, in the situation under analysis, what is found is that the taxable person intends to change the criteria present to it when selecting the amounts to be included in the denominator and numerator of the fraction that makes up the pro rata, considering in it the amount of financial amortizations corresponding to the financial leasing contracts, which by its own error was not considered.

  27. Even if this were not understood, in so far as the Claimant, when filling in the periodic return, observed the understanding set out in Circular Letter no. 30108/2009, of January 30, the truth is that it cannot be said that there is an error attributable to the services, since the same is shown to be in accordance with internal or EU regulations on VAT, and does not suffer from any of the defects invoked, as will be better explained in the following section.

  28. Thus, the situation in question does not constitute a matter capable of being classified within the prerequisites for official review as defined in the General Tax Code and the VAT Code.

V.1.3.2 - Error in Self-Assessment Due to Non-Consideration of the Amount of Capital of Rents Billed Under Financial Leasing Contracts in the Determination of the Final Deduction Pro Rata:

  1. The contested claim in the Official Review in question is embodied in the partial annulment of the VAT self-assessment, underlying the periodic return no. ..., relating to the period of December 2013 (1312), resulting from the alleged overpayment of the amount of € 334,047.06, the Claimant considering that this is an error in the self-assessment embodied in an error concerning the legal regime applicable to the deduction of tax relating to resources of mixed use.

  2. Having analyzed the request submitted by the Claimant, as well as the grounds invoked, it appears that the question here under analysis relates to the consideration of the amount relating to the capital of rents billed under financial leasing contracts for the determination of the pro rata of the respective taxation period.

  3. In the specific case, we are dealing with operations of movable property financial leasing, and it is sought to assess the legality, in light of the norms of EU law or internal law, of the exclusion from the calculation of the deduction percentage of the portion of the value of the rent from financial leasing that corresponds to the financial amortization, only considering the amount of interest and other charges billed.

  4. In that measure, it is important to note that the Claimant is classified, in VAT, in the normal regime, with monthly periodicity, assuming the nature of a "mixed" taxable person.

  5. This is because it carries out financial operations that do not confer the right to deduct VAT, as they are exempt under n.º 27 of article 9 of the VAT Code and operations with VAT assessment, as is the case, for example, with leasing and ALD rents, which confer the right to deduct the VAT incurred.

  6. The Claimant also carries out other financial or ancillary operations that likewise confer the right to deduct VAT, in accordance with the provisions of article 20 of the VAT Code.

  7. Within the set of operations that confer the right to deduct VAT, financial leasing contracts are included, in which the Claimant assumes the position of lessor and, in that capacity, acquires the goods (or the financing for their acquisition) that are the subject of these contracts, increased by VAT, with the same being delivered to the respective lessees for their use and enjoyment.

  8. In return, the Claimant bills rents to the lessees, to which VAT is added.

  9. With regard to acquisitions of goods and services of mixed use, in reason of having been indistinctly allocated to the various operations developed by the Claimant, for the purpose of exercising the right to deduction, it is understood that the general and supplementary method of the deduction percentage should apply – also called pro rata – in accordance with the provisions of paragraph b) of n.º 1 and of n.º 4, both of article 23 of the VAT Code.

  10. In the year 2013, the total VAT incurred with the acquisition of resources used in operations subject to, with and without the right to deduction (mixed use), amounted to € 1,590,700.29, as mentioned by the Claimant in point 26 of the petition for Official Review.

  11. It happens that, in error, the Claimant did not consider either in the numerator or in the denominator of the formula for calculating the pro rata the amount of capital of financial leasing rents, determining a final deduction percentage of 7%, to which there corresponded a deduction of € 111,349.02 (point 27 of the petition for Official Review).

  12. In fact, the inclusion of the capital amortization component would lead to the determination of a deduction percentage of 28%, compared to the 7% reflected in the VAT periodic return for the period of December 2013. This means that it would have been entitled to deduct the amount of € 445,396.08 (point 28 of the petition for Official Review).

  13. In light of the question under analysis in the present proceedings, it is important to note that it is not considered that there exists any error in filling in the return, embodied in an error in the calculation of the deduction pro rata.

  14. In fact, the calculation of the deduction percentage made by the taxable person is in perfect accordance with the norms of EU and internal law, for which reason it does not appear that the Claimant is correct as to the claim formulated in its initial request.

  15. This is a matter with regard to which the AT has already pronounced itself through Circular Letter no. 30108, of January 30, 2009, from the Office of the Deputy Director-General - VAT Management Area.

  16. This administrative instruction came to embody the doctrine defended by the then DGCI (current AT) which sought to "(...) disseminate the correct interpretation to be given to article 23 of the VAT Code with regard to its application by credit institutions that exercise, among others, the activity of Leasing or ALD (...) ".

  17. From a reading of Letter no. ..., it can be concluded that the calculation of the final deduction percentage referred to above (7%) was carried out, by the Claimant, in perfect accordance with the terms provided therein, which are transcribed:

  18. "7. In light of the current wording of article 23, real allocation is the method that, based on objective allocation criteria, best adapts to the determination of deductible VAT in goods and services of mixed use."

  19. "8. In that sense, considering that the determination of deductible VAT in accordance with the application of the general pro rata established in n.º 4 of article 23 of the VAT Code is susceptible to causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, can lead to "significant distortions in taxation", taxable persons who within the scope of financial activities practice Leasing or ALD operations should use, in accordance with n.º 2 of article 23 of the VAT Code, real allocation based on objective criteria that allow determining the degree of use of these goods and services, so as to determine the amount of VAT to be deducted with respect to the whole of the activities."

  20. "9. In the application of the method of real allocation, in accordance with the above number and whenever it is not possible to apply objective allocation criteria for common costs, a specific allocation coefficient should be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in the calculation of the deduction percentage. In this case, the percentage referred to above does not result from the application of n.º 4 of article 23 of the VAT Code." (underlined ours).

  21. That is, the deduction percentage initially calculated does not result from the application of n.º 4 of article 23 of the VAT Code, but rather rests on the application of the method of real allocation, through the use of an objective allocation criterion, taking into account the amounts involved in the operations developed within the scope of the activities of Leasing or ALD.

  22. As a preliminary matter, it is important to effect the legal - tax classification of the contract under analysis, which underlies the provision of leasing services: financial leasing contract.

  23. The legal basis for any form of leasing contract is found, in general terms, in articles 1022 to 1114 of the Civil Code. Nevertheless, and because it is a particular type of lease, it is important to note the provisions of the legal regime specially created for this type of contract, and which is established in Decree-Law no. 149/95, of June 24, with subsequent amendments.

  24. In accordance with article 1 of Decree-Law no. 149/95, of June 24, financial leasing is "(...) a contract by which one of the parties undertakes, for remuneration, to grant to the other the temporary enjoyment of a thing, movable or immovable, acquired or constructed at the indication of the latter, and which the lessee may purchase, after the agreed period, at a price determined therein or determinable by simple application of the criteria fixed therein."

  25. In that sense, António Menezes Cordeiro states that "financial leasing is the contract by which one entity - the financial lessor - grants to another - the financial lessee - the temporary enjoyment of a tangible thing, acquired for the purpose, by the lessor himself, from a third party, at the indication of the lessee."

  26. This is, therefore, a contract commonly used as a means of providing bank credit, by which the financial institution, at the request of the interested party, acquires the good in question and grants it to such person in lease, with the same being obligated to pay a "(...) remuneration that translates the amortization of the good and interest; at the end, the lessee may acquire the good at the residual value or enter into a new contract; may also do nothing."

  27. From this it follows that the object of this type of contract is not the transfer of ownership, but rather the granting, by the lessor of the use of the good, that is, the lessor undertakes to provide a service, translated in the availability of the good in question, receiving in return a benefit, without prejudice to it being possible to provide for the option to purchase, at the end of the contract, in favor of the lessee, at a residual value fixed by agreement of the parties.

  28. Attentive to this legal classification, and transposing it to the tax perspective, it can be concluded that financial leasing constitutes a provision of services subject to tax, in accordance with the provisions of n.º 1 of article 4 of the VAT Code, and is carried out by the taxable person within the scope of an economic activity.

  29. Effectively, in the case of leasing operations, there is no doubt that the respective consideration is concretized in the rents received by the entity that assumes the contractual position of lessor.

  30. However, we cannot abstract ourselves from the fact that these leasing operations (leasing and ALD) embody a form of credit (among others), for which reason the activity of the lessor entity is, in substance, the granting of financing, the remunerative consideration of which is constituted, essentially, by interest and other charges included in the rents.

  31. The Claimant refers, invoking the provisions of article 73 of the VAT Directive and article 16 of the VAT Code, in particular paragraph h) of n.º 2, that the consideration resulting from this type of contract (rent) enjoys a unitary nature in that the taxable value for VAT purposes corresponds to the value of the rent received or to be received (cf. points 53 to 62 of the gracious claim petition).

  32. For which reason the rents resulting from financial leasing contracts (as long as no exemption is applicable) are, in fact, entirely subject to VAT.

  33. In this regard, it should be noted that one of the objectives of the legislator in this matter was to ensure compliance with the principle of tax neutrality, in the aspect of the principle of equality which, in the specific case, is embodied in the fact that it ensures equivalent tax treatment, in the sense of equal burden, in relation to the one who acquires a good through a financial leasing contract, in relation to another person who acquires it directly.

  34. Now, the fact that the full value of the rent, paid by the lessee to the lessor, constitutes the taxable value on which VAT will be levied does not mean that the portion of the rent corresponding to the financial amortization or capital must be included in the calculation of the deduction percentage, together with the portion corresponding to interest and other charges.

  35. First of all because the rent constitutes the payment for the service of granting financing to the lessor, being composed of two parts: capital or financial amortization, which is nothing more than the reimbursement of the "loaned" amount and interest, plus any possible charges, which constitute the remuneration of the lessor.

  36. Note that, from the perspective of the leasing operation as a financing operation, the acquisition value of the good subject to the leasing contract corresponds to the capital financed which constitutes the component of financial amortization in the rent billed by the lessor to the lessee.

  37. Being that, at the time of the acquisition of that same input, the taxable person (lessor) exercised the right to full deduction of the amount of VAT billed by the provider of the good subject to the leasing contract, through the method of direct allocation.

  38. For which reason the portion of the financial amortization included in the rent cannot fail to be excluded from the calculation of the deduction percentage, with the method of real allocation being applied to it with recourse to an objective allocation criterion, since this is nothing more than the restitution of the capital financed/invested for the acquisition of the good.

  39. Thus, in light of the principle of neutrality on which this tax system is based, it becomes easy to understand that the incidence of VAT on the entirety of the rent is the only way to guarantee that the State recovers the value of the tax that was already deducted by the taxable person.

  40. On the other hand, the inclusion in the ratio between operations with and without the right to deduction of the component relating to the restitution of capital (financial amortization), as an integral part of the rent, causes an unjustified increase in the final deduction percentage, given that it will be significantly and positively influenced, through a mere restitution of financing, the underlying good of which was already subject to VAT assessment and deduction at the time of acquisition.

  41. This fact will generate increased deductions for the taxable person, with regard to the generality of mixed-use inputs, through the use of a coefficient, which in that measure, presents itself as exaggerated, in light of the reality of the taxable operations.

  42. The main activity of the lessor does not consist of the purchase and sale of goods, but only in the granting of credits to third parties for the acquisition of those goods, even though it takes the place of the recipients of the goods in the acquisition, reserving to itself the right of ownership. And from that activity it obtains, fundamentally, interest.

  43. In this way, it becomes understandable that in the calculation of the mentioned specific allocation coefficient, applicable to the case under analysis, and in harmony with the understanding of the AT, only the amount that exceeds the value of the costs used in taxed operations should be considered, since, through the direct allocation method, the VAT on the capital portion is deducted in full.

  44. And it is only that differential value (which, generically, corresponds to interest) that is connected to the costs of acquisition of resources used indistinctly in operations with and without the right to deduction.

  45. If this were not the case, it would allow an artificial increase in the VAT deduction percentage incurred with the generality of goods or services of mixed use acquired by the taxable person.

  46. From the understanding advocated by the AT, no restriction of the legitimate right to deduction follows, as the Claimant claims. Rather the contrary, it advocates the inadmissibility of the exercise of the illegitimate right to deduction, in that the possible execution of the procedure defended by the Claimant would undermine the fiscal neutrality inherent to the mechanics of VAT.

  47. Furthermore, the method of pro rata provided for in n.º 4 of article 23 of the VAT Code, which the Claimant intends to see applied, does not have the merit of measuring the degree of use that the two categories of operations, with and without the right to deduction, make of the goods and services that are indistinctly allocated to them (mixed use) and, consequently, cannot be used to determine the deductible portion, the VAT assessment of which was carried out upstream by other economic operators that are situated in the immediately preceding phase of the economic chain.

  48. There are two methods of deduction provided for in the VAT Code (article 23).

  49. On the one hand, the so-called method of real allocation, which "(...) consists in the application of objective, real criteria, on the degree or intensity of use of goods and services in operations that confer the right to deduction and in operations that do not confer that right. It is in accordance with that degree or intensity of use of the goods, measured by objective criteria, that the taxable person will determine the portion of the tax incurred that can be deducted. The criteria are subject (...) to the scrutiny of the Directorate-General of Taxes which may come to impose special conditions or even bring the real allocation procedure to an end, in the case of verification that this causes or may cause significant distortions of taxation (...).

  50. And on the other hand, the method of deduction percentage or pro rata, defined in paragraph b) of n.º 1 and n.º 2 of article 23, and developed in n.ºs 4 to 8 of the same legal provision. Fundamentally, it is a partial deduction, which is translated in the fact that the tax incurred in the acquisitions of goods and services used in both types of operations is only deductible in the percentage corresponding to the annual amount of operations that give rise to deduction.

  51. In this case, the deduction percentage to be applied is calculated provisionally based on the amount of operations carried out in the previous year (provisional pro rata), being corrected in the return for the last period of the year to which it relates, in accordance with the definitive values of turnover volume referring to the year to which they relate, determining the corresponding regularization by application of the definitive pro rata.

  52. Now, with the amendment introduced to article 23 by Law no. 67-A/2007, of December 31, such procedures were "extended" to the method of real allocation, in particular to cases where the same is imposed by the Tax Administration, whether for situations in which the taxable person carries out distinct economic activities, or for cases in which it is found that the use of the other methods could cause significant distortions in taxation, as provided for in n.º 3 of the article under analysis.

  53. Which is perfectly justified and in no way contradicts the common VAT system. In fact, from one year to another the degree of use of goods under the real allocation regime may change and the objective criteria for calculating the same may change.

  54. It is precisely within the scope of the powers conferred on the Tax Administration by paragraph b) of n.º 3 of article 23 VAT Code, which is based on the faculty that was conferred by paragraph c) of the third paragraph of n.º 5 of article 17 of the Sixth Directive, that the Circular Letter no. 30.108, here in discussion, is framed, providing for a solution that allows preventing the possibility of the occurrence of significant distortions, when we are dealing with taxable persons who carry out financial leasing operations and ALD.

  55. Thus, in its point 9 it prescribes that "In the application of the method of real allocation, in accordance with the above number and whenever it is not possible to apply objective allocation criteria for common costs, a specific allocation coefficient should be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in the calculation of the deduction percentage. In this case, the percentage referred to above does not result from the application of n.º 4 of article 23 of the VAT Code." (underlined ours).

  56. That is, the Tax Authority came to establish the adoption of more adequate criteria that allow assessing with greater objectivity the degree of allocation of goods and services of mixed use, in cases such as the present one.

  57. It is important to note that the adoption of the criterion mentioned is demonstrative that the Tax Authority admits the existence of some degree of allocation of resources forming the concept of general expenses incurred by banks within the scope of the celebration of this type of contract. Although it is a notorious fact that, as a rule, operations of this nature require the use of technical and administrative resources that are considerably less relevant than those allocated to the main activities developed by banking institutions such as the Claimant.

  58. On the other hand, this does not mean that taxable persons are obligated to follow the understanding advocated in the Circular Letter, applying the criterion defined therein. Indeed, as follows from the same, the Tax Authority accepts that financial institutions resort to other real allocation criteria, provided that they prove suitable for the intended purpose.

  59. Given this, the question that arises is whether the procedure adopted by the Tax Administration is in accordance with the internal and EU norms, in particular article 16 and 23 VAT Code, already mentioned, as well as articles 174 and 175 of the VAT Directive.

  60. This administrative instruction came to embody the doctrine defended by the then DGCI (current AT) which sought to "(...) disseminate the correct interpretation to be given to article 23 of the VAT Code with regard to its application by credit institutions that exercise, among others, the Leasing or ALD activity (...)", seeking to dispel some interpretative difficulties raised by the wording of article 23 of the VAT Code, harmonizing it with EU doctrine and case law.

  61. Nevertheless, much of the doctrine advocated therein had already been applied by the Tax Administration even before its publication.

  62. The main question resolved here was already the subject of assessment by the CJEU, and the understanding advocated therein confirms the position that has been assumed by the Tax Authority with respect to this matter.

  63. "In this context, the CJEU understood that internal law (specifically article 23, n.ºs 2 and 3 of the VAT Code, in the wording in force) legitimized the action of the AT, to the effect of derogating the pro rata calculation rule provided for in the Sixth Directive.

  64. "The CJEU's understanding was in the sense that the regulatory framework in question, considering the principles that inform VAT (namely those of neutrality and proportionality) and considering that the calculation of a deduction quotient should be as close as possible to reality (despite some margin of error that characterizes it, by definition), does not oppose Member States applying a method or criterion different from the volume of business, if this method is the most accurate.

  65. In the specific case, the CJEU understood that the method that the Portuguese AT defined is, in principle, more precise than that provided for in the Sixth Directive, given that it only considered the portion of the rents paid that serve to compensate for the consideration of the costs of financing and management of the contracts borne by the lessor."

  66. Being that this understanding came, necessarily, to be received by our superior courts, in particular in the context of proceedings where a preliminary reference had been requested to the said court.

  67. In truth, the capital component contained in the rents should not burden the calculation of the deduction percentage, since it does not constitute income from the activity of the taxable person, contrary to what happens with the remaining variables that form part of the formula, and its consideration would cause significant distortions in taxation, it would also distort the pro rata method itself and the entire VAT deduction system, by recognizing as deductible costs that did not contribute to the realization of taxed operations. Only in this way is the neutrality of the tax achieved. It is not all taxed and/or non-taxed operations that should be integrated into the formula, but only those that, carried out within the scope of an economic activity carried out by the taxable person, have used common costs to generate added value (in the case of financial leasing, it comes from the granting of the use of the good subject to the contract, through which the lessor obtains income in the form of interest).

  68. Now, it is clear to evidence that, embodying the component of the rents corresponding to the financial amortization, a mere reimbursement of capital, which in that sense does not generate any added value, it is only to a very diminished extent that the common costs borne by the lessor in a financial leasing operation can, possibly, contribute to its realization. If they did not contribute to the financial amortization, they cannot be imputed to it.

  69. In light of all that has been said, there is no doubt that the procedure adopted by the Tax Administration is in accordance with internal and EU norms and no illegality can be ascribed to it.

  70. In fact, article 174 of the VAT Directive, which corresponds to n.º 5 of article 17 of the Sixth Directive, allows Member States options with regard to the determination of VAT on "mixed inputs", authorizing or requiring that they use certain specific methods of VAT deduction when circumstances justify it.

  71. In harmony with this permission is the provision of n.º 2 and paragraph b) of n.º 3, both of article 23 of the VAT Code.

  72. These rules governing the right to deduction are contained in the directives that govern the common VAT system, being also in harmony with the provisions contained in the VAT Code.

  73. In light of the foregoing, it is unequivocally demonstrated that the method adopted by the Claimant and which it now seeks to change is the only one that proves adequate for the purpose of exercising the right to deduction, allowing, with the specificities contained in Circular Letter no. 30.108, to prevent distortions in taxation that would otherwise be manifest, as amply demonstrated and found in the provision in question.

  74. This fact by itself being justificatory for the imposition of the obligation of its use, since from n.ºs 2 and 3 of article 23 it does not follow that this power granted to the AT is dependent on the cumulative verification of the two paragraphs of the last number indicated, that is, beyond distortions in taxation, the practice by the taxable person of distinct economic activities.

  75. Furthermore, in reinforcement of what has been said, it is important to note also the manner of accounting for the two components that make up the rent paid. On the one hand, the lessor should reflect the value of the good as a receivable, which is reimbursed through the financial amortizations, should be recorded as a receivable, and the remaining part (interest and other charges) should be recognized as income. Thus it follows from this that the financial amortization aims only at the reduction of a receivable, while interest will influence the result of the year.

  76. For which reason, in the case of Credit Institutions and other financial institutions, the concept of turnover, established in paragraph a) of n.º 3 of article 5 of Regulation (EC) no. 139/2004 of the Council of January 20, does not contemplate the portion corresponding to the financial amortization.

  77. Although paragraph h) of n.º 2 of article 16 of the VAT Code refers to the fact that in financial leasing operations the taxable value corresponds to the rent received in its entirety, the truth is that the portion corresponding to the financial amortization does not assume the nature of income and, as such, does not form part of the concept of turnover in credit institutions, and thus cannot influence the calculation of the deduction percentage.

  78. The AT's position finds perfect accommodation both in constitutional principles and in the spirit and principles governing the mechanism of the exercise of the right to deduction, contained both in EU case law and in the national regulatory framework, which is nothing more than a transposition of EU legal norms.

  79. In this regard, it should be clarified that the guidance contained in point 9 of Circular Letter 30.108 do nothing more than contribute to the practicability of the constitutional designs embodied in articles 103 and 104 of the Portuguese Constitution, being a decisive factor in guaranteeing and protecting the confidence of taxpayers.

  80. In fact, the administrative guidelines contained in circulars or circular letters are relevant for the adequate pursuit of the public interest, in respect of the rights and interests of taxpayers - article 266 of the Portuguese Constitution and article 55 of the General Tax Code.

  81. The importance of the said guidelines results, first of all, from the fact that "tax activity [is] today a massive activity, which involves the treatment of thousands of cases, generally translated into tax returns of taxpayers and in this context an important element of legal certainty is the prior knowledge of the organization implemented to deal with these cases, of the criteria and procedures it adopts, given that it allows individuals, in the face of a problem or a doubt, to know, if there is internal regulation on that matter, how, in principle, that case will be resolved by the officials responsible for applying the law."

  82. Adding Casalta Nabais, who, in the dogmatic cutting of the principle of tax legality, understands "to bring here, as a limit to the determinability required by the principle of tax typicity, (...) the principle of practicability, which implies that the legislator does not go so far in determining legal solutions as would be required, allowing the administration a given margin of discretion, under penalty of being faced with impractical solutions in the sense of economically unsustainable (...). Hence, given the reality of situations whose degree of differentiation and individualization cannot be followed for practical reasons, namely due to unsustainable or inappropriate costs that they imply, an appeal is made to the enactment of simplification standards, whether in legislative form or in administrative form, through which the typification (or typification), globalization or standardization, assuming as a rule what is typical, normal, probable (...)", and for the Author, "the principle of practicability can still contribute to an attenuation of the requirements of determinability of the principle of tax legality (...), constituting itself as support for the legislator to use indeterminate concepts (...) or even grant discretionary powers, which indeed occurs throughout and which, among us, has several manifestations (...)."

  83. The AT's position, at no time, questions either the internal or EU norms relating to the right to deduction, as has already been amply elucidated, never seeking to alter or violate the legal rules that gave rise to it.

  84. The application of the law would necessarily have to result in the application of the guiding principles contained in Circular Letter no. 30.108.

  85. Furthermore, the fact that in the same Circular Letter the method to be used is explained, in addition to promoting legal certainty, also allows the effective realization of the purposes of the right to deduction, being the only one that proves compatible with the fundamental principle in this matter, and in the entire VAT system: the principle of neutrality and fiscal justice in relation to all taxable persons.

  86. In light of what has been said, with due respect for what was decided within the scope of case no. 309/2017-T of CAAD, we cannot agree with the understanding sustained there, following, in its entirety, the case law of the CJEU, necessarily adopted by the STA in the numerous decisions taken by it in matters similar to the present one, such as the Judgments of the Tax Contentious Section of the Supreme Administrative Court, of 04.03.2015, appeals no. 1017/12 and no. 81/13, of 29.10.2014, appeal no. 1075/13, of 17.06.2015, appeal no. 01874/13, of 27.01.2016, appeal no. 331/14, and of 15.11.2017, appeal no. 0485/17.

  87. It should be noted that the decision of the CJEU has the value of res judicata, being binding not only on the court that requested its pronouncement by way of preliminary ruling, but also on the remaining courts and equivalent instances that judge the case in the context of an appeal, also binding, as a matter of uniformity, all national jurisdictions of the Member States.

  88. Being an interpretative decision relating to n.º 5 of article 17 of the Sixth VAT Directive (current article 173 n.º 2 of the VAT Directive), which was transposed into our internal law through article 23 of the VAT Code, the interpretation advocated therein should be applied by national courts with the meaning and scope defined therein, including CAAD.

  89. In these terms, it is concluded that the understanding contained in Circular Letter no. 30.108, of January 30, 2009, does not violate, itself, any internal or EU provisions on VAT, and does not suffer, in that measure, from any of the defects invoked by the Claimant.

V.1.4 - Conclusion and Proposed Decision

  1. In light of the foregoing, it is concluded that the arguments invoked by the Claimant with respect to this question are without merit, and its claim should be dismissed.

O. On 30-01-2009, the Tax and Customs Authority issued Circular Letter no. 30108, published at
http://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/legislacao/instrucoes_administrativas/Documents/OficCirc_30108.pdf, the content of which is reproduced, in which the following is mentioned, among others:

  1. In light of the current wording of article 23, real allocation is the method that, based on objective allocation criteria, best adapts to the determination of deductible VAT in goods and services of mixed use.

  2. In that sense, considering that the determination of deductible VAT in accordance with the application of the general pro rata established in n.º 4 of article 23 of the VAT Code is susceptible to causing unjustified advantages or disadvantages due to the lack of coherence of the variables used therein, that is, can lead to "significant distortions in taxation," taxable persons who within the scope of financial activities practice Leasing or ALD operations should use, in accordance with n.º 2 of article 23 of the VAT Code, real allocation based on objective criteria that allow determining the degree of use of these goods and services, so as to determine the amount of VAT to be deducted with respect to the whole of the activities.

  3. In the application of the method of real allocation, in accordance with the above number and whenever it is not possible to apply objective allocation criteria for common costs, a specific allocation coefficient should be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to the Leasing or ALD activity should be considered in the calculation of the deduction percentage. In this case, the percentage referred to above does not result from the application of n.º 4 of article 23 of the VAT Code.

P. On 13-07-2018, the Claimant submitted the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Broadening of the Facts Following the Supreme Administrative Court Decision of 04-03-2020

In light of the lack of limitation of the powers of cognition of the facts to the facts alleged in the initial pleadings, which follows from the judgment of the Supreme Administrative Court, the following facts are also considered to be proved:

Q. The Claimant's procedures regarding the vehicle financial leasing processes follow the terms indicated in documents nos. 1 to 7 attached with the request of 04-08-2020, the contents of which are reproduced, which cover:

• Circuit for Analysis and Validation of Automobile Proposals, which includes the activity relating to the definition of the circuit and the participants involved in the analysis and validation of a proposal;

• Vehicle Legalization Processes: Registration, Terms of Commitment and Terms of Responsibility, which includes:

• Definition of the operational circuit to be taken into account in the financing of an auto contract with presentation of a term of commitment;

• Definition of the financing circuit for service and used vehicles in accordance with the Auto Moto Partner Manual – exception, with use of a term of responsibility;

• Making known the circuit and rules to be followed in the registration and legalization of vehicles;

• Follow-up and controls to be carried out to ensure the existence of vehicle legalization.

• Liquidation of Vehicle Circulation Tax and Associated Penalties for leasing and ALD contracts;

• Request for Identification of Drivers, which includes the rules for handling notifications received, in writing or by file, with a request for identification of the driver of a vehicle registered in the Bank's name;

• Claims Process and Total or Partial Auto Amortization;

• Contract Termination Term which defines the rules and steps relating to the contract legalization process that is terminated, whether by contract rescission or contract termination upon completion of the monthly reimbursement plan;

• Customer Care & Rebound/DO&EO which defines the rules for the Assignment of Contractual Position in leasing and ALD products for contracts in force and without arrears as of the date of execution of the Assignment.

R. The phase of approval and formalization of leasing and ALD contracts occurs over a period of about 15 days, with reduced Claimant resources used therein (testimony of witnesses B..., C... and D...);

S. The delivery of the leased asset to the lessee depends on prior authorization communicated by the Claimant to the supplier of the asset, with contacts between the Claimant, the suppliers of the leased assets and the Claimant's internal department responsible for the management of these contracts, an activity aimed at making the leased assets available to the lessees (testimony of witness D... and document no. 1 attached on 04-08-2020);

T. The authorization for payment and the registration of the loan with a view to making the leased assets available depend on interactions between the Claimant and the suppliers of the leased assets, in particular the analysis of the documentation sent by the supplier with reference to the assets to be acquired by the Claimant with a view to their lease to customers (testimony of witness D...);

U. The Claimant participates in the legalization process of the leased vehicle, ensuring the completion of the single model (for vehicles) and the legalization of the vehicle and contacts the suppliers to obtain a copy of the proof of legalization (document no. 2 attached on 04-08-2020 and testimony of witness D...);

V. With regard to the payment of taxes on vehicles financed through leasing relating to previous years, the Claimant receives notifications from the AT for payment of Vehicle Circulation Tax and subsequently proceeds to identify the lessee or associated contract so as to obtain the tax payment forms, made available on the Finance Portal and requests, internally, its payment and attaches the payment proof to the respective form, notifying the lessee, mentioning the deadline for the debit of the assessed tax amount (Document 3 attached on 04-08-2020);

W. In cases of traffic violations involving leased vehicles, once the driver identification request is received, the Claimant, having the duty to identify the lessee, taking into account the license plate stated in the notice received, sends a letter to the customer (with the original notification) and a letter to the ticketing entity in which the lessee is identified (Documents no.s 3 attached on 04-08-2020);

X. With regard to insurance, the Claimant, in addition to controlling whether it is paid by the lessees throughout the contract, after receiving letters from the insurers, verifies the information provided, in particular the updating of the insured capital, the cancellation of insurance for settled leasing contracts, the termination of insurance contracts due to non-payment of premiums and requests for policy cancellations. When informed by the Insurance Company(ies) of the non-payment of insurance premiums and requests for policy cancellation relating to active contracts, the Claimant sends notification to the customer's address;

Y. Both the financing, as well as the management of the contracts, as well as the provision of vehicles to the Claimant's customers involve the allocation of resources of mixed use;

Z. The Claimant, from 21-07-2020, charges its customers commissions and expenses referred to in the documents which appear on the Internet site:

https://www...

AA. The Claimant has thousands of active financial leasing and ALD contracts for vehicles (testimony of witness B...);

BB. The portion of the activity relating to the financing of financial leasing and ALD contracts occurs over about 15 days (testimony of witnesses B... and C...);

CC. The Claimant develops activities for recovery of amounts owed through contacts with customers (testimony of witness C...);

DD. The Claimant receives vehicle returns and handles the sale of vehicles recovered by court order or voluntarily by customers, incurring expenses with equipment for work, postage, travel costs, lawyers, telephone, furniture allocated to the activity (testimony of witness C...);

EE. The Claimant frequently makes computer system updates (testimony of witness D...).

2.3. Facts Not Proved

2.3.1. The exact extent of the use of mixed-use resources by the Claimant relating to vehicle financial leasing operations was not proved, in particular whether, in 2013, it was determined by the financing and management of the financial leasing contracts entered into with its customers or by the provision of the vehicles.

In fact, from the evidence produced result the types of activities developed by the Claimant, but not the quantification of the use of mixed-use resources allocated to any of them, in particular in 2013, to which the self-assessment relates.

2.3.2. It was not proved that financial leasing operations require the use of technical and administrative resources of mixed use that is less relevant than those allocated to the remaining activities, in particular in 2013. No evidence was presented on this matter and it is not considered a notorious fact.

2.3.3. It was not proved that the expenses and commissions referred to in the document https://www... were already charged before 21-07-2020, in particular in the month of December 2013.

In fact, it is that date that is indicated in that document and no evidence was produced that what it contains regarding expenses and commissions was applied previously, in particular in 2013.

2.3.4. It was not proved that in the case at hand the use of the method of determining the pro rata based on the volume of business causes or may cause "significant distortions in taxation," in particular that it may "cause unjustified advantages or disadvantages due to the lack of coherence of the variables used therein."

In fact, these conclusive judgments are used in point 8 of Circular Letter no. 30108, but no evidence was presented of any of the statements contained therein, nor are they clarified what the "unjustified advantages or disadvantages" referred to are.

2.4. Reasoning for the Determination of Facts

The facts that were established as proved are based on the documents submitted by the Claimant, on those contained in the administrative proceedings and on what appears on the Internet site mentioned.

As for the facts established as proved within the scope of the broadening of the facts, they were based on the documents attached by the Claimant on 24-08-2020 and on the testimony referred to for each point, which generally corroborated the application of the procedures referred to in those documents.

The witnesses appeared to testify with impartiality and with personal knowledge of the facts they reported.

As it is credible that the Claimant would have to carry out the tasks indicated in the said procedures, the mere challenge of the documents by the Tax Administration, because they are of an internal nature, does not appear sufficient to lead the Arbitral Tribunal to doubt their correspondence to reality, as we are dealing with documents addressed to the Claimant's own employees and which, by their nature, will be of an internal nature.

Thus, having produced no evidence that undermines the credibility of the said documents, which is corroborated by the witnesses, the option was to consider it proved that the Claimant adopts the procedures contained therein.

3. Law

3.1. Maintenance of the Decision on the Exception of Material Incompetence of the Arbitral Tribunal Resulting from the Circumstance that the Request for Arbitral Pronouncement was Formulated Following the Dismissal of a Request for Official Review

The decision in the arbitral judgment of 29-11-2018 on the exception of incompetence raised by the Tax and Customs Authority, because the request for arbitral pronouncement was formulated following the dismissal of a request for official review,

Frequently Asked Questions

Automatically Created

What is the pro rata method for VAT deduction in financial leasing operations under Portuguese tax law?
The pro rata method for VAT deduction in financial leasing operations requires determining the proportion of mixed-use expenses allocable to taxable versus exempt activities. Under Portuguese VAT law, financial leasing is generally exempt, but ancillary services like vehicle provision may be taxable. The pro rata calculation depends on whether shared resources (goods/services) are primarily used for exempt financing and contract management activities or for taxable vehicle provision. Companies must establish the predominant business purpose of mixed-use expenses through factual evidence of operational activities. The Tax Authority's circulars provide guidance, but taxpayers can challenge interpretations that improperly restrict deduction rights, as demonstrated in this CAAD case where the tribunal required extensive factual inquiry into actual resource utilization.
Can a taxpayer request official review (revisão oficiosa) to recover overpaid VAT on financial leasing activities?
Yes, a taxpayer can request official review (revisão oficiosa) to recover overpaid VAT on financial leasing activities under Article 78 of the LGT (General Tax Law). This administrative procedure allows taxpayers to challenge self-assessments they believe contain errors resulting in overpayment. In this case, the claimant filed an official review request to recover €334,047.66 in VAT related to pro rata calculations for December 2013. While the Tax Authority initially dismissed the request, the taxpayer successfully brought the matter to CAAD arbitration. The official review mechanism is particularly relevant for complex VAT issues involving mixed operations where initial self-assessments may not correctly apply deduction methodologies, providing a pre-litigation remedy before pursuing arbitral or judicial review.
What is the applicable deadline for filing an official review request for VAT self-assessments in Portugal?
The deadline for filing an official review request for VAT self-assessments in Portugal is generally four years from the date of payment or the end of the tax period, pursuant to Article 78(1) of the LGT. However, timeliness was contested in this proceeding, with the Tax Authority raising untimeliness as a defense. The specific deadline calculation can be complex, particularly for periodic VAT returns where self-assessment occurs. Taxpayers must act promptly upon discovering errors in their VAT calculations affecting deduction rights. The deadline is critical because late requests will be dismissed, potentially barring recovery of overpaid amounts. In this case, despite the Tax Authority's untimeliness objection to the official review request filed regarding the December 2013 period, the arbitral tribunal proceeded to substantive analysis, though the decision was later remanded for factual expansion regarding pro rata methodology.
How does CAAD arbitral jurisprudence address the VAT deduction right for mixed-use expenses in financial leasing?
CAAD arbitral jurisprudence addresses VAT deduction rights for mixed-use expenses in financial leasing by requiring fact-intensive analysis of how shared resources are actually employed in business operations. This decision establishes that the critical determination is whether mixed-use goods and services are primarily utilized for exempt activities (financing and managing leasing contracts) or taxable activities (vehicle provision). The Supreme Administrative Court's remand specifically directed the tribunal to broaden the factual basis to clarify this predominant use question. CAAD jurisprudence requires substantial evidence beyond categorical assertions - including testimonial proof, operational documentation, and detailed expense analysis. The approach rejects rigid application of Tax Authority guidelines in favor of examining actual business practices. This case-by-case methodology protects taxpayers' constitutional right to deduct VAT proportionally while preventing improper deductions, demonstrating CAAD's commitment to factual accuracy in complex pro rata calculations for financial institutions.
Does the Portuguese Tax Authority's Circular on pro rata calculation affect the right to VAT deduction for leasing companies?
Yes, the Portuguese Tax Authority's circulars on pro rata calculation can significantly affect VAT deduction rights for leasing companies, but such administrative guidance is not immune from challenge. While circulars provide interpretive framework for applying pro rata methodology to mixed operations, they do not override statutory VAT provisions or constitutional principles of legality. In this proceeding, the claimant challenged how circular guidance was applied to its specific operational circumstances. The arbitral decision noted that administrative interpretations restricting deduction rights must be scrutinized for compliance with VAT Code provisions and EU VAT Directive principles. Leasing companies can contest circular-based assessments through official review and arbitration when they believe the Tax Authority's interpretation improperly limits legitimate deduction rights. The case demonstrates that circulars serve as guidance but must yield to correct legal application based on factual circumstances of each taxpayer's actual use of mixed resources in their business operations.