Process: 338/2015-T

Date: March 7, 2016

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 338/2015-T) addresses whether subsidies received under Portugal's Human Potential Operational Programme (POPH) for professional training are subject to VAT. A training company challenged a VAT assessment of €4,813.45 for November 2010, arguing the Tax Authority lacked proper substantiation and that the €27,734.62 POPH subsidy received did not constitute a price subsidy under Article 16(5)(c) of the Portuguese VAT Code (CIVA). The Tax Authority contended the subsidies were directly linked to the volume of training services provided, triggering VAT liability under Article 16(5)(c) CIVA, which subjects subsidies directly connected to transaction prices to VAT. The claimant, accredited by DGERT since 2008, had waived VAT exemption for professional training activities and operated under the normal VAT regime with monthly periodicity. The central legal issue focused on whether POPH subsidies qualify as consideration forming part of the taxable amount. Article 16(5)(c) CIVA applies when subsidies are granted with reference to specific transactions and constitute part of the price charged. The Tax Authority argued the subsidy calculation methodology—based on training volume delivered—created a direct link between the subsidy and taxable supplies. The claimant failed to appear at the arbitral hearing with witnesses, and the Tax Authority presented oral arguments reiterating its position. The tribunal found no procedural defects, confirmed jurisdiction under RJAT Article 2(1)(a), and proceeded to analyze whether the subsidy's characteristics met the Article 16(5)(c) criteria for VAT taxation, examining the regulatory framework of Regulatory Decree 84-A/2007 governing POPH funding mechanisms.

Full Decision

ARBITRAL DECISION

1. Report

A…, Lda, with collective person number…, with registered office at Rua…, Building…, no.…, … floor, office…, in ..., hereinafter referred to as the Claimant, submitted to the Administrative Arbitration Center (CAAD) a request for an arbitral ruling with a view to annulling the Value Added Tax assessment, no.…, referring to the period 1011 – November 2010 - which set a tax amount payable of € 4,813.45 and the assessment act no.…, which set compensatory interest payable of € 734.81.

The Claimant bases the illegality of the VAT assessment and the consequent annulment of the tax act on the following defects:

A) Lack of substantiation of the assessment;

B) Non-existence of the taxable event, for the reasons better set out in its request for an arbitral ruling, which are hereby reproduced, understanding, in summary terms, that the subsidies referred to in the AT inspection report do not constitute any price subsidy, which can be classified under article 16, no. 5, paragraph c) of the VAT Code, which is why the tax assessment has no legal foundation;

The Tax Authority, for its part, argued that there is no illegality of the tax act, given that the subsidies received by the Claimant under the POPH program are attributed with reference to the volume of training services provided, which is why the Claimant would be obliged to carry out the VAT assessment on these subsidies, by applying paragraph c) of no. 5 of article 16 of the VAT Code.

It also rejects the acceptance of the request for an arbitral ruling based on the alleged lack of substantiation of the assessment, concluding that it is clear, congruent and sufficient.

The sole arbitrator was appointed and designated on 27.07.2015.

In accordance with the provisions of article 11, no. 1, paragraph c) of the Legal Regime of Arbitration in Tax Matters (RJAT), the singular arbitration tribunal was constituted on 07.09.2015.

After an arbitration meeting was scheduled, also with the purpose of examination of the witnesses listed by the Claimant and submission of pleadings, given the non-appearance of neither the Claimant nor its representative nor the listed witnesses, the AT proceeded to submit oral arguments, in which it reiterated and reproduced the position previously set out in its Response.

2. Sanitation of the Proceedings

The singular arbitration tribunal has material competence, in accordance with the provisions of articles 2, no. 1, paragraph a) of the Legal Regime of Arbitration in Tax Matters (RJAT).

The parties have legal personality and capacity and have standing in accordance with article 4 and no. 2 of article 10 of the RJAT, and article 1 of Order no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullity, there are no exceptions that prevent the appreciation of the merits of the case, the claim is timely, so the conditions for issuing the arbitral decision are met.

3. Factual Matters

3.1. Facts Proved:

After analyzing the documentary evidence produced and the position of the parties, the following facts are considered proved and of interest for deciding the case:

  1. By official letter of 10.11.2014, the Finance Directorate of … proceeded to notify the Claimant of the content of the Inspection Report carried out under VAT and IRS, for the year/periods of 2010, which was based on Service Order no. 2014….

  2. The Claimant was notified of the Value Added Tax assessment act, no.…, referring to the period 1011 – November 2010 - which set a tax amount payable of € 4,813.45 and the assessment act no.…, which set compensatory interest payable of € 734.81.

  3. The Claimant was registered for the fiscal period of 2010 in the general regime of corporate income tax (IRC) taxation, and for VAT purposes under the normal regime of monthly periodicity.

  4. The claimant is registered for tax purposes with the main activity of "Other business consulting and management activities" and with the secondary activity of "Professional Training", having waived the VAT exemption for this latter activity.

  5. The Claimant is an accredited entity in the field of training since 06/08/2008, by the General Directorate of Employment and Labor Relations (DGERT), in accordance with decree-law no. 210/2007 of 29 May.

  6. The Claimant received from the European Social Fund (ESF), under Regulatory Decree 84-A/2007, of 10 December and Dispatch no. …/008, a subsidy under the Human Potential Operational Program (POPH), "Adult Education and Training Courses" (EFA) - …-POPH …2010 (…– POPH …/2010), in the amount of € 27,734.62 in the month of November 2010.

  7. On 28.05.2015 the request for arbitral pronouncement and constitution of an arbitration tribunal was submitted, via computer platform, by the Claimant.

  8. The Claimant proceeded to pay the initial court fee;

No other facts with relevance to deciding the case were proved.

3.2. Substantiation of the Facts Proved:

With respect to the facts proved, the conviction of the arbitrator was based on the documentary evidence attached to the case file and the position taken by each of the parties.

3.3. Facts Not Proved

The matter deemed proved is sufficient for appreciating the questions raised in these proceedings, which are reduced to questions of law, there being no unproved facts relevant to the solution of this dispute.

4. Matters of Law:

4.1. Object and Scope of the Present Proceedings

The request for an arbitral ruling has as its object the declaration of illegality of the VAT assessment act and compensatory interest, notified to the Claimant and has as its cause of action the lack of substantiation of the assessment of such tax acts and the illegality of the interpretation adopted by the Tax Authority, according to which the subsidies received by the Claimant in November 2010 would fall within the scope of paragraph c) of no. 5 of article 16 of the VAT Code.

Given the above, and bearing in mind the provisions of article 124 of the Code of Tax Procedure (CPPT), applicable by virtue of paragraph a) of no. 1 of article 29 of the RJAT, it is important to examine the defects that are being attributed to the VAT tax act that is the object of these arbitral proceedings, following this criterion, which amounts to stating that the appreciation of the substantive or fundamental question raised by the Claimant regarding the classification or otherwise of the subsidy received and referring to the period 1011 should be initiated and, in case of lack of merit thereof, to the question relating to the alleged lack of substantiation.

4.2. Classification of the Subsidy Received by the Claimant within the scope of paragraph c) of no. 5 of article 16 of the VAT Code

The central question now under consideration is based on ascertaining the practical applicability of the norm contained in paragraph c) of no. 5 of article 16 of the VAT Code to the subsidy received by the Claimant in the period 1011 under the "POPH-EFA…" and as a result, the subjection to VAT on such subsidy or subvention.

Let us first examine the classification of the Claimant's operations in light of the exemption provided in no. 10 of article 9 of the VAT Code.

The aforementioned provision states:

Exemptions

SECTION I

Exemptions in Domestic Operations

Article 9
Exemptions in Domestic Operations

The following are exempt from the tax:

(…)

  1. Services with the object of professional training, as well as the supply of goods and provision of related services, such as the provision of accommodation, food and teaching materials, carried out by public law entities or by entities recognized as having competence in the fields of professional training and rehabilitation by the competent ministries;"

Whereas, as established in paragraph a) of no. 1 of article 12 of the VAT Code:

"Article 12
Waiver of Exemption

1 - The following may waive the exemption, opting for the application of the tax to their operations:

a) Taxable persons who carry out the services referred to in nos. 10) and 36) of article 9"

Whence, being in question in the present proceedings an operation in the field of training provided by the Claimant and over which the latter waived, as was within its discretion, the exemption, there is no doubt regarding the obligation of the Claimant to assess VAT on all its taxable operations classified within paragraph 10) of article 9 of the VAT Code.

It being established that the classification is regular in terms of VAT for the training activity provided by the Claimant and on which the concrete appreciation of these proceedings focuses with respect to the operation "…– POPH …/2010" and the consideration or otherwise of the amount received as subsidy in the taxable value.

The Claimant argues that there is no obligation to include in the taxable value the amount received from the subsidies under the support "…– POPH …/2010" alleging that the nature of such supports do not fall within the scope of paragraph c) of no. 5 of article 16 of the VAT Code, and therefore the VAT assessment to be carried out should not be based on the invoiced value plus the amounts received under the aforementioned program.

It is therefore important to bear in mind the provisions of such legal precept, which is cited below:

Article 16
Taxable Value in Domestic Operations

(…)

5 - The taxable value of the supply of goods and the provision of services subject to tax includes:

(…)

c) Subsidies directly linked to the price of each operation, being considered as such those that are determined on the basis of the number of units supplied or the volume of services provided and are fixed prior to the carrying out of the operations."

For this same purpose, it is equally important not to lose sight of what is established by the VAT Directive which is the basis for the transposition into the Portuguese legal system of the aforementioned norm, this European directive which in its article 73, regarding the taxable value of deliveries of goods and provision of services, provides the following:

"In the case of deliveries of goods and the provision of services other than those referred to in articles 74 to 77, the taxable value includes everything that constitutes the consideration which the supplier or service provider has received or is to receive in respect of those operations, from the purchaser, the recipient or a third party, including subsidies directly related to the price of such operations." (emphasized).

From the concatenation of both norms, it follows that only subsidies linked to the price of operations will be included in the taxable value of the operation, and from the aforementioned article 16 of the VAT Code there also result two other requirements for such subsidies to be considered included in the taxable value subject to tax, namely:

  • that the subsidies are determined by reference to the sale values of goods or the volume of services provided;

  • that the subsidies are fixed at a moment prior to the carrying out of the operations;

The subject of subsidies and the treatment thereof in VAT and specifically with respect to whether or not they are included in the taxable value has been the subject of various approaches, both at the case law level (internal and of the Court of Justice of the European Union), and at the level of doctrine.

For the sake of better synthesizing the positions already taken on this subject, we cannot fail to rely on, transcribing an excerpt from the arbitral decision no. 111/2014-T, within the scope of which it was established:

"The European Commission, in its first report on the operation of the common VAT system (contained in document COM (83) 426 final, of 14 September 1983), understands that there are certain types of subsidies regarding which it is easy to decide on their inclusion in the taxable value, enumerating the cases in which the amounts of the subsidies (i) are determined with reference to the selling prices of the goods or services provided; (ii) or depending on the quantities supplied; (iii) or are intended to cover the costs of goods or services that are provided free to the public.

However, regarding various other types of subsidies – namely those intended to cover deficits and operational subsidies – the Commission considers it extremely difficult to lean towards their inclusion (or otherwise) in the taxable value of operations covered by VAT (as emphasized by RUI LAIRES and ISABEL VEGA MOCOROA cited above).

These are usually assigned to strengthen the economic situation of the subsidized entities, and are not specifically reported to the prices practiced, although, the Commission adds, a substantial difference is not found between these two types of subsidies. This finding, combined with the fact that it is possible with relative ease to convert a subsidy directly reported to prices into another type of subsidy illustrates, according to the Commission, the fragility of a distinction based on a formal criterion and the inadequacy of the norms of the Directive (at the time the Sixth Directive, 77/388/CEE.

In the second report of the Commission on the operation of the common VAT system (contained in document COM (88) 799 final, of 20 December 1988), a strict and literal interpretation is recommended, according to which the inclusion of the subsidy in the taxable value depends on the concurrence of three cumulative conditions: (i) the subsidy constitutes the consideration or part of the consideration; (ii) the subsidy is paid to the supplier of goods or service provider; and, finally, (iii) the subsidy is paid by a third entity.

For XAVIER DE BASTO "It can be questioned the logic of the inclusion of these subsidies in the taxable value of VAT. Including or not including subsidies linked to operation relates to two ways of conceiving or rationalizing the value added tax – the two faces of the tax: as a tax on transactions (tax on companies) or as a general consumption tax. (…) In truth, the inclusion of subsidies in the taxable value only makes sense when VAT is seen as a tax on companies, "a business tax – intended, ultimately, to tax the respective value added. If subsidies are not included, the tax would not reach the value added, the value of production at the cost of factors – the subsidized company would be favored relative to the non-subsidized company. However, that is not how the problem should be posed when one is faced with a consumption-type VAT" (…) In this logic, what should matter is the effective price, the expenditure of the consumer" – cf. "The Taxation of Consumption and its International Coordination", in Cahiers de Droit Fiscal (164), 1991, p. 210.

Still according to this illustrious Professor, the solution of the Directive is far from easy to apply. "It implies the distinction between subsidies "directly linked to the price" of operations, to be included in the taxable base, and those of other natures, which do not count towards determining that base. Given the diversity of situations that can occur, the distinction is not always easy. When the amount of the subsidies is determined either by reference to selling prices or quantities sold ("compensatory indemnities"), it is clear that these are subsidies directly linked to prices. Nor will the non-inclusion of capital subsidies raise doubts. However, it may prove difficult to decide the question regarding other types of operational subsidies, which are paid to improve the economic position of companies, but which are not calculated with reference to prices or quantities sold. This would be the case, for example, of so-called "equilibrium subsidies", calculated retrospectively, to cover operating deficits, and "operational subsidies", which constitute revenue supplements determined a priori, regardless of the results of the operation." – cf. work cited, p. 212.

CLOTILDE CELORICO PALMA points out that subsidies are "one of the gray areas of this tax" and that the community legislation does not contain a definition of subsidy, "limiting itself to providing for the rule on its inclusion in the taxable value of operations and the possibility of its inclusion in the pro rata calculation". She adds that the "treatment of subsidies in VAT is not a fully harmonized matter at the level of the various Member States, questioning a uniform application of the common system and respect for the neutrality of the tax" – in Public Entities and Value Added Tax – A Breach in the Principle of Neutrality, Almedina, 2011, pp. 561 and 565.

In this framework of some indeterminacy, it is the case law construction of the Court of Justice of the European Union that provides us with the (valid) interpretation of the VAT Directive and the decision criteria for the taxation of subsidies." – (emphasized).

One cannot fail to consider, in light of the case sub judice, given a lack of conceptual clarity regarding the concept of subsidies that flows from the letter of the law – read VAT Directive - with respect to its article 73 (and its respective transposition to the internal norm), that which has been the interpretation of the Court of Justice of the European Union (CJEU) so that one can assess the inclusion or otherwise of subsidies in the taxable value.

Thus, the CJEU understood, within the scope of the also called OPW case, the need to verify four assumptions for a particular subsidy to be considered covered in the taxable value for VAT purposes.

Resorting to the transcription already made within the scope of Arbitral Decision no. 111/2014-T of the said CJEU decision, which we follow here, results:

"First assumption – that it is a subsidy granted by an authority in the context of a triangular relationship, i.e., that involves three parties (point 10 of the OPW Decision):

(a) The authority that grants the subsidy;

(b) The organism/taxable person that benefits from it; and

(c) The buyer of the good or the recipient of the service respectively delivered or provided by the subsidized operator, clarifying that the operations in question are not those carried out for the benefit of the authority that grants the subsidy.

Second assumption – that the subsidy is directly related to the price of the operations to be carried out by the subsidized operator (point 12 of the OPW Decision). For this to be the case, such subsidy must be specifically paid to the operator so that it supplies a good or provides a determined service.

Third assumption – the price of the good or service must be determined, in principle, at the latest, at the moment when the taxable event occurs (point 13 of the OPW Decision).

Fourth assumption – the commitment to pay the subsidy assumed by the one who grants it has as a corollary the right to receive it recognized in the beneficiary when the taxable operation was carried out by the latter (point 13 of the OPW Decision).

It is important to note that the CJEU expressly returns to the national court the proof of the existence of a direct nexus between the subsidy and the good or service in question (point 14 of the OPW Decision).

This relationship between the subsidy and the price must result unequivocally and after a case-by-case analysis of the circumstances at the origin of the payment of the consideration and requires that it be verified, in a first phase, that the buyers of the good or the recipients of the service benefit from the subsidy granted to the beneficiary thereof. Indeed, it is necessary that the price to be paid by the buyer or by the recipient (in this case the three municipalities) be fixed in such a way that it decreases in proportion to the subsidy granted to the seller of the good or the service provider. Otherwise, it is not necessary that the price of the good or service – or part of the price – is determined. It is enough that it is determinable.

It is the national court that has to assess whether, objectively, the fact that a subsidy is paid to the service provider enables the latter to supply a service at a price lower than it would require in the absence of that subsidy. It is not necessary that the amount of the subsidy corresponds exactly to the decrease in the price of the good delivered, it being enough that the relationship between this and the referred subsidy, which can be fixed, is significant. However, it must be emphasized that the mere fact that a subsidy may have an influence on the prices of goods delivered or services provided by the subsidized organism is not enough to make it taxable (points 12, 14 and 17 of the OPW Decision)."

Supporting this Arbitration Tribunal the doctrine above emanating from the CJEU and moreover, already previously and equally supported by previous arbitral decisions (111/2014-T and 337/2015-T), it is important to assess whether in the present case the four aforementioned assumptions are verified or not that could possibly lead to the inclusion of such subsidy received by the Claimant within the scope of the taxable value of the operation sub judice.

For the foregoing, with respect to the first assumption, we cannot fail to conclude that such condition is met, given that there is indeed a triangular relationship based on the existence of a direct nexus between the subsidy received and the training services provided.

In truth, in the case under consideration there is a three-party or triangular relationship constituted by the European Social Fund (within the scope of the POPH project), the Claimant and the recipients of the services provided by it, that is, the trainees.

It is equally evident that the authority European Social Fund is not the entity benefiting from the training activities carried out by the Claimant, so the first assumption aligned by the CJEU is met.

With respect to the second assumption: existence of a direct relationship between the provision of a service and the price of operations to be carried out.

In this regard, it is important to take into account that the subsidy in question falls within the scope of Regulatory Decree 84-A/2007, of 10 December and Dispatch no. …/008, which regulates the general regime for the application of the European Social Fund (ESF).

Accordingly, under no. 1 of article 14 of Dispatch …/2008, of 8 July:

"The acceptance of the decision approving the application by the beneficiary gives it the right to receive financing for the implementation of its projects, under the terms of article 40 of Regulatory Decree 84-A/2007, of 10 December."

That is, it results from what has been cited that the perception of these subsidies is based on the existence of a prior application for this purpose, in which in a detailed manner the applicants cannot fail to present their project of training actions to be carried out, specifying the trainees involved and their respective associated costs.

It is also apparent that the right to be subsidized under the POPH and the aforementioned Dispatch is directly related to the implementation of the training project previously approved, that is, in case of non-compliance with the services to be provided to which the training entity applied, the latter loses the right to the perception of such subsidy, which is why one cannot fail to conclude that the subsidy delivered by the European Social Fund is carried out with a view to the provision by the Claimant of a determined service, in the present case training in the area of "Education and Training for Adults" and the value subject to subsidy is dependent on the aforementioned costs presented by the training entity when applying.

Given the legal environment cited above, it is concluded that there is a direct relationship between the volume of service provided and the value to be perceived, which is fixed (via project/application) upon the acceptance of the decision approving the subsidy to be received from the European Social Fund, and it is equally inexorable that such fixing of the services to be provided is carried out prior to the realization of those same training operations, from which the third assumption in question cannot fail to be verified.

With respect to the last assumption, it concerns the commitment to pay the subsidy assumed by the one who grants it, which has as a corollary the right to receive it recognized in the beneficiary when the taxable operation was carried out by the latter.

It provides, to this end, in no. 1 of article 15 of Dispatch no. …/2008, under the heading "Annual Information on Implementation and Request for Balance Payment", the following:

"1 - The beneficiary entity is obliged to submit, by 15 February of each year, annual implementation information, reported to 31 December of the preceding year, on the physical and financial implementation of the application, in accordance with what is provided for in no. 6 of article 40 of Regulatory Decree 84-A/2007, of 10 December."

Adding what is provided for in the aforementioned no. 6 of article 40 of Regulatory Decree. The following:

"6 — The beneficiary entities of multi-annual applications are obliged to provide the managing authorities, in the manner and with the periodicity defined by them, the information necessary for the preparation of the annual report of the Operational Program, namely, information on the physical and financial implementation of the project, with payment of expenses being conditional on the provision of such information, except for a duly justified reason and accepted by the managing authority."

It thus results from the jointly provided in the norms cited above that the perception of subsidy in favor of the Claimant under this concrete program of the European Social Fund – "…– POPH …/2010" – is conditional on the actual implementation of the project to which it applied in the manner in which it was approved by the European Social Fund and accepted by it.

What means to say that once the provision of the training service on which the subsidy in favor of the Claimant falls is carried out, such implementation of the project generates in the latter the right to perceive from the European Social Fund the subsidy to which it was previously admitted, such subsidy perception being dependent on the concrete volume of services provided, which is why, also with respect to the fourth assumption, one cannot fail to conclude by its verification.

Given the verification of the four assumptions legitimating the inclusion of the amount of subsidies within the scope of the taxable value, by subsumption to the normative provision resulting from paragraph c) of no. 5 of article 16 of the VAT Code, the assessment carried out by the Tax Authority deserves no censure, it not being considered, for the foregoing, illegal the inclusion in the taxable value subject to assessment, of the amount of the subsidy of € 27,734.62, from which resulted a tax amount payable of € 4,813.45 (to which compensatory interest was added) and with which the Claimant found fault.

4.3. Lack of Substantiation:

The Claimant argues that the assessment that is the object of these proceedings issued and notified by the Tax Authority is tainted with the defect of lack of substantiation, namely by violation of the provisions of no. 2 of article 153 of the Administrative Procedure Code (CPA), annullable under the terms of article 163 of the CPA, insofar as the assessment does not make known, with sufficiency, the essential elements that support the assessment, it being only possible to conjecture that it would hypothetically originate from the inspection action previously carried out on the Claimant.

The law imposes a duty of substantiation, as a right enshrined and constitutionally guaranteed to citizens (article 268, no. 3 of the Constitution of the Portuguese Republic) and an act defining the position of the Tax Authority vis-à-vis individuals, so that the taxpayer from the tax-legal relationship can ascertain the reasoning followed by the Tax Authority to decide in a particular direction and not another.

The duty of substantiation is thus aimed at allowing a recipient to realize the cognitive and evaluative path followed by the author of the act to render the decision, so that the latter may know the reasons why the author of the act decided as it did and, from that perception, can trigger the administrative or contentious mechanisms of challenging that decision handed down by the Tax Authority.

Thus it is justified that article 77, no. 2 of the General Tax Law imposes that the decision of the procedure contain "the applicable legal provisions, the qualification and quantification of the facts subject to tax and the operations of determining the taxable matter and the tax", because only in this way can the taxpayer grasp the reason for being of the tax act and ponder any reaction to such a decision of the administration.

Now, in view of the content of the assessment notified to the Claimant, it appears that it contains, not only the applicable legal provisions and qualification of the facts subject to tax, but also the quantification of the facts subject to tax and the operations of determining the taxable matter and the tax.

Even though the assessment placed in question contains all the elements required by article 77, no. 2 of the General Tax Law, it is important to ascertain whether these elements will be sufficient to assert that the duties of substantiation of the act are, in this case, properly fulfilled.

This is because, and as the Claimant rightly points out, the duty of substantiation is a relative concept that varies depending on the legal type of the administrative act and the circumstance in which it was practiced.

In this sense, it has been argued that the requirements for substantiation of the tax act are not rigid, varying according to the type of act and the concrete circumstances in which it was issued.

Even though the Claimant argues in the direction of lack of substantiation, the truth is that, given the substantiation of the request for an arbitral ruling made by the Claimant with respect to its right to exemption, it appears that the latter understood exactly which path was followed by the Tax Authority leading to the VAT assessment and interest, so we do not see the existence of the pointed formal defect.

This is because, as is accepted unanimously by the case law, "there is no formal defect of lack of substantiation if the very party challenging it expressly reveals that it has understood perfectly the logical and juridical process that led to the taxation decision, recognizing that it understood the assumptions specifically taken into account by the author of the act and the reasons why the taxed values were reached, denouncing the cognitive and evaluative path taken (…)"[1].

In the case under consideration, it appears that the Respondent Tax Authority made known, through the inspection report, the substantiation by which, in its perspective, the Claimant could not fail to include in the taxable value for VAT purposes the value relating to the subsidy in question.

Now, from the content of the inspection report that underlies the VAT assessment and interest, the reasons of fact and of law on which such positioning of the Tax Authority is based result expressly, sufficiently and congruently.

Whether these assumptions and reasons provided by the Tax Authority for the inspection report are or are not substantively valid is a question that has to do with the merits and no longer with the form and which, therefore, is placed in another dimension that is not within the purview of this point.

In the present case, the criterion (rightly or wrongly) followed by the Tax Authority is patently clear.

And, as is emphasized in the judgment of the Supreme Administrative Court, of 02.02.2006, in appeal no. 1114/05, «this legal duty of substantiation has, alongside an exogenous function - giving knowledge to the administered of the reasons for the decision, allowing it to opt for acceptance of the act or its challenge -, an endogenous function consisting in the proper consideration of the administering entity, in a careful, serious and impartial manner.»

As such, the substantiation should be contextual and integrated into the act itself (though it may be done in a remissive manner), expressed and accessible (through a succinct exposition of the factual and legal grounds of the decision), clear (so as to allow, through its terms, the precise apprehension of the facts and the law on the basis of which the decision is made), sufficient (allowing the recipient of the act concrete knowledge of its motivation) and congruent (the decision should constitute the logical and necessary conclusion of the reasons invoked as its justification), the lack of substantiation being equivalent to the adoption of grounds that, by obscurity, contradiction or insufficiency, do not concretely clarify the motivation of the act.

Drawing on case law language, the act is only substantiated if a normally diligent or reasonable recipient - a normal person - placed in the concrete situation expressed by the substantiating declaration and faced with the concrete administrative act (which will determine, depending on its diverse nature or type, a greater or lesser requirement of the density of substantiation elements) is in a position to know the functional cognitive and evaluative path of the author of the act.

It being thus essential that the contextual discourse makes known to him the path of apprehension and evaluation of the assumptions of fact and of law that support the decision or the reasons why the decision was made in a particular direction and not in any other. It aims «to clarify concretely the reasons that determined the decision taken and not to find the substantial base that might legitimize it, since the formal duty of substantiation is fulfilled "by the presentation of possible assumptions or of coherent and credible reasons, while substantial substantiation requires the existence of real assumptions and of correct reasons capable of supporting a legitimate decision on the merits".

In the present case, we have that the Tax Authority expounded expressly the grounds of the tax act, and from the combination with the content of the inspection report exceed the requirement of sufficiency, clarity and formal congruence of the argumentation convoked by the Tax Authority to conclude as it did.

Moreover, the exposition by the Claimant regarding ignorance as to the origin of the VAT assessment cannot proceed, given that it had been the subject of notification regarding the corrections set out in the inspection report carried out.

Now, objectively from the combined reading of the table on page 8 of the inspection report (as well as the substantiation set out in chapter III.2 – Year 2010 – Under VAT) and the VAT assessment sub judice, the existence of an identity in the amount of VAT additionally assessed by the AT is apparent, this value being exactly the amount for the tax period – 1011 – in which this VAT was determined.

Now, with the evident and clear existence of identity from both documents with respect to the tax, identity as to the assessed values and identity of the period to which the tax relates, it is ill understood how the Claimant can suggest ignorance as to the origin of the tax act, because, as is proven, it had been previously notified of the final inspection report, where the tax – VAT – was determined to be missing in each of the monthly tax periods.

Substantiation consists in the expression of the real reasons why a certain act was practiced, which thus constitute the foundation on which it rests, in order to allow the administered to conform with it, or to challenge it, if tainted with any of the defects leading to its annulment;

And, in that respect, the Claimant was made aware of such reasons, as well as the arithmetic realization that underlies the motivation set out in the inspection, with the Claimant not demonstrating any difficulty or obstacle in rejecting and counter-arguing against the position assumed by the AT in the inspection, so that, in no way, can the right of defense of the now Claimant be considered diminished.

The substantiation that our legal system imposes as a condition of validity of the act destined to support only takes on a formal dimension, not a substantial one, and consists of the exposition of reasons apt to support the final decision.

And those reasons are amply present, both in the inspection report, regarding the cognitive process followed by the AT, and also in the acts that are the subject of the present request for an arbitral ruling, through the quantitative exposition of the arithmetic-quantitative reasoning that underlies the final tax determined, as well as the expression of the means of defense available to the Claimant to put into question the legality in concreto of such tax act.

In these terms, it is understood that, in the present case, it results sufficiently perceptible to an average recipient, placed in the position of the concrete recipient, what is the substantiation of the tax act now placed in question, and the allegation of the Claimant cannot fail to lack merit.

For the foregoing, no censure is warranted by the VAT and compensatory interest assessment now under consideration.

5. DECISION:

In these terms and with the substantiation set out above, this arbitration tribunal decides:

  1. To judge the claim for declaration of illegality of the tax act of VAT assessment and compensatory interest completely without merit, for the non-verification of any of the defects attributed to it by the Claimant.

  2. To condemn the Claimant to the payment of costs in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings (RCPTA), calculated based on the value of the cause - arts. 4-1 of the RCPTA and 6, no. 2, paragraph a) and 22, no. 4, of the RJAT.

Value of the cause: € 5,548.26 – arts. 97-A of the Code of Tax Procedure (CPPT), 12 of the RJAT (Decree-Law 10/2011), 3-2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT).

Let this arbitral decision be notified to the parties and, in due course, the proceedings shall be filed.

Lisbon, 7 March 2016.

The sole arbitrator,

Luís Ricardo Farinha Sequeira

Text produced by computer, in accordance with article 138, no. 5 of the Code of Civil Procedure (CPC), applicable by remission of article 29, no. 1, paragraph e) of the Legal Regime of Arbitration in Tax Matters, with blank lines and reviewed by me.

[1] Judgment of the Supreme Administrative Court, of 30/01/2013, proc. 0105/12,

Frequently Asked Questions

Automatically Created

What is the VAT treatment of subsidies received under the POPH (Human Potential Operational Programme) in Portugal?
Subsidies received under the POPH (Human Potential Operational Programme) in Portugal are subject to VAT when they qualify as price subsidies under Article 16(5)(c) of the Portuguese VAT Code (CIVA). This occurs when the subsidy is directly linked to the price of specific taxable transactions, such as training services provided. Under Article 16(5)(c) CIVA, subsidies granted with direct reference to the volume or value of services rendered form part of the taxable amount for VAT purposes. The key factor is whether the subsidy constitutes consideration for the supply of goods or services. For POPH training subsidies, if the funding is calculated based on the number of training hours delivered, participants enrolled, or courses completed, the Tax Authority typically considers this a sufficient connection to trigger VAT liability. However, general operational subsidies or funding not linked to specific transactions may be excluded from the VAT base. The taxpayer's VAT status is also relevant—entities that have waived exemption for professional training under Article 9(10) CIVA must charge VAT on all related income, including qualifying subsidies.
When does a subsidy qualify as a price subsidy subject to VAT under Article 16(5)(c) of the Portuguese VAT Code (CIVA)?
A subsidy qualifies as a price subsidy subject to VAT under Article 16(5)(c) of the Portuguese VAT Code when three conditions are met: (1) there must be a direct and inseverable link between the subsidy and the price of specific taxable transactions; (2) the subsidy must be granted by reference to the quantity or value of goods supplied or services rendered; and (3) the subsidy must constitute consideration forming part of the taxable amount. Article 16(5)(c) CIVA provides that subsidies directly linked to the price of transactions are included in the taxable amount for VAT purposes. This applies when the subsidy is calculated based on the volume of transactions (number of services provided, training hours delivered, units sold) rather than general operational support. The European Court of Justice jurisprudence, which influences Portuguese VAT interpretation under EU Directive 2006/112/EC, establishes that a subsidy forms part of consideration when it is paid to the supplier by a third party as payment (wholly or partially) for the goods or services supplied. General subsidies for maintaining activities, covering deficits, or supporting operational costs without reference to specific transactions typically do not fall within Article 16(5)(c). The burden of proof lies with the Tax Authority to demonstrate the direct link between the subsidy and the taxable transactions.
What constitutes sufficient reasoning (fundamentação) for a VAT tax assessment by the Portuguese Tax Authority?
Sufficient reasoning (fundamentação) for a VAT tax assessment by the Portuguese Tax Authority requires compliance with Article 77 of the Tax Procedure Code (LGT - Lei Geral Tributária), which mandates that tax acts must be grounded in facts and law. The assessment must contain: (1) clear identification of the factual basis—the specific transactions, amounts, and circumstances giving rise to the tax liability; (2) legal foundation—citation of applicable legal provisions and explanation of how they apply to the facts; (3) logical connection between facts found and legal conclusions reached; and (4) sufficient detail to enable the taxpayer to understand the assessment and exercise defense rights. For VAT assessments involving subsidies under Article 16(5)(c) CIVA, the Tax Authority must explain why the subsidy constitutes a price subsidy, demonstrating the direct link between the subsidy and specific taxable transactions. Reference to inspection reports containing detailed analysis of the subsidy mechanism, contractual terms, and payment calculations typically satisfies substantiation requirements. The reasoning must be clear, congruent, and sufficient—vague or conclusory statements are inadequate. Procedural defects in substantiation constitute grounds for annulment under Article 124 CPPT (Tax Procedure Code), even if the underlying tax liability is correct. CAAD arbitral tribunals review substantiation independently before examining substantive issues.
How does CAAD arbitration handle disputes over VAT assessments on government training subsidies?
CAAD (Administrative Arbitration Center) arbitration handles disputes over VAT assessments on government training subsidies through a specialized tax arbitration procedure established under the RJAT (Legal Regime of Arbitration in Tax Matters). The process begins with the taxpayer filing an arbitration request within the statutory deadline, typically 90 days from notification of the assessment. The CAAD has jurisdiction under Article 2(1)(a) RJAT over VAT assessment disputes below €10 million. After payment of the initial court fee, an arbitrator is appointed (sole arbitrator for claims under specific thresholds). The arbitration tribunal examines both procedural defects (lack of substantiation, violation of defense rights) and substantive issues (correct legal interpretation of Article 16(5)(c) CIVA regarding subsidy classification). The tribunal follows the order of analysis prescribed by Article 124 CPPT, addressing fundamental substantive questions before procedural defects. Both parties may submit evidence, including documentary proof of subsidy agreements, payment records, and witness testimony. The tribunal independently determines facts based on the evidence presented and applies relevant Portuguese and EU VAT law. For training subsidy cases, the tribunal examines the POPH regulatory framework (Regulatory Decree 84-A/2007), funding agreement terms, subsidy calculation methodology, and whether the subsidy meets Article 16(5)(c) criteria. CAAD decisions are binding and subject to limited judicial review.
What are the legal consequences of the taxpayer's failure to appear at the CAAD arbitral hearing?
The taxpayer's failure to appear at the CAAD arbitral hearing, while procedurally noted, does not automatically result in adverse substantive consequences or dismissal of the claim in Portuguese tax arbitration. Under RJAT procedural rules, the arbitration tribunal must decide the case on the merits based on all evidence in the record, regardless of party appearance at hearings. When the claimant and listed witnesses failed to appear, the proceeding continued with the Tax Authority presenting oral arguments reiterating its written response position. The tribunal may not treat non-appearance as an admission or draw negative factual inferences against the absent party. However, practical consequences include: (1) loss of opportunity to present oral testimony from witnesses who could support the claimant's position; (2) inability to clarify factual issues or respond to arguments raised by the Tax Authority during oral submissions; (3) missed opportunity to emphasize key points or challenge the authority's interpretation; and (4) the tribunal's factual findings will be based solely on documentary evidence and the Tax Authority's uncontested statements. The burden of proof allocation remains unchanged—the Tax Authority must still prove the legal basis for the assessment. The tribunal continues its independent legal analysis, examining whether Article 16(5)(c) CIVA applies based on the evidence in the administrative file and written submissions. Non-appearance may weaken the practical persuasiveness of the claimant's case but does not constitute a procedural bar to substantive review or shift legal burdens.