Process: 336/2015-T

Date: February 18, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 336/2015-T) addresses whether European Social Fund subsidies received under the POPH (Operational Programme Human Potential) for vocational training activities constitute taxable price subsidies subject to VAT under Portuguese law. The Tax Authority issued an additional VAT assessment of €1,862.13 plus interest for March 2010, arguing that subsidies calculated based on training participants and hours constitute price subsidies under Article 16(5)(c) of the Portuguese VAT Code (CIVA), with VAT deemed included in amounts received. The claimant training entity contested this classification, arguing the subsidies were non-taxable production subsidies rather than price subsidies. Key arguments included: (1) trainees paid nothing for training, so no taxable supply occurred; (2) the program served public interest objectives for social and employment policy, not commercial transactions; (3) POPH legislation distinguishes 'public financing' from 'project revenues'; (4) subsidies financed eligible costs including trainee stipends, meals, transport, trainer fees, facilities, and administrative expenses; (5) reimbursement was based on documented actual costs, not service volume; and (6) the entity acted as a state instrument implementing EU social policy, not providing services to third parties. The case turns on the critical VAT distinction between price subsidies (directly linked to supply price and taxable) versus structural subsidies (financing general costs and non-taxable). Article 16(5)(c) CIVA taxes subsidies 'directly linked to the price of supplies,' following EU Directive 2006/112/EC. The determination requires analyzing whether subsidies relate to specific transactions with identifiable recipients who derive benefit, or whether they finance general policy objectives. This case exemplifies common VAT classification disputes regarding public funding for social programs implemented by private entities.

Full Decision

ARBITRAL DECISION

I. REPORT

Object of the Application

A..., LDA, NIF..., with registered office at Rua..., Edifício..., no. ..., ... floor, Office..., in …, hereby requests the constitution of a Single Arbitral Tribunal, pursuant to articles 2 and 10 of the Legal Regime of Tax Arbitration approved by Decree Law no. 10/2011, of January 20 (hereinafter RJAT), having as its object to obtain the declaration of illegality of the VAT assessment (additional assessment no. ...), relating to the period of March 2010, in the amount of € 1,862.13, as well as the respective compensatory interest (assessment no. ...), in the amount of € 334.27.

Pursuant to the provisions of article 6, no. 1 of the RJAT, the Honorable President of the Deontological Council of CAAD designated as single arbitrator the undersigned, Joaquim Silvério Dias Mateus, who accepted the assignment within the legally prescribed period without either party having manifested refusal of his designation.

The single arbitral tribunal was constituted on 07-09-2015.

A ruling was issued dispensing with the holding of the meeting provided for in article 18 of the RJAT, without either party having opposed it, and it was also considered by the tribunal that witness evidence would be dispensed with. Notified to present arguments, neither party exercised that right.

Grounds of the Application

The claimant substantiated its request to annul the disputed assessments with the argumentation that, in summary, is presented as follows:

In the scope of its vocational training activity, the claimant organized and executed various vocational training actions included in the Operational Programme Human Potential (POPH) which had as its object the application of the Community policy of economic and social cohesion in Portugal, in the period from 2007 to 2013, as can be read in the respective programmatic document and results from the resolution of the Council of Ministers no. 86/2007 which approved the National Strategic Reference Framework (QREN).

However, the claimant reports that in 2014 it was the subject of a tax inspection action in which it was considered that it should have charged value added tax (VAT) on the receipt of subsidies that were attributed to it by the European Social Fund, within the scope of said Programme, which the Tax Authority (AT) considered as price subsidies given that, according to the inspection report, approved financing is determined with reference to the training actions that the beneficiary entity will carry out, taking into account the number of participants and training hours, that is, subsidies are allocated, unequivocally, with reference to the volume of services provided, pursuant to the provisions of article 16, no. 5, paragraph c) of the VATA, further adding the said report that it should be considered that the outstanding VAT was included in the amounts received.

The claimant disagrees with the tax classification defended by the AT, which it considers illegal, for which it presents the argumentation summarized below.

First, the claimant invokes the public interest objectives attributed to the said POPH programme, namely, overcoming the structural deficit in population qualifications, promoting scientific knowledge, innovation, modernization of the production fabric, job creation, among others, which were pursued by the claimant in the development of its professional activity.

Furthermore, the claimant informs that to finance the vocational training projects developed by it, the following expenses were considered eligible:

· Expenses with trainees, namely, with stipends, meals, transport, accommodation, insurance and even expenses for hosting dependents in charge of the trainees;

· Expenses with trainers, also including expenses for accommodation, meals and transport;

· Expenses with management personnel, administrative staff, consultants, mediators and other personnel involved in the preparation, execution and evaluation of projects, as well as expenses for accommodation, meals and transport with this personnel;

· Expenses with rent, leasing and depreciation of equipment directly related to the project, expenses with rent or depreciation of facilities where the project took place;

· Expenses with leasing or depreciation of vehicles for the transport of trainees and other participants;

· Expenses with the preparation, development, monitoring and evaluation of projects; the general expenses of the project; expenses with the promotion of thematic meetings and seminars; and also expenses with the promotion and coordination of the integrated vocational training application.

And, the claimant adds, the subsidies received are thus intended for expenses with its training activity, after presenting the relevant evidence, with trainees having no cost for the training, regardless of its type, and neither they nor the ESF or any other entity paid any amount that could be considered as a price.

On the other hand, continues the claimant, "the training actions did not constitute the provision of any service to third parties by private entities but rather the pursuit of the social and employment policies intended by the State and the European Union which, for this purpose, avails itself of private parties."

After the initial argumentation, countering the thesis that the received subsidies are price subsidies, the claimant contends that there are "subsidies to production and cost structure."

It bases this assertion by saying that the training actions it provides are not services to third parties by a private entity but rather aim at the pursuit of the social and employment policies intended by the State and the European Union which, for this purpose, avails itself of private parties.

Furthermore, it adds, it is the specific legislation of the POPH itself, particularly the normative dispatch no. 4-A/2006, of January 24, as well as Regulatory Decree no. 84-A/2007, of December 10, which establishes the general regime for the application of the European Social Fund (ESF), which distinguish what is "public financing" from what are "project revenues," the former being the sum of the community contribution with the national public revenue which is calculated based on the total approved eligible cost, deducted from the private contribution and the projects' own revenues when they exist"; and "project revenues" are the resources generated within the project resulting namely from sales, provision of services, leasing, enrollments and registrations, credit interest or other equivalent revenues.

In any case, the claimant informs that the projects in question did not generate revenues and that, in fact, "it was absolutely prohibited from charging trainees anything whatsoever" neither with the frequency of training courses nor with teaching materials and that, although subsidies were calculated taking into account the number of participants and hours of training effectively provided, which was necessary given there was allowance for payment of stipends and expenses to trainees, this does not mean that the allocated subsidies were price subsidies.

On the contrary, the subsidies aimed to finance the concrete realization of the projects, causing private parties – such as the claimant herein – to fully replace the State and the European Union in the execution of social and employment policies.

Adding, on the other hand, that only properly documented costs were eligible and that it was the POPH that defined the maximum value that could be paid by the claimant to the trainees and that if the claimant paid a value lower than the maximum established then the subsidy would be only the corresponding to the value actually paid, from which it follows evidently, in the claimant's view, that the subsidies in question indeed constitute subsidies to production and cost structure.

The claimant also informs that "it obtains no profit from the training actions," that what is subsidized is not the price but rather the costs and that subsidies are calculated exclusively based on expenses actually incurred, whether with project execution or with payments to trainees.

Following this, the claimant reports that in 2011 it was the subject of a POPH inspection on the projects executed in 2010, namely on the project ...-POPH .../2010, whose report it attached as an annex and from which result the areas verified in this type of inspections, namely the technical process, the contracts concluded, publicity, the means used in training, the profile of beneficiaries and trainers, accounting, stipends, costs with personnel and even compliance with tax obligations, being recorded in the POPH inspection report that "the total cost of the project is exactly equal to the public financing obtained" verifying once more that the project was 100% supported with public financing and the absence of revenues emerging from those projects.

Regarding tax obligations, the claimant says that the POPH inspection considered that it fulfilled its tax obligations and ensured correct VAT treatment.

The claimant also reports that a considerable part of the subsidies received by it were directly delivered to the trainees, which proves "the absurdity of the inspection report considering as price subsidy the amounts attributed to the claimant and which it delivered to the trainees because they were amounts to which the same, pursuant to law, had rights by way of subsidies, stipends and/or expenses"

The claimant also protests against the fact that the inspection report considers that "in determining the outstanding VAT amounts it should be considered that these are included in the amounts received," saying that in that report there is no account of the facts on which such consideration is based, since the claimant did not charge any VAT on the received amounts and that it would be the AT that would have the burden of asserting and proving the collection of such tax.

The claimant then proceeds (items 78 and following of the p.i.) to present its argumentation on the matter of law, beginning by invoking the lack of substantiation of the disputed assessment saying that it is "impossible for any recipient to know which facts it is based on" given that, observes the claimant, the only substantiation contained in the assessment act is: "additional assessment made based on correction carried out by the Tax Inspection Services," being that no reference is made to which correction that substantiation refers and that, for this reason, the claimant itself merely makes a mere presumption about the substantiation of the assessment, adding that "nothing remains but to extrapolate, with no certainty, that such assessment may result from the inspection report attached as Doc 7."

It concludes therefore that the claimant was violated the provisions of article 77 of the TLP.

Next, the claimant, continuing to refer to the inspection report, states that, even if it were considered that the assessment resulted from said report, it presents insufficient substantiation (item 96 of p.i.) (it is observed that in items 97 and 98 of p.i. there is a decontextualized reference to an execution process) since said report does not substantiate its own conclusions on assertions it makes, giving as an example of an unsubstantiated assertion the one that "approved financing is determined with reference to the training actions that the beneficiary entity will carry out, taking into account the number of participants and training hours" being that, adds the claimant, these "facts do not appear in the inspection report," where also does not appear the number of participants and training hours to which the subsidies in question relate, nor which the price relating to each training action, nor identifies the tax facts.

The claimant continues, returning again to the lack of substantiation (items 116 and following of p.i.) to invoke the violation of article 153, no. 2 of the CPA (item 131), to present different doctrine and jurisprudence on the relevance of substantiation, ending this part by requesting that the assessment be annulled for lack of substantiation.

Without dispensing with the previous invocations, the claimant then proceeds to analyze the content of article 16, no. 5, paragraph c) of the VATA (items 142 and following) beginning by asserting that in function of this rule, as well as the Court of Justice judgment (judgment of November 22, 2001, case C-184/00) it results that for subsidies to be included in the price of performances there must necessarily be a price and that, in the case at hand, "not only does the claimant not charge any price, but is prevented from doing so and, furthermore, still makes payments to the trainees, on behalf of the authority that grants it the subsidy."

The claimant then addresses what it considers should be price subsidies (items 156 and following of p.i.) invoking again the argument that it did not charge any price for the training actions carried out within the scope of the POPH and that is legally prevented from doing so under Regulatory Decree 84-A/2007, which is why the actions developed in the projects in question cannot even be framed within the scope of article 1, no. 1, paragraph a) of the VATA, resuming several arguments in the same line that it is the law that defines access to its activity, the financing conditions, that subsidies are allocated to projects and not to individualizable performances, that it does not make its services available to the public nor to third parties but only pursues the social and employment policies intended by the State and the European Union, resulting all of this from the resolution of the Council of Ministers no. 25/2006, of March 10 and Regulation EC no. 1081/2006 of the European Parliament and Council of July 5.

The claimant also invokes the judgment of November 22, 2001 (Items 172 and following) according to which "the operations provided for in article 11-A of the Sixth Directive are not those carried out for the benefit of the authority that grants the subsidy," concluding from this that activities carried out for the benefit of the entity granting the subsidy should be considered excluded from taxation, "as is clearly the case here."

The p.i. continues, in the same line, repeating its argumentation, that in the execution of POPH projects "what is subsidized is not the price for services provided but rather the expenses that, concretely, are considered eligible" (item 174 of p.i), also invoking the difference in regimes between this situation, in which the project is subsidized, and subsidies to transport in which the State effectively subsidizes part of the price depending on "each individually considered service," transcribing or making again references (items 180 and following) to components of the normative dispatch 4-A/2008, of Regulatory Decree 84-A/2007 and of Community Regulation 1081/2006, to demonstrate the costs that are eligible in training projects and the support that is provided to these costs, again highlighting that the subsidies allocated by POPH are decomposed into two parts, one intended for trainees (training stipends, meals, accommodation and transport) and another to finance the expenses with project execution supported by the claimant itself.

From this it concludes and reinforces once more the claimant that the subsidies it receives are allocated to eligible costs with project execution and not to the counterpart abstractly to be received for training actions, not falling within article 16, no. 5, paragraph c) of the VATA.

In the case of the part of subsidies that are intended for and delivered to trainees, this departure from the concept of price and the framing in the cited provision of the VATA would be even greater, since the claimant is "mere intermediary of the amounts between the POPH and the trainees."

Repeating previous assertions the claimant accuses the inspection report of not weighing that its training actions "do not constitute any provision of services carried out by the Claimant but rather the development of social and employment policies that the State understood to assign to private parties" and of also not taking into account "that the amounts intended for expenses with trainees, namely with stipends, remuneration, meal and accommodation subsidies are granted by the ESF directly to the trainees, serving the Claimant as mere intermediary" and that these do not have commercial nature.

It emphasizes that the stipends to trainees are fixed normatively and that in the case of "Certified Modular Training" projects they received an amount of € 4.11 "for each attended training session," and that the claimant is even legally obliged to "ensure that the project beneficiaries are informed that the ESF participates in its financing."

In summary and conclusion, according to the claimant (in 206 of p.i.) the amounts received by the claimant within the scope of POPH do not correspond to any price for training actions, are not determined taking exclusively into account the number of participants and training hours and include values relating to stipends, remuneration and subsidies that must be delivered in full to the trainees.

And the claimant now proceeds to say (item 207 and following) that, at least some costs, namely those related to the leasing or depreciation of equipment, rent or depreciation of facilities, leasing or depreciation of vehicles, acquisition of books and teaching material also are not price subsidies and are rather investment subsidies not taxed for VAT purposes.

Following this, the p.i., approaching its end once more reinforces the previous argumentation that the projects it executed were 100% financed with public financing (items 212 and following), then proceeding to analyze the VAT Code and Community legislation to conclude that the assessment is illegal and once again informs that it did not charge VAT on the subsidies received whose total value is exactly equal to the total cost of the project.

Regarding VAT, the claimant informs that faced with Community Regulation 1081/2006 "recoverable VAT is not eligible for ESF participation," it being incorrect for the report to say that the claimant could charge/demand VAT from the ESF and that, on the contrary, Community legislation itself prevents VAT from being charged within the scope of POPH execution.

The p.i. ends with the assertion that, under article 79 of the VATA, the AT should charge VAT to the ESF, which has joint and several responsibility to pay the tax, which, having not done so, the AT violated the principles of equality and legality on the basis of which the assessment in question cannot be maintained.

Response of the Defendant

The defendant authority responds to the claimant by saying, in summary:

First of all that it disagrees with the invocation of the defect of lack of substantiation presented by the claimant since, as it alleges, given article 3, no. 3 of article 268 of the Constitution of the Republic and article 77, no. 2, of the TLP, substantiation does not obey rigid formalities, can be succinct, can be of mere concordance with opinions, information or proposals, provided it is sufficient, clear and congruent, invoking that the assessment was made based on the inspection report opportunely notified to the claimant, as it itself assumes.

Furthermore, the defendant alleges that the claimant could request complementary data to clarify the notification, as provided for in article 37 of the CPPT, which it did not do, concluding thus that, in its view, this first ground presented by the claimant is unfounded.

As to the merits of the case, the defendant, appealing to what was found in the inspection report, reports that the claimant received from the European Social Fund, within the scope of the Operational Programme Human Potential (POPH), various support subsidies for various training actions, among which are indicated, relating to the month of March 2010 (2010.03), the subsidies identified as "MOD ...-POPH .../2008" and "EFA ...-POPH .../2008," regarding which it informs that the claimant received in the month in question the amount of € 11,172.77.

The entire response of the defendant authority is based on the assumption that the subsidies received by the claimant should be considered as price subsidies and that, fitting within the conceptual limits established in article 16, no. 5, paragraph c), of the VATA, the claimant should have proceeded to charge VAT upon their receipt.

This conclusion, adds the defendant, results from the fact that it was found by the inspection action that said subsidies are determined with reference to the training actions executed by the claimant based on the number of participants and training hours, and should therefore be considered as allocated in function of the volume of services provided.

Thus, the defendant disagrees with the qualification sought by the claimant that said subsidies should be classified as subsidies to production and cost structure and not price subsidies (see articles 42 and following of the response).

The defendant invokes from the outset the official POPH website itself where it is stated that the subsidies in question are assimilated to counterparties of exempt operations, without right to deduction, and that for this reason VAT is considered as an eligible expense for the European Social Fund, pursuant to Regulation EC 1081/2006, published in JO L 166, of 28.06.2007, this happening only when the beneficiary renounces the exemption pursuant to article 12 of the VATA.

Following this, the defendant asserts that the prerequisites for the applicability of the cited paragraph c) of no. 5 of article 16 of the VATA (see articles 50 and following of the response) are fulfilled in the case of the subsidies received by the claimant.

In support of that conclusion, the defendant invokes the recent arbitral award issued in case no. 111/2014-T and the Community jurisprudence mentioned therein, particularly the judgment issued in case C-180/00, in which the requirements necessary for us to be faced with a subsidy are summarized.

Thus, summarizing the terms of the response, the first prerequisite is the existence of a triangular relationship with an authority that grants the subsidy, by a taxable person to whom it is paid and by third parties who are beneficiaries of goods or services provided by the immediate beneficiary of the subsidy, all as provided for in Regulatory Decree 84-A/2007, Ordinance 230/2008 and Dispatches 18227/2008 and 18223/2008 cited in the response.

In the situation in question there is a public authority that is the European Social Fund that pays the subsidies composed of a community component and a national component, we have the claimant that is a recipient of them as consideration for the training actions that previously committed itself to execute and we have the third parties that are the trainees that are beneficiaries of said training actions.

The second element of said triangular relationship is that the subsidy be directly related to the price of the operations in the sense that it must be paid to the operator so that it provides a good or provides a determined service.

The third element is the existence of beneficiaries of the training services who are adults holding low school and or professional qualifications.

As to the second prerequisite it equally results from the legislation invoked verifying that the subsidies in question are directly related to the price of the operations to be carried out by the subsidized operator, as results from the very documents attached by the claimant, it being irrelevant that the amount of the subsidy be calculated based on the cost of training and that the trainees pay nothing.

As to the third prerequisite, says the defendant that it is equally verified and that passes by the requirement of the price of the service having been fixed before its own provision.

The fourth prerequisite has to do with the payment of the subsidy by the grantor to whoever carried out the agreed performance. In the case in question the granting of financing implies the integral fulfillment of the approved training project.

From this it is concluded, continues the defendant, that one is not faced with a subsidy to operation and production costs, which aimed to improve its economic position in the market (…), rather constituting "a consideration for services provided to certain categories of beneficiaries, that is, there is a direct nexus between the subsidy received and the provision of training services provided to third parties, which is why the received subsidies should be taxed for VAT purposes."

That is, concludes the defendant that, as recorded in the inspection report, "it is verified that the approved financing is determined with reference to the training actions that the beneficiary entity will carry out, taking into account the number of participants and training hours, that is, subsidies are allocated, unequivocally, with reference to the volume of services provided pursuant to the provisions of article 16, no. 5 paragraph c) of the VATA."

The response ends by requesting that the case be judged unfounded, absolving the defendant entity of the requests presented by the claimant.

Sanation

The arbitral tribunal is materially competent and was regularly constituted, the parties enjoy legal personality and capacity, have standing and were legally represented.

Since the case does not suffer from nullities and no questions were raised that prevent the appreciation of the merits of the case, the conditions are met for the arbitral award to be issued.

II. SUBSTANTIATION

Factual Matters:

In light of the documents submitted by claimant and defendant and consulting the applicable normative instruments that complement said documentation with a view to establishing the contours of the tax situation in question, the following is established as proven:

  1.  That the claimant was the subject of an external inspection action by the tax inspection services of the Finance Department of..., with a view to collecting elements relating to subsidies received within the scope of the POPH programme in the financial year 2010;

  2.  That the claimant is registered in the tax records as a VAT and CIT taxable person for the main activity of "other business and management consulting activities" having as a secondary activity "Vocational Training";

  3.  That the claimant is an entity accredited in the field of vocational training by the General Directorate of Employment and Labor Relations since 06/08/2008 (see documents 3 to 6 attached as annex to p.i);

  4.  That the claimant, being exempt from VAT under article 9, no. 10, of the VATA, in relation to its services connected with the exercise of vocational training, renounced the VAT exemption pursuant to article 12, no. 1, paragraph a) of the VATA, a situation that was maintained in the period covered by the inspection action and to which the disputed assessment relates;

  5.  That the disputed assessment was based on the inspection report referred to, notified to the claimant through an official letter dated 10-11-2014, of the Finance Department of..., and related to subsidies received by the claimant in the month of March 2010, in the amount of € 11,172.77, within the scope of the Operational Programme Human Potential (POPH), as partial consideration for the execution of actions identified as "MOD ...-POPH .../2008" and "EFA ...-POPH .../2008," and that in the year 2010 these training actions yielded to the claimant the amounts, respectively, of € 52,125.50 and € 82,144.06;

  6.  That the VAT considered to be outstanding by the tax inspection, in relation to all months of the year 2010, amounted to € 144,242.56, with the claimant having disputed only the part of the assessment relating to subsidies received in the month of March 2010;

  7.  The assertion/information of the claimant, without contradiction by the defendant, that the trainees did not pay any consideration for the training actions from which they benefited and, furthermore, also received stipends, meal and transport subsidies;

  8.  It is established as proven that the subsidies received by the claimant were granted by the European Social Fund, being composed of public funds of national and community origin, and were allocated to the claimant so that it would provide to third parties, the trainees, the training actions that were previously approved by the granting entity;

  9.  That the inspection report pronounced in the sense of considering that financing is fixed taking into account the number of participants and training hours, which is not contradictory with p.i. and attached documents, but without informing which the number of participants and which the hours spent in each of the training actions;

  10. It is equally established as proven that the total outstanding VAT determined by the inspection action, in relation to the year 2010, amounted to € 144,242.56, with the inspection report presenting a map with the subsidies received on account of each of the training actions in each of the months of 2010;

  11. It is established as proven that the claimant did not charge VAT to the financing entities on the subsidies it received nor did it proceed to their self-assessment and payment to the State coffers and that the disputed assessment was issued based on the inspection report, with nothing showing that prior to the assessment any complementary information collection had been carried out by the defendant nor that there had been the initiative to deliver any document or request for inquiry by the claimant;

  12. The following are established as proven, based on the documents and other sources of information presented by the claimant with the petition, combined with the normative instruments that govern the actions in question, which objectives were pursued by the Operational Programme Human Potential (POPH) (see DOC 8 attached to p.i.), the essential characteristics and requirements for approval of subsidized training actions, from the submission of applications to project approval, criteria for determining eligible costs, course structure, execution control (see Doc 9 attached to p.i.), amounts of subsidies, particularly those relating to projects .../2008 and .../2008 (which are those related to subsidies received in March 2010), also confirming that part of these subsidies is intended for the payment of stipends and other expenses of the trainees (see documents 10 to 18 of p.i.).

Legal Matters

The central question posed in the present case is whether the subsidies received by the claimant, as consideration for the execution of training actions financed by the European Social Fund, within the scope of the Operational Programme Human Potential (POPH), are or are not subject to VAT under paragraph c) of no. 5 of article 16 of the VATA.

The claimant contends that such subsidies do not meet the prerequisites of price subsidies and, consequently, are not framed in the said legal provision, and that the disputed additional assessment should be annulled, whereas the defendant authority holds the contrary view and, based on said rule, pronounces itself in the sense of the unfoundedness of the objection.

On the invoked defect of lack and insufficiency of substantiation of the assessment

The petition invokes the defect of lack of substantiation of the disputed additional assessment considering that it is "impossible for any recipient to know which facts it is based on" given that, observes the claimant, the only substantiation contained in the assessment act is: "additional assessment made based on correction carried out by the Tax Inspection Services," being that no reference is made there as to which correction that substantiation refers and that, for this reason, the claimant itself merely makes a mere presumption about the substantiation of the assessment, adding that "nothing remains but to extrapolate, with no certainty, that such assessment may result from the inspection report attached as Doc 7" (Doc 7 is a copy of the inspection report on which the disputed assessment was based), concluding therefore that the provisions of article 77 of the TLP were violated.

Furthermore, the claimant argued that even if it were considered that the assessment in question resulted from that report, the latter presents insufficient substantiation since said report did not substantiate assertions it makes, giving as an example of an unsubstantiated assertion the one that "approved financing is determined with reference to the training actions that the beneficiary entity will carry out, taking into account the number of participants and training hours" being that, says the claimant, these "facts do not appear in the inspection report" nor does it contain which the price relating to each training action, nor identifies the tax facts.

The tribunal does not adhere to the invoked lack or even insufficiency of substantiation of the disputed assessment given that, as to the first argument, it is the claimant itself that demonstrates that it had no doubts that the disputed assessment was based on the inspection report that was opportunely notified to it, either in the project version or in the final version, as established as proven.

As to the invocation of insufficient substantiation it is observed that the inspection report, even though it does not present the number of trainees involved in each training action nor the number of hours of each of them, in which it is agreed with the claimant, the truth is that it is not seen that this would be a decisive element in terms of substantiation of the assessment, particularly when the report accounts for the fact that in the tax inspection action the application processes for subsidies were examined and, giving evidence of that examination, indicates the types of training actions, making reference to the essential data of each of them, presents a map with the identification of each of the training actions developed by the claimant in 2010 and with the amounts received for their execution, confirming that receipt with indication of the account where the receipt of subsidies was recorded and presents another map with indication of the amounts received in each month of 2010 for each of the training actions and the calculation of the corresponding VAT.

On the claimant's objections regarding the lack of indication of the number of trainees and training hours, the tribunal observes that the claimant also expressly recognizes that "the allocated subsidies take into account the number of participants and hours of training effectively provided in that the execution of the projects depends immediately on the existence of trainees" (see, for example, articles 39 and following of p.i.) and that, also not indicating these numbers, it did not thereby cease to extensively expose that subsidies cannot be qualified as price subsidies, defending instead that they should be qualified as subsidies to production and cost structure.

The claimant decided to dispute only the subsidies relating to the month of March 2010, in the amount of € 11,172.77, when the inspection report proceeded to determine the total amount of hundreds of thousands of euros of subsidies.

Now, to disagree with the AT and to defend its thesis on the qualification of subsidies, the claimant also had no need to present data contained in its own accounting with the number of trainees and with the number of hours of the training actions, neither as to the entirety of the funds it received nor, above all, in relation to said amount of € 11,172.77 that it received in March 2010 whose VAT it disputed, having merely limited itself to presenting the characteristics of the subsidies, which the type of ineligible expenses, and their allocation to the various expenses incurred with the training actions, without discrimination and without quantification.

In fact, as to quantification the claimant extensively informs that part of the subsidies it received were intended for use in the payment of stipends, subsidies, meals, insurance, transport and other expenses of the trainees, but presents nothing more than a table, extracted from official documents, in which it indicates which the percentages of the subsidies that were devoted to such expenses in their entirety (see article 67 of p.i.).

On the other hand, to support said percentages, in addition to information about projects numbers .../2008/22 and .../... /2008/23, within the scope of which the € 11,172.77 were received that gave rise to the disputed VAT, the claimant also attaches copies of verification reports and other tables with information about others that have nothing to do with the basis of the disputed assessment, namely, with projects numbers .../2010/22, .../2008/22, .../2008/23, .../2010/22, .../2010/23, .../2010/23 and .../2010/22, whose verification reports were prepared by the Regional Core of Alentejo of the POPH.

And, it is repeated, the claimant does not proceed to the presentation of numbers extracted from its own accounting that would allow demonstrating the distribution and allocation of the € 11,172.77 received in March 2010 on which the disputed assessment was based.

Thus, since the receipt of said € 11,172.77 was not contested by the claimant and that the request for arbitral decision does not present data from its accounting that would allow demonstrating that such amount in particular was devoted to specific and quantified expenses of the responsibility of the granting entity, the tribunal considers that the information made available by the parties is sufficient to take a position on the qualification and tax classification of the subsidies in question.

In conclusion, in the part that now interests us, it is considered that the disputed assessment is sufficiently supported from a factual point of view, the requirements of substantiation provided for in numbers 1 and 2 of article 77 of the TLP having thus been met, in conjunction with the special provisions provided for in articles 60 and following of the Supplementary Rules of Tax Inspection Procedure, approved by Decree Law 403/98, of December 31, particularly in article 63 regarding substantiation of the decision, the now claimant having been validly notified through an official letter dated 10-11-2014, with registered mail and receipt acknowledgment with the same date, thus being unfounded the invoked defect of lack or insufficiency of substantiation.

On the tax classification for VAT purposes of the subsidies received by the claimant within the scope of its vocational training activity

The taxable amount of supplies of goods and supplies of services subject to VAT, says no. 1 of article 16 of the VATA, "is the value of the consideration obtained or to be obtained from the purchaser, the recipient or a third party."

In turn, paragraph c) of no. 5 of the same article 16 provides that "the taxable amount of supplies of goods and supplies of services subject to tax, includes:

"c) Subsidies directly connected with the price of each operation, considered as such those that are established in function of the number of units supplied or the volume of services provided and are fixed prior to the performance of the operations."

The concept of subsidy is generally associated with an allocation from a public body that is paid to a VAT taxable person so that it performs a determined task or pursues an objective of public interest contractually assumed.

Subsidies will be taxable if they are directly associated with the price of a taxable VAT operation, that is, if they constitute the consideration obtained for the supply of goods or the provision of services, whether constituting a supplement or reinforcement of said consideration, whether in the case that they themselves constitute the entirety of the consideration obtained by the supplier or provider.

On the level of Community law, article 73 of the VAT Directive, which came to replace article 11-A, no. 1, paragraph a), of the Sixth Directive and which, in essence, maintains the wording of this provision, provides that "In supplies of goods and supplies of services (…), the taxable amount comprises everything that constitutes the consideration that the supplier or provider has received or must receive in relation to such operations, from the purchaser, the recipient or a third party, including subsidies directly related to the price of such operations."

The Court of Justice of the EU has pronounced on the interpretation of the provisions in question, particularly on the matter of subsidies and on when it should be considered that they are or are not directly related to the price of operations subject to VAT.

To that effect, according to the Court of Justice, some conditions must be cumulatively met, namely, that the authority granting the subsidy is not the recipient of the taxable operations carried out by the subsidized taxable person; that the subsidy fixed or variable is paid to the subsidized entity so that it supplies determined goods or provides determined services; that the subsidy allows the subsidized entity to practice lower prices than it would require in its absence, possibly equaling the entirety or part of the subsidized price; and that the performance is previously determined or is determinable (this requirement is not always required).

There are several Court of Justice judgments dealing with the matter of subsidies and considering that article 11°, A, no° 1, paragraph a), of the Sixth Directive, is intended to ensure that the taxable amount encompasses the entirety of the consideration paid for the supply of goods or the provision of services, whether said consideration is paid by the beneficiary or by a third party, which may be a public body (see, for example, judgment of June 13, 2002, Case C-353/00) and that, in the case of subsidies, only those that constitute the consideration or part of the consideration of taxable operations may be subject to VAT taxation (see Judgment of November 22, 2001, Case C-184/00).

One of the most recent judgments on this matter was issued on March 27, 2014, in Case C-151/13, following a request for a preliminary ruling submitted by the "cour administrative d`appel de Versailles" on the interpretation of article 11-A, no. 1, paragraph a), of the Sixth Directive (D.77/388/CEE, of May 17, 1977) which corresponds to article 73 of the VAT Directive currently in force (D.2006/112/CE, of November 28, 2006).

In that case, there was a dispute between the French tax administration and a commercial company, called Rayon d´Or, that operated a care home (LTIPD) that provided health care services to the elderly for which, in accordance with applicable legislation of the French social security system, was financed by the national health insurance fund through an annual fixed amount calculated, in relation to each elderly person admitted, based on a daily tariff relating to accommodation, a daily tariff relating to dependency and a daily tariff relating to health care.

In accordance with the text of the judgment, it was reported that the tariff relating to health care covered the medical and paramedical services necessary for the treatment of physical and psychological pathologies of the persons residing in the establishment as well as the paramedical services corresponding to health care related to the condition of dependency of the persons admitted.

For its part, in accordance with the same text, "the methods of calculating the fixed amount for health care take into account the number of residents admitted to each home and their level of dependency, assessed according to criteria defined in law, and also historical coefficients determined at the national level updated annually based on the average expenditures of all homes."

The tax situation that was in question and that opposed the commercial company and the French tax authorities had to do with the question of whether the subsidies received should or should not be taken into account for the determination of the pro rata of deduction, given that, in the French tax system, health care services are exempt from VAT.

According to the commercial company the subsidies for health care could not be qualified as "subsidies directly linked to the price" of the health care services provided to the residents of the home and therefore were outside the scope of VAT.

Its arguments were based on the fact that the services provided to the residents of the home were not defined in advance nor individualized, adding that health care was free and that the residents would pay nothing whatever the amount of the subsidy granted to the home.

The French tax administration, on its part, sustained that there was a direct and immediate nexus between the payment of the "fixed amount for health care" and the provision of health care services supplied to the beneficiaries.

Thus, the French administrative court placed the dispute before the Court of Justice so that it would pronounce itself on "whether article 11-A, paragraph a), of the Sixth Directive and article 73 of the VAT Directive should be interpreted in the sense that the payment of an amount such as the fixed amount for health care in question in the main proceedings constitutes the consideration for the provision of health care services provided for a charge by an LTIPD for the benefit of its residents and, therefore, whether it is covered by the scope of VAT"?

To answer the question, the Court of Justice begins by noting that, in accordance with article 2 of the Sixth Directive, which defines the scope of VAT, "supplies of services provided for a charge" are subject to tax and that, according to consistent jurisprudence of the Court of Justice, a supply of services is only provided for a charge, in the sense of article 2, no. 1, of the Sixth Directive, and is therefore only taxable if there exists between the supplier and the beneficiary a legal relationship during which reciprocal performances are transacted, with the remuneration received by the supplier constituting the actual countervalue of the service provided to the beneficiary.

On the other hand, it continues to be read in the judgment, the CJ has already declared that subsidies directly linked to the price of a taxable operation constitute nothing more than one situation among others provided for in article 11°A, no. 1, paragraph a), of the Sixth Directive, and in article 73 of the VAT Directive that replaced it and that, irrespective of the particular situation in question, the taxable amount of a supply of services is, in any case, constituted by everything that is received in consideration of the service provided.

On the other hand, the court considers that "the fixed amount for health care" paid by the health insurance fund to the care homes is received by the latter in consideration of the health services they provide, according to different arrangements, to their residents. Now, for it to be considered that a supply of services is provided for a charge in the sense of the Directive, it is not necessary that the consideration for this supply is obtained directly from the recipient thereof, it can be obtained from a third party (in that sense judgments Loyalty Management UK, case 53/09 and judgment Baxi Group, case 55/09).

Furthermore, the Court advances that "the fact that in the main proceedings the direct beneficiary of the services in question is not the national health insurance fund that pays said fixed amount but the insured, is not, contrary to what Rayon d´Or alleges, capable of breaking the direct nexus existing between the supply of services provided and the consideration received" and that it is also not necessary to demonstrate that the payment refers to an individualized and punctual health care service provided at the request of a resident.

Thus, concludes the CJ, that the circumstance that the health care services provided to the residents are not defined in advance nor individualized and that remuneration is paid in the form of a fixed amount is also not capable of affecting the direct nexus existing between the supply of services provided and the consideration received, whose amount is determined in advance and according to well-determined criteria.

The final decision of the Court of Justice expressly determined that "article 11-A, no. 1, paragraph a), of the Sixth Directive and article 73 of the VAT Directive should be interpreted in the sense that the payment of an amount such as the fixed amount for health care in question in the main proceedings constitutes the consideration for the provision of health care services provided for a charge by a care home for the elderly for the benefit of its residents and, therefore, is covered by the scope of VAT."

Notwithstanding the specific characteristics of each of them, the truth is that the tax situation presented by the claimant to this arbitral tribunal has contours similar to those of the situation addressed in the judgment just transcribed in its most relevant parts.

Indeed, first of all, as extensively alleged and demonstrated by the claimant, a fact that the defendant did not contradict, the training actions have as their only consideration the subsidies paid by the European Social Fund, with the claimant not charging any additional price to the trainees.

However, the truth is that these subsidies, paid by said public body and previously fixed in function of legal criteria in which the number of beneficiary trainees and the hours of training have an admittedly very relevant weight, even though it is not the only one, nonetheless do not cease to constitute the consideration for supplies of training services provided for a charge by a VAT taxable person and, therefore, such subsidies cannot but be considered as price for the purposes of the provisions in paragraph c) of no. 5 of article 16 of the VATA.

And it is not the fact that the claimant provides its training service pursuing public interest objectives that were delegated to it by the competent bodies and to which it voluntarily applied and committed, nor the fact that it is obliged to use part of the subsidies in concrete expenses also pre-determined, nor the fact that it does not charge any supplement to the trainees, that alters the essential nucleus of the prerequisites for taxation for purposes of VAT.

Nor is the argument that subsidies did not constitute the price of the training actions instead constituting the financing of expenses with such actions correct. This type of argumentation is, with due respect, a mere game of words that detracts nothing from the true nature of the performances in question.

As to the allegations of the claimant and counter-allegations of the defendant about whether VAT was or was not included in the amounts received, how it should be calculated, to whom it could be demanded and who was responsible, adding what the POPH inspection considered about compliance with the claimant's tax obligations, all of this are considerations irrelevant to what is in question and which has to do with the tax classification of the subsidies in question.

What must not fail to be noted is that the claimant presented a request for renunciation of the VAT exemption declaring that it opted to tax its professional training operations downstream as a condition for it being recognized the right to deduct the VAT it supported in its inputs.

This request was accepted within said conditions and, with due respect, it is observed that such request would be entirely undermined if it had as result only the favorable component of the renunciation, that is, the deduction of the upstream-supported tax, failing the other requirement, which was to charge the tax downstream, with the invocation that the consideration obtained could not be qualified as price to charge the tax thereon.

Very poorly structured would be a tax system that for merely nominal reasons allowed this type of expedients.

The claimant also alleges that the subsidies were not intended exclusively to pay for the teaching services and that part of them were subsidies to production and cost structure and that, in some situations, were also subsidies to investment used in equipment devoted to its training activity, and consequently not taxed.

It is true that subsidies that do not have direct influence on the prices of goods supplied or services provided by the beneficiary entity, but instead aim to improve its operating structure, to improve its economic capacity, to expand its markets, among other purposes, are excluded from taxation although, in the case of mixed taxable persons, enter the denominator of the fraction to determine the pro rata of deduction (see no. 4 of article 23 of the VATA). What, pursuant to the same provision, does not happen with subsidies for equipment that are also excluded from taxation but do not enter the denominator of the fraction.

However, in the present case, the invoked qualification of subsidies as subsidies for operation or investment cannot proceed given that, as is normal and happens in the generality of situations, the claimant used part of its revenues to meet the expenses with the functioning of the company and to finance the acquisition of equipment, without it being possible to disregard these amounts as consideration for its supply of services and, as such, subject to VAT by its entirety.

On the other hand, it is observed that tax law provides that, in determined conditions, payments that taxpayers make to third parties, on behalf and on account of clients, may not constitute taxable matter for purposes of VAT.

In any case, the claimant did not demonstrate that its accounting was organized in terms of being able to evidence which the portion of the € 11,172.77 received in March 2010, on which the disputed assessment was based, that was devoted to each of said destinations, nor demonstrated that said accounting complied with what is provided in law regarding payments to third parties.

Decision

In these terms it is judged totally unfounded the request for declaration of illegality of the additional VAT assessment, relating to the tax period of March 2010, in the amount of € 1,862.13, as well as the respective compensatory interest, in the amount of € 334.27 and, in consequence, the defendant is absolved therefrom and the claimant is condemned in costs.

Value of the Case

Given what is determined in no. 2 of article 315 of the CPC, in paragraph a) of no. 1 of article 97-A of the CPPT and in no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 2,196.40.

Costs

Pursuant to the provisions of no. 2 of article 12 and no. 4 of article 22 of the RJAT, as well as in no. 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings and of Table I attached to this Regulation, the costs are fixed at € 612.00 (six hundred and twelve euros), to be borne entirely by the claimant.

Notify

Lisbon, February 18, 2016.

The Arbitrator,

(Joaquim Silvério Dias Mateus)

Frequently Asked Questions

Automatically Created

Are EU training subsidies from the POPH programme subject to VAT under Portuguese tax law?
EU training subsidies from the POPH programme are generally not subject to VAT under Portuguese tax law when they constitute structural or production subsidies rather than price subsidies. Under Article 16(5)(c) of the Portuguese VAT Code (CIVA), only subsidies 'directly linked to the price' of taxable supplies are subject to VAT. When training is provided free to participants with no consideration paid by trainees or third parties, and subsidies reimburse eligible project costs for implementing public employment and social policies, these typically qualify as non-taxable structural subsidies. However, the Tax Authority may challenge this classification if subsidies are calculated by reference to training volume (participants and hours), arguing they are linked to service provision. The determination depends on whether the subsidy recipient provides services to identifiable third parties or acts as an instrument of state policy implementation.
What is the difference between price subsidies and non-taxable subsidies for IVA purposes under Article 16(5)(c) CIVA?
The distinction between price subsidies (taxable) and non-taxable subsidies under Article 16(5)(c) CIVA centers on the direct link to supply price. Price subsidies are directly connected to the price of specific taxable transactions, constitute part of the consideration for supplies, and benefit the recipient of goods or services by reducing what they would otherwise pay. These are taxable with VAT deemed included in the amount received. Non-taxable subsidies (structural or production subsidies) finance general operating costs, production capacity, or policy objectives without direct link to specific transaction prices. They support the supplier's activities generally rather than reducing prices for identifiable customers. Key indicators include: whether recipients pay anything for the supply; whether subsidy calculation references transaction volume or documented costs; whether the activity serves public policy objectives; and whether specific beneficiaries can be identified. This follows EU VAT principles established in cases like Keeping Newcastle Warm and Landboden-Agrardienste.
Can the Portuguese Tax Authority reclassify European Social Fund subsidies as price subsidies subject to VAT?
The Portuguese Tax Authority can reclassify European Social Fund subsidies as price subsidies subject to VAT based on their analysis of the subsidy's economic nature and direct link to supplies. In this case, the Tax Authority argued that because approved financing was determined by reference to training actions (number of participants and training hours), the subsidies were 'unequivocally' allocated with reference to service volume under Article 16(5)(c) CIVA. This reclassification can be challenged through CAAD tax arbitration, where the taxpayer must demonstrate the subsidies are structural rather than price-based. The burden involves showing: no consideration was charged to service recipients; subsidies financed eligible costs as defined by program regulations; the entity implemented public policy rather than providing commercial services; and program rules distinguished public financing from project revenues. The arbitral tribunal independently assesses the legal classification based on CIVA provisions, EU VAT Directive principles, and relevant CJEU case law, not bound by the Tax Authority's characterization.
How does CAAD arbitration process work for challenging additional VAT assessments in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitration process for challenging additional VAT assessments in Portugal operates under the Legal Regime of Tax Arbitration (RJAT - Decree-Law 10/2011). Taxpayers can request constitution of a single arbitral tribunal within 90 days of final administrative decision. The application must specify the contested assessment acts and grounds for illegality. The President of CAAD's Deontological Council designates an arbitrator from the official list; parties may refuse the designation within specified timeframes. Once constituted, the tribunal may dispense with hearings if parties agree and written submissions suffice. The Tax Authority responds to the application. Parties may present final arguments. The arbitrator issues a binding decision with the same effects as judicial decisions. The process typically concludes within 6 months, offering a faster alternative to administrative courts. Costs include an initial fee based on disputed amount. Decisions can be appealed to administrative courts only on limited grounds (jurisdictional issues, public policy violations). This case followed standard procedure: application filed, arbitrator designated and accepted September 7, 2015, hearing dispensed with by agreement, and parties notified for arguments.
What criteria determine whether public funding for professional training constitutes a taxable subsidy under the Portuguese VAT Code?
Several criteria determine whether public funding for professional training constitutes a taxable subsidy under the Portuguese VAT Code (Article 16(5)(c) CIVA): (1) Direct link to price: whether the subsidy is directly connected to the price of specific training supplies rather than general cost financing; (2) Consideration from beneficiaries: whether trainees or third parties pay any amount for training services; (3) Calculation methodology: whether funding is based on documented eligible costs or calculated by reference to service volume (participants, hours); (4) Program structure: whether regulations distinguish public financing from project revenues, and whether charging beneficiaries is prohibited; (5) Identifiable recipients: whether specific beneficiaries receive economic advantage from subsidy-reduced prices; (6) Public policy implementation: whether the activity implements state social/employment policies or constitutes commercial service provision; (7) Eligible cost categories: whether subsidies reimburse specific costs (trainee stipends, meals, transport, facilities) defined by program rules; (8) Profit element: whether the entity derives commercial profit or merely recovers costs for policy implementation. These criteria must be analyzed holistically following EU VAT Directive 2006/112/EC Article 73 principles and CJEU jurisprudence on subsidy classification.