VAT Exemption Waiver for National Health System Entities – CAAD Ruling 341/2015-T

ARBITRAL DECISION

The arbiters Counselor José Baeta de Queiroz (arbitrator-president), Professor Doctor Clotilde Celorico Palma and Dr. Marcolino Pisão Pedreiro, designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 11.08.2015, agree as follows:

1. On 29.05.2015, the Claimant, A..., Lda., holder of collective legal person identification number..., with registered office on Rua ... n.º..., requested from CAAD the constitution of an arbitral tribunal, in accordance with article 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter designated only as RJAT), in which the Tax and Customs Authority is the Respondent, with a view to the annulment of additional assessments n.º..., in the amount of € 390,751.10, corresponding to VAT, and n.º..., in the amount of € 59,522.63, corresponding to compensatory interest, both relating to the period 2010.12; n.º 2015..., in the amount of € 516,686.23, corresponding to VAT, and n.º 2015..., in the amount of € 58,038.70, corresponding to compensatory interest, both relating to the period 2011.12; n.º 2015..., in the amount of € 506,274.98, corresponding to VAT, and n.º 2015..., in the amount of € 36,506.99, corresponding to compensatory interest, both relating to the period 2012.12; n.º 2015..., in the amount of € 447,740.68, corresponding to VAT, and n.º 2015..., in the amount of € 14,425.83, corresponding to compensatory interest, both relating to the period 2013.12, and of the statements of account correction n.ºs 2015..., 2015..., 2015..., 2015..., 2015... and 2015...;

The Claimant petitions, furthermore, in the alternative, should it be considered that it should be framed within the VAT exemption regime during the years 2010 to 2013, the reimbursement by the TA of VAT wrongfully assessed and paid to the State, in the amount of € 2,449,805.41;

It further petitions, should it be considered that it has grounds, the fixation of compensation for wrongfully provided security, in accordance with article 53 of the LGT, and article 171 of the CPPT.

1. The request for constitution of the Arbitral Tribunal was accepted by His Excellency the President of CAAD and notified to the Tax and Customs Authority (TA).

In accordance with and for the purposes of the provisions of no. 1, article 6, of the RJAT, by decision of the President of the Deontological Council, duly communicated to the parties within the legally applicable periods, the undersigned were designated as arbiters, who communicated to the Deontological Council and to the Centre for Administrative Arbitration the acceptance of the assignment within the regularly applicable period.

I. REPORT

1. The grounds presented by the Claimant in support of its claim were, synthetically, the following:

a. It filed its declaration of commencement of business activity on 11.03.1999, indicating that it would engage in exempt operations that did not confer the right to VAT deduction;

b. On 10.05.2000, it presented a declaration of changes to its activity, in which it opted to exercise the right to waive this exemption, granted by article 12, no. 1, paragraph b), of the VAT Code (CIVA);

c. The fulcral argument of the TA for proceeding with the assessments which are the subject of the present process is that the Claimant began, from a date not determined (but which was, according to it, certainly before the year 2010), to be integrated in the National Health System, losing the right of waiver of exemption, by the mere existence of agreements with "various public health subsystems, with the Northern Regional Health Administration (ARS north) and with public hospitals", for the purposes of article 12, no. 1, paragraph b), of the VAT Code, but such understanding lacks legal basis;

d. It constitutes erroneous interpretation violating the principles of legality and typicality of taxation to consider that the National Health System mentioned in paragraph b) of no. 1 of article 12 of the VAT Code is frameable within the concept of "Health System" set forth in the Health Framework Law (a law subsequent to the VAT Code), which encompasses all private entities that enter into agreements with the National Health Service;

e. The explicit reference of the State Budget Law for 1999 (Law no. 87-B/98, of 31 December) to the waiver of exemption provided for in paragraph b) of no. 1 of article 12 of the VAT Code indicating that, in relation to this, private institutions "integrated in the National Health Service" are at issue, constitutes a decisive element in the sense that the concept of Health System is not applicable here, but rather that of National Health Service;

f. Furthermore, at least until 2007, it was perfectly settled, for the TA itself, that the waiver of exemption at issue here could be exercised by private entities, with profit-making purposes, even if they had entered into agreements with the Ministry of Health and other entities and bodies of the NHS;

g. There are even various responses from the DGCI to requests for clarification from taxpayers in those conditions in which the right to waiver of exemption is stated, without reservation, on the part of hospital establishments of companies with protocols or agreements with the State;

h. Contrary to what results from the TA Report, EU case law does not conclude that a certain private hospital establishment pursues an activity in conditions socially analogous to a public hospital establishment by the mere fact that the services pursued by such establishment are "in large part" assumed by social security bodies or other health funds, i.e., by public bodies;

i. It is necessary that "various elements" be taken into consideration, the fact that the costs of the services provided are partially assumed by public bodies being only one of those elements to be considered;

j. Furthermore, it is incumbent on whoever invokes a right to bear the burden of proof of its constitutive facts, but the TA failed to present in its Report any other elements proving that the Claimant exercises (would exercise) its activity in conditions socially analogous to those of public hospital establishments or similar;

k. With respect to the concrete situation of the Claimant, it is evident that the protocols and agreements entered into with entities linked to the public sector do not define the prices applicable to all of its users, but only to a part thereof;

l. According to the TA's view, more than 45% of the Claimant's billing would be due and charged to public entities in the years 2010 to 2013, but the data contained in the Report do not permit such an interpretation and, in relation to the period between 2010 and 2013, billing allocated to public entities corresponded, on average, to 36.46% of the total volume of business;

m. It is further to be rejected any thesis asserting that the activity exercised by the Claimant represents (would represent) any kind of competitive pressure on similar public establishments;

n. The prices currently practiced are set by Ordinance, with VAT due thereon being included by the Claimant within the price, so it is not by becoming exempted from VAT on the Claimant's operations that users begin to opt for public hospitals to the detriment of the Claimant;

o. Even if the Claimant were to begin to be integrated in the "National Health System" from a certain date (which the TA failed to determine) – which is only conceived by mere hypothesis of reasoning, without conceding – there exists no legal mechanism that determines the "loss of the right to waive exemption" by that fact, after having validly exercised the right of waiver of exemption;

p. On the other hand, let it not be said against what is stated above that the TA would have revoked with ex tunc effects the administrative act that framed it in the general VAT regime since, as stated above, it exercised its right of waiver in accordance with no. 2, article 12, of the VAT Code, by means of delivery of the respective declaration and the TA, following delivery of this declaration, altered the registration by means of an administrative act, which framed the Claimant in the general VAT regime and granted to it the right of waiver;

q. Even if it were argued that the TA would have powers to revoke this administrative act, under the general terms provided in the CPA, the truth is that the TA never revoked this administrative act, having merely "decreed" the loss of the right of waiver in the reasoning of the Report and carried out the assessments, such that a hypothetical act of revocation would always be invalid, by violation of articles 136 and 141 of the CPA;

r. Of the assessments carried out, the determination of the value of € 258,356.98 (€ 226,211.56 + € 32,145.42) is based on regularizations in favor of the State in accordance with article 24 of the CIVA, but the truth is that there exists no rule provided in the VAT Code or in separate legislation that obligates the Claimant to regularize VAT deductions previously made as a result of changes to VAT framing determined officially by the TA and the application of article 24 of the VAT Code, in the concrete case, thus leads to the fact that the imposition of tax, in the part relating to regularization, in the amount of € 258,356.98, is materially unconstitutional, by violation of article 103, no. 3, of the CRP, in the part in which it states that no one may pay taxes whose assessment is not made in accordance with the law;

s. In the alternative, should the exemption regime prevail, the VAT assessed, of €2,449,805.41, would not be due under article 2, no. 1, paragraph c), of the VAT Code, since this is a fraud prevention mechanism and constitutes a mere presumption juris tantum, and in the case at hand there is no question of any act of fraud or VAT deduction, since the VAT collected in medical services is not deductible by users. The collection of this VAT in light of the exemption regime applied by the Respondent would constitute venire contra factum proprium;

t. On the contrary, the only way to guarantee fiscal neutrality and apply justice, should the above-described scenario occur, would be (as a counterpoint to recognizing the VAT deduction made in excess by the Claimant) to recognize that the amount of VAT assessed and overpaid by the Claimant to the State should be regularized by the State in its favor and reimbursed by this to the users;

u. Finally, the acts of assessment impugned constitute unequal treatment between taxpayers, since in a similar case it was determined that the effects of the new position of the DGCI should only apply to the future and therefore, the interpretation and application of article 12 of the VAT Code by the TA in such a manner as to lead to the Claimant being more severely treated (with retroactive application of the loss of the right to waive exemption with obligation of VAT regularizations and handing over to the State of assessed VAT) will be unconstitutional, providing, thereby, yet another reason to consider illegal and unconstitutional the assessments carried out by the TA.

To support the request, the Claimant attaches an Opinion, on the subject of waiver of VAT exemption, authored by Professor R….

1. The Tax and Customs Authority, called upon to state its position, presented a Response raising the exception of lack of material jurisdiction of the Arbitral Tribunal as to the legality of the statements of account correction, as well as regarding the request for "recognition of the right to waive VAT exemption", since, in both cases, they do not involve the assessment of the legality of the additional assessments carried out.

It was further defended, by way of impugnation, alleging that:

a. From the year 2004, the Claimant entered into agreements and/or protocols with various insurance companies that provide health insurance, with various associations, with unions, with hospital centers, with public health subsystems and with the Regional Health Administration, with the users covered by the agreements or protocols benefiting from the respective regimes, making only partial payment of the service (co-payment or moderate fee) as agreed;

b. It clearly results that the question to be decided is, from the outset, whether, by force of the agreements entered into with the Northern Regional Health Administration, I.P., and with public hospitals, the now Claimant should be considered as a private institution integrated in the "National Health System", in accordance with and for the purposes of article 12, no. 1, paragraph b), of the CIVA;

c. However, and notwithstanding the pertinent classification of the concept of the expressions "national health service", "health system" and "national health system", the fact is that, in reality, what is also at issue here, if we take into account its "right" or "non-right" of waiver of exemption provided for in paragraph b) of article 9 of the VAT Code, is whether such entirely subverts the rules of neutrality that govern any and all system of Value Added Tax, in force in the European Union, in the concrete case, between healthcare services provided by public entities or by private entities providing services in "socially analogous conditions";

d. Insofar as, in understanding that yes, the Claimant, from the moment of its entry into effect, could no longer continue to benefit from the regime of waiver of VAT exemption;

e. Even before the Health Framework Law (of 1990) adopted the term "health system", legally enshrining it, the normal addressee of article 12, no. 1, paragraph b), of the CIVA, a rule in force since 01/01/1986, but approved by a Decree-Law of 26 December 1984, understood its scope: private entities that enter into agreements with the Portuguese State for the provision of medical and health services listed in no. 2 of article 9 of the CIVA become integrated in the "national health system", which prevents the option of that waiver;

f. The circumstance that the Health Framework Law, approved by Law no. 48/90, of 24 August, comes to define the concept of "health system", as encompassing the National Health Service and all public entities that develop activity of promotion, prevention and treatment in the area of health, as well as by all private entities and all independent professionals who agree with the first to provide all or some of those activities (Base XII), merely demonstrates the correctness of the terminology used in 1984 by the legislator of the VAT Code;

g. In contrast, it is thought that the reference to "National Health Service" previously contained in item 2.7 of List I annexed to the VAT Code reflected a terminological imprecision, which should be interpreted, taking into account the content of paragraph b) of no. 1 of article 12 of the VAT Code and the legal framework that regulates the health system, as referring to the "national health system", since, as we have seen, and the Claimant states, there are no private institutions integrated in the National Health Service;

h. Allowing the right of waiver in the case of the now Claimant translates to the subversion of all rules, notably that of the much-touted neutrality, which it is sought to preserve, since the end consumer, in this case the patient, in theory the weakest in economic and social terms, who resorts to a public hospital for the provision of the same service, will have to bear a higher cost, since this incorporates the amount of tax that he cannot deduct, since he is denied the right of waiver;

i. The value of 36.46%, alleged by the Claimant as corresponding to the average value between 2010 and 2013, of the Claimant's billing allocated to public entities only refers to the values billed to those public bodies, not including the moderate fees and payments made by the beneficiaries of those systems and it should be noted that ADSE beneficiaries bear, on average, 18%[1] of the cost of healthcare services when they resort to services in a regime agreed with private entities, so the values billed to ADSE correspond to the remaining 82%;

j. Therefore, once the part supported by the beneficiaries of those regimes is considered, the relative weight presented in the above tables comes to amount to more than 45% in all years;

k. Within the scope of the inspection procedure, the Tax Inspection Services, mindful of the applicable set of rules, especially, in light of the concepts of "socially analogous conditions" and "national health system", analyzed in detail in the RIT, conclude that "both in light of EU law and in light of domestic law, the HPVC comes within paragraph b) of no. 1 of article 132 of the VAT Directive and therefore within the exemption of no. 2 of article 9 of the VAT Code, without the possibility of exercising the waiver of exemption in accordance with paragraph b) of no. 1 of article 12 of the VAT Code";

The Claimant further defends that the TA starts from a wrong assumption in inferring that the VAT assessed and paid to the State by the Claimant is due to the State coffers since, in the case at hand, there is no circumstance of fraud involved, so its situation would never be frameable within the scope of paragraph c) of no. 1 of article 2 and no. 2 of article 27, both of the VAT Code but, also on this point, it must be stated that the understanding defended by the Claimant has no foundation since VAT does not burden taxable persons, but rather end consumers, who bear the tax that is passed on to them;

l. This follows from the basic principles of the functioning of the tax and its characteristics, namely, passthrough and neutrality and therefore, one cannot agree with the Claimant's understanding of the non-application in the situation sub judice of article 2, no. 1, paragraph c), of the VAT Code;

m. The Respondent further alleges the necessity of ordering the referral of the process to the CJEU, under the provisions of article 267 of the TFEU, for the purposes of defining the scope of waiver of the exemption regime in accordance with article 12, no. 1, paragraph b), of the VAT Code, specifically on the content of the expression "socially analogous conditions".

1. On 19.10.2015 the meeting of the Arbitral Tribunal provided for in article 18 of the RJAT took place, in which the Claimant responded to the exceptions raised by the Respondent, arguing for their dismissal.

2. The parties presented arguments in which, in essence, they maintained the positions already stated in the pleadings.

3. The following questions must be resolved:

a) Whether the Arbitral Tribunal should be declared incompetent ratione materiae, either with respect to the question of the legality of the statements of account correction, or with respect to the alleged request for "recognition of the right to waive VAT exemption";

b) Whether the assessments which are the subject of the present process are tainted by the defect of violation of law;

c) Whether the process should be ordered referred to the CJEU, under the provisions of article 267 of the TFEU, for the purposes of defining the scope of waiver of the exemption regime in accordance with article 12, no. 1, paragraph b), of the VAT Code;

d) Should it be considered that the Claimant should be framed within the VAT exemption regime during the years 2010 to 2013, not ordering the annulment of the assessments, whether the VAT assessed and paid by it to the State, in the amount of € 2,449,805.41, should be reimbursed by the Respondent to the Claimant;

e) In case of annulment of the assessments which are the subject of the present process, whether compensation for wrongfully provided security should be awarded to the Claimant, in accordance with article 53 of the LGT, and article 171 of the CPPT.

II. RULING ON PRELIMINARY ISSUES

1. Exception of lack of material jurisdiction of the Arbitral Tribunal with respect to the question of the legality of the statements of account correction.

The Respondent contends that in no. 1 of article 2 of the RJAT are fixed with rigor which matters the arbitral tribunal can rule upon, in which there is no reference to the statements of account correction identified by the Claimant in the final part of the preamble of its petition. Thus, the Respondent understands that "the arbitral request, in this part, cannot be heard by the present Tribunal, in light of the verification of a dilatory exception which translates into lack of competence of the tribunal".

Let us examine this.

First and foremost, it must be observed that the so-called "statement and settlement of accounts" constitutes an instrumental reality in relation to the assessment, producing no legal effects of its own, but merely reflecting what follows from the assessment itself. Once this is annulled, the respective "statement of account correction" ceases to have a reason for being, which has the assessment as its prerequisite.

On the other hand, it follows from article 24 of the Legal Regime of Tax Arbitration that the Tax Administration must, "in the exact terms of the success of the arbitral decision in favor of the taxpayer", "Restore the situation that would exist if the tax act which is the subject of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose". Thus being, there is no doubt that, once the assessments are annulled, the respective statements of account correction shall be annulled.

And, even if, strictly speaking, it is not necessary for the formulation of such a request by the taxpayer, as Jorge Lopes de Sousa understands, it is still within the competence of arbitral tribunals to determine the effects of their decisions.[1]

Thus being, regarding this question it is manifest that lack of competence of the Tribunal ratione materiae does not occur, and therefore the raised exception is without merit.

1. Exception of lack of material jurisdiction in respect of the principal claim

The Respondent further alleges that "the present arbitral instance is materially incompetent to hear one of the various requests formulated in the present proceedings, namely, whether the now Claimant has or does not have the right of waiver of exemption provided for in accordance with paragraph 2) of article 9, as provided in article 12, no. 1" since "in light of article 2 of Decree-law no. 10/2011, of 20 January, which approved the Legal Regime of Tax Arbitration (RJAT), the competence of arbitral tribunals comprises, among others, the assessment of claims relating to the "declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account" – cf. no. 1, paragraph a)."

For the TA, "with the Claimant requesting the annulment of the additional assessments in question, by violation of the provisions of article 12, no. 1, paragraph b), of the VAT Code, it is thus requesting the condemnation of the Tax Administration to the recognition of the right of waiver of VAT exemption of which it benefits in accordance with paragraph 2) of article 9 of the VAT Code."

In the Respondent's view, we are faced with a request for recognition of rights in tax matters not provided for in the RJAT.

However, the claim deduced by the Claimant is not one of recognition of a right, but rather, insofar as it is relevant here, one of annulment of the tax assessment acts.

Having as its subject matter a matter identical in this respect to that of the present proceedings, the following can be read in the arbitral decision issued by this Tribunal in Process 278/2013-T:

"The Claimant deduces a claim that is typical of a constitutive action such as the action of impugnation within the scope of the tax arbitration process and not a claim of a simple assessment action (positive) characteristic of the action for recognition of a right (cf. article 10 of the Code of Civil Procedure ("CPC") ex vi article 29, no. 1, paragraph e) of the RJAT).

Naturally, the decision to annul the tax acts intended by the Claimant implies the assessment of the underlying tax legal relationship. Thus, in order to conclude the illegality of the impugned tax acts and their invalidating defect, it will be necessary to assess whether the Claimant maintains the right of waiver of VAT exemption and whether it should be framed in the normal VAT regime with the right to deduction. This is the ground of claim (basis) and not the request (claim) deduced in the dispute.

The recognition of rights and legitimate interests in tax matters is always implicit in the declaration of illegality of the tax acts and only when it is separated from this (we are referring to the declaration of illegality and its annulling effect) can it be configured within the scope of an action for recognition of a right, which is not the case.

In this sense, Jorge Lopes de Sousa states in "Commentary to the Legal Regime of Tax Arbitration, Guide to Tax Arbitration", Coord. Nuno Villa-Lobos and Mónica Brito Vieira, Coimbra, Almedina, 2013, p.105: "the recognition of rights and legitimate interests in tax matters, outside the cases in which it may be implicit in the declaration of legality of acts or assessment of the questions indicated in no. 1 of article 2 of the RJAT, is outside the competence of arbitral tribunals" (emphasis ours).

It is clear to us that the main subject of the process relates to additional VAT assessments, whose legality is questioned, which is why the competence of this arbitral tribunal is verified, in accordance with article 2, no. 1, paragraph a) of the RJAT and the exception of lack of competence of the present collective tribunal regarding the principal claim is judged to have no merit."

Supporting this understanding, we also consider, for the reasons indicated, that material incompetence does not occur, so the exception of lack of competence of the Tribunal, insofar as it concerns the principal claim, is judged to have no merit.

1. The tribunal is materially competent and is regularly constituted in accordance with the terms of the RJAT.

2. The parties have legal personality and capacity, are legitimate and are legally represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

3. The process is not tainted by any nullities.

4. No other circumstances exist that prevent the tribunal from hearing the merits of the case.

III. MERITS

A. Matter of Fact

1. Proven Facts

Based on the elements contained in the process and the administrative file attached to the proceedings, the following facts are deemed proven:

a. The Claimant is a limited liability company with private capital, with profit-making purposes, that provides various medical services;

b. It is framed, in accordance with the Portuguese Classification of Economic Activities - CAE Rev 3, in Activity Code 86 100 - "activities of hospital establishments with inpatient care", which comprises "the activities of hospitals (general and specialized), clinics (includes dental clinics), health houses and other health establishments with facilities for inpatient care of patients of short and long duration. These activities are mainly directed to hospitalized patients, under the direct supervision of physicians, encompassing a wide variety of healthcare services (medicine, surgery, analysis, radiology, emergencies, etc.). It includes official hospitals (public, military, paramilitary and prison) and private";

c. The Claimant exercises its economic activity in a hospital unit of its own, designed and equipped for the provision of healthcare, by professionals in various medical and surgical specialties;

d. After the completion of the construction of the hospital unit, which occurred in the beginning of the year 2004, the Claimant entered into agreements, protocols and accident victim assistance agreements with the following entities:

[TABLE OF AGREEMENTS - preserved as structured]
| Agreements | Protocols | Accident Victim Assistance Agreements |
| B... | R... | AA… |
| C... | S… | D… |
| D… | T... | AXA |
| E… | U... | BB… |
| F... | V… | CC… |
| G… | W... | DD… |
| H… | X... | EE… |
| I... | Y… | FF… |
| J… | Z… | GG… |
| K... | | HH… |
| L… | | |
| M… | | |
| N… | | |
| O | | |
| National Health Service (for analyses and echocardiogram) | | |
| P… | | |
| Q… | | |

e. During the years 2010 to 2013, and by force of the exercise of the activities relating to its corporate purpose, the Claimant presented the following volume of business:

[TABLE - preserved]
| 2010 | 2011 | 2012 | 2013 |
| € 8,361,892.13 | € 9,354,927.05 | € 11,024,227.43 | € 9,608,743.21 |

f. A part of that volume of business of the Claimant was due to the values billed to entities linked to the public sector, within the scope of the agreements entered into as detailed below:

[TABLE - preserved]
| Entity | 2010 | 2011 | 2012 | 2013 |
| C... | 2,227,991.79€ | 2,652,144.98€ | 2,685,297.14€ | 2,754,804.34€ |
| II... | 519,734.96€ | 274,018.10€ | 452,226.30€ | 111,241.16€ |
| I... | 309,895.15€ | 362,938.13€ | 349,557.71€ | 380,505.97€ |
| B... | 61,695.87€ | 134,777.68€ | 159,761.38€ | 166,355.70€ |
| JJ... | 50,747.91€ | 26,250.30€ | 42,487.58€ | 22,297.61€ |
| KK... | 15,736.93€ | 3,137.98€ | 0.00€ | 0.00€ |
| LL... | 14,624.97€ | 19,649.08€ | 0.00€ | 4,683.09€ |
| MM... | 13,887.75€ | 12,237.95€ | 40,261.01€ | 4,353.07€ |
| NN... | 2,996.77€ | 0.00€ | 0.00€ | 0.00€ |
| OO... | 0.00€ | 26,888.23€ | 4,378.98€ | 0.00€ |
| PP... | 0.00€ | 0.00€ | 58,795.66€ | 17,432.80€ |

Total: 3,217,312.10€ | 3,512,042.43€ | 3,792,765.76€ | 3,461,673.74€

g. In relation to the period between 2010 and 2013, the Claimant's billing allocated to public entities corresponded, on average, to 36.46% of the total volume of business;

h. These values reflect the net values billed to those public bodies, not including the moderate fees and co-payments that, by force of the contracts entered into by the Claimant with entities linked to the public sector, the beneficiaries of healthcare paid to the Claimant, in an amount not concretely determined, but which, in the case of C..., is, on average, 18% of the cost of services, with C... bearing the remaining 82%;

i. During the years 2010 to 2013, in the transfers of goods and provision of services that it carried out, the Claimant assessed VAT in the total amount of € 2,449,805.41, thus broken down:

[TABLE - preserved]

j. In the same period, the Claimant deducted VAT in the total amount of € 1,748,036.91, thus broken down:

[TABLE - preserved]

k. The Claimant filed its declaration of commencement of activity on 11.03.1999, indicating that it would engage in exempt operations that did not confer the right to VAT deduction;

l. On 10.05.2000, the Claimant presented a declaration of changes to its activity, in which it opted to exercise the right to waive the exemption, granted by article 12, no. 1, paragraph b), of the VAT Code;

m. From that date, the Claimant was framed in the normal taxation regime, with monthly periodicity;

n. The Tax Authority issued Service Orders n.º OI2014... and n.º OI2014..., both of 31.01.2014, intended to initiate an external inspection action of partial scope – VAT – for the years 2010 to 2013;

o. These inspection orders were issued as a result of the fact that the Claimant appeared in the information, of 30.01.2014, of the Office of the Director of the Finance Directorate..., in which it was proposed to issue credentials to taxpayers who had wrongfully waived VAT exemption;

p. On 05.11.2014, the Claimant was notified of the Draft conclusions of the report;

q. This Draft proposed, as a consequence of what was stated above, VAT corrections in the amount of € 1,861,481.59, relating to: (i) tax deducted in excess and (ii) regularizations of assets in fixed assets;

r. The Claimant did not exercise the right to be heard;

s. The Claimant was, through official letter n.º..., of 04.12.2014, notified of the Final Tax Inspection Report, which reproduces the matter previously presented in the draft;

t. On 22.12.2014 the Claimant received the following additional VAT assessments and respective compensatory interest:

[TABLE - preserved]
| Assessment | N.º | Period | Amount |
| VAT | … | 2010.12 | € 390,751.10 |
| Compensatory interest | … | 2010.12 | € 59,522.63 |
| Total | | | € 450,273.73 |

u. On 26.01.2015, the Claimant was notified of the following compensatory interest assessments:

[TABLE - preserved]
| Assessment | N.º | Period | Amount |
| Compensatory interest | 2015 ... | 2011.12 | € 58,038.70 |
| Compensatory interest | 2015 ... | 2012.12 | € 36,506.99 |
| Compensatory interest | 2015 … | 2013.12 | € 14,425.83 |
| Total | | | € 108,971.52 |

v. Subsequently, the Claimant was notified of the following statements of VAT assessment and account correction:

[TABLE - preserved]
| Assessment | N.º | Period | Amount |
| VAT | 2015 ... | 2011.12 | € 516,686.23 |
| VAT | 2015... | 2012.12 | € 506,274.98 |
| VAT | 2015 ... | 2013.12 | € 447,740.68 |
| Total | | | € 1,470,701.89 |

[TABLE - preserved]
| Assessment | N.º | Period | Amount |
| Account correction | 2015… | 2011.12 | € 516,686.06 |
| Account correction | 2015… | 2011.12 | € 58,038.70 |
| Account correction | 2015… | 2012.12 | € 506,274.98 |
| Account correction | 2015… | 2012.12 | € 36,506.99 |
| Account correction | 2015… | 2013.12 | € 447,740.68 |
| Account correction | 2015… | 2013.12 | € 14,425.83 |
| Total | | | € 1,579,673.24 |

x. In global terms, the Claimant was notified of statements of VAT assessment and compensatory interest that total the amount of € 2,029,946.97;

y. In the final inspection report drawn up following the inspection, which is contained in the administrative file and whose contents are deemed reproduced, the following appears, among other matters:

• "15) Hospitalization and medical assistance (…) provided by organisms of public law and, in conditions socially analogous to these, by hospital establishments, medical care and diagnostic centers and other establishments of the same nature duly recognized, is exempt from VAT in accordance with no. 2 of article 9 of the VAT Code, without the possibility of waiver of exemption, since they fall within paragraph b) of no. 1 of article 132 of the VAT Directive".

• "18) The national health system (health system) encompasses public entities integrated in the National Health Service (NHS), as well as private entities that, in accordance with applicable law, have entered into agreements or agreements with the NHS or with one of the public health subsystems for the provision of healthcare".

(…)

• "20) The A... has entered into agreements with public health subsystems, with the Northern Regional Health Administration (ARS north) and with public hospitals".

• "21) (…) it is noted that the beneficiaries of C.. bear on average 18% of the cost of healthcare services when they resort to services in a regime agreed with private entities, so the values billed to C... correspond to the remaining 82%."

• "22) Thus, if we consider the part supported by the beneficiaries of that regime, the relative weight presented (…), comes to amount to more than 45% in all years. Therefore, it is concluded that the percentage of operations carried out by A... under the agreements and agreements with public health subsystems, with the ARA and with public hospitals, is representative of a large part of the value billed, therefore the costs of the services are also largely assumed by public entities.

• "23) "(…) The A... falls within paragraph b) of no. 1 of article 132 of the VAT Directive and therefore within the exemption of no. 2 of article 9 of the VAT Code, without the possibility of exercising the waiver of exemption in accordance with paragraph b) of no. 1 of article 12 of the VAT Code"

"24) However, one should not overlook that when, in 2000, the A... waived the exemption it could do so and would have, in accordance with no. 3 of article 12 of the VAT Code, to remain in the regime for a period of at least 5 years, however as soon as the conditions verified to exercise the right of waiver of exemption are altered, making the activity mandatorily covered by exemption, the effects of the waiver are considered ceased."

1. In the concrete case we cannot, and in light of the analysis carried out, determine when the effects of the waiver cease for the A.... The fact is that, in the years in question, and as already stated, it must exempt the activity of hospitalization and medical assistance, as well as the provision of services closely related to them, with other activities exercised by the A... that do not fall within the exemption of no. 2 of article 9 of the VAT Code being subject to VAT";

z. It appears in Information n.º..., of 16.06.1992, endorsed by the concordant ruling of 1.07.1992 of the Deputy State Secretary of the State Secretariat for Budget, the following:

"(…) paragraph b) of no. 1 of article 12 of the CIVA allows whoever operates hospital establishments, clinics, dispensaries and similar, who is not a legal person of public law or a private institution integrated in the national health system, to waive the exemption in relation to provisions of medical and health services and operations closely connected with them.

(…).

Thus, in the concrete question posed by the petitioner, it will be obligated, should it opt for subjection to the tax, to pass on the tax assessed corresponding to the services provided, whether these are provided to the beneficiaries of the Regional Health Administration, or to those of other similar entities. Hence, since the tax is added to the net price of the services provided, the buyers, including the ARS, will assume the obligation to pay the total thus obtained.

(…)

It must also be stated, regarding this question, that in cases of option for taxation, once the provider begins to have the right to tax supported in the acquisition of goods and services, namely equipment, raw materials incorporated in the services and other expenses, consequently, will see reduced its operating costs".

aa. On 14.12.2007, the ruling n.º.../2007 was issued by the State Secretary for Tax Affairs, from which, among other matters, the following appears:

[CONTENT CONTINUES BUT APPEARS TO BE REDACTED IN ORIGINAL]

bb. In the agreements entered into with the ARS or ADSE and the private hospital establishments, the price of the services which are the subject of agreement is identical for all establishments adhering to the agreements;

cc. The price of each treatment and examination is billed by the private hospital establishments to the ARS or to C... individually, for each operation carried out, in accordance with its nature;

dd. The Claimant was cited within the scope of the fiscal enforcement process n.º...2015... and appendices, as a result of non-payment of the assessments now contested, within the period established for voluntary payment;

ee. To prevent the continuation of that process, the Claimant constituted, in favor of the services of the TA, a voluntary mortgage on the urban property, described in the Land Registry Conservatory of ... under n.º ... and registered in the respective land registry under n.º..., whose patrimonial value amounts to € 4,698,495.13;

2. Unproven Facts

With interest for the decision of the case, there are no unproven facts.

3. Reasoning on the Matter of Fact

The facts were deemed proven based on the documents submitted by the parties and contained in the administrative file, as well as the positions of the parties, it being noted that no effective disagreement emerges from the positions assumed by the Claimant and Respondent regarding the matter of fact, with the disagreement being limited to the matter of law.

B. Matter of Law

1. Preliminary Note

In this process, just as in Processes n.ºs 278/2013-T and 227/2015-T of this Tribunal, the heart of the problem, as it has been presented by the Tax Administration in inspection visit reports to various taxpayers involved, lies in assessing whether hospital establishments, clinics, dispensaries and similar, which opted for taxation by considering themselves not integrated in the national health system, understanding that they meet the conditions provided for in article 12 of the CIVA for the waiver of exemption, should or should not continue to be considered for such as eligible when they enter into protocols or agreements with public entities belonging to the national health service, in order to provide to the beneficiaries of those subsystems provisions of healthcare covered by the exemption rule of no. 2 of article 9 of the same Code.

Let us see, therefore, what we have to say regarding the matter of law at issue. For this purpose, we will closely follow this Tribunal's understanding in the aforementioned Process n.º 227/2015-T.

2. VAT Framing of Healthcare Activity

2.1 Types of Exemptions

It was with the Sixth Directive that an attempt was made to harmonize exemptions in internal transactions that Member States could grant, given that in the Second Directive this matter was left to the exclusive discretion of the national legislator.

The main concern underlying the exemption regime provided for in the Sixth Directive was to establish a common list of exemptions so as to make it possible, as results from its preamble, for own resources to be collected uniformly in all Member States.

Exemptions, however, with the exception of those relating to foreign trade, constitute a significant obstacle to the neutral functioning of the tax, as is widely recognized. Indeed, although, for reasons of an economic and social nature, or for reasons of a technical order, the system must provide for tax relief, it is desirable to limit strictly the cases of exemption and to make the necessary reliefs through the application of reduced rates, in order to allow, as a rule, the exercise of the right to deduct assessed tax.

As is known, in VAT, there are two types of exemptions depending on the possibility of exercising the right to deduction of VAT. On one hand, we have complete, total, full exemptions, or those that grant the exercise of the right to deduct assessed VAT.

In these exemptions, just as the very designation indicates, the beneficiary taxable person does not assess tax on its active transactions (transfers of goods or provision of services carried out) and has the right to deduct assessed VAT for their accomplishment. Should these exemptions be established at intermediate stages, there is no interruption of the chain of deductions, there are no cumulative effects and the consequences for revenue are null, since the intermediate rates are "immaterial". The final rate (non-null) will be responsible for recovering the revenue — it is the known positive recovery effect. If they are established at the final stage, there will be complete relief from the fiscal burden and the seller deducts the VAT that burdened the respective inputs, with any fiscal burden, patent or hidden, disappearing from the value of the good. In contrast to simple exemptions, these exemptions do not alter the qualities of VAT's neutrality and have the effect of completely protecting from the tax the consumption of the good or service to which such full exemption applies, therefore appear as the indicated solution for pursuing equity objectives in the taxation of consumption, when such objectives require complete relief from the fiscal burden relating to certain goods and services[4].

In the so-called incomplete, simple, partial exemptions, or those that do not grant the exercise of the right to deduct assessed VAT, as is the case with the exemptions relating to healthcare that occupy us here, the beneficiary taxable person does not assess tax on its active transactions, but does not have the right to deduct assessed VAT for their accomplishment[5].

In incomplete exemptions, the operator is thus outside the mechanism of the tax, being treated as an end consumer, whereas in complete exemptions, or in zero-rate situations, the operator is an integral part of the mechanism of the tax, being able to deduct it in general terms. Thus being, it is easily concluded that simple exemption can be disadvantageous for productive operators and may even harm their competitive capacity. The non-assessment of VAT on sales or provision of services carried out by them may not offset the impossibility of obtaining credit for assessed tax, especially that which affects investment in durable goods.

That is, simple exemptions distort the properties of neutrality of the tax. If assigned to "intermediate" operators in the economic circuit of goods and services, they give rise to cascading taxation, leaving the fiscal burden from being proportioned exactly to the value of consumption. It is for this reason that, ideally, such exemptions should be provided with parsimony, are harmonized in the common European VAT system and the rules that provide for them are interpreted restrictively.

For this reason, the EU legislator came to allow, in exceptional cases, that Member States grant the right to waive certain exemptions, with taxable persons beginning to apply the tax in general terms, i.e., to assess and deduct assessed VAT, in such a way as not to increase the price of their transactions. Among these cases is found, precisely, the exemption provided for in paragraph b) of no. 1 of article 132 of the VAT Directive, transposed among us in no. 2 of article 9 of the CIVA.

In the selection of operations exempt from the value added tax, the EU legislator was inspired, in the adoption of the Sixth Directive, on one hand, by the exemptions already existing in the Member States, on the other hand, sought to limit the number of exemptions, given that they constitute an exception to the general principle that all provision of services and transfer of goods carried out for consideration by a taxable person are subject to VAT and call into question the principle of proportionality[6].

Thus, essentially for reasons of a social, cultural and political nature, the VAT Directive, following the Sixth Directive, provides for a series of exemptions which, however, apply to a restricted set of services, given the broad base of incidence of VAT.

2.2 Health Exemptions in the VAT Directive

In the VAT Directive the regulation of exemptions is systematized distinguishing "exemptions for the benefit of certain activities of general interest", "exemptions for the benefit of other activities" (internal exemptions), "exemptions related to intra-Community operations and exemptions on importation", "exemptions on exportation", "exemptions applicable to international transport", "exemptions applicable to certain operations assimilated to exports", "exemptions applicable to provision of services by intermediaries" and "exemptions applicable to operations related to international traffic in goods".

The provision of services in the field of healthcare, whether those provided directly by healthcare professionals (physicians, nurses, paramedics) or those relating to hospitalization and medical care provided by organisms of public law or private entities working in socially analogous conditions, are, in principle, exempt from tax. This is what is concluded from paragraphs b) and c) of article 132 of the VAT Directive.

The solution of exempting these provisions of services has its origin in the Sixth VAT Directive, predecessor of the currently in force VAT Directive[7].

The common system allows, in a transitional or derogatory regime, that Member States exempt hospital establishments, medical care and diagnostic centers and other establishments of the same nature, even if they are not recognized as practicing socially analogous conditions to those of organisms of public law. This is what currently appears in point 7 of part B of Annex X to the VAT Directive ("Operations that Member-States may continue to exempt") - Annex which corresponds to Annex F of the Sixth Directive, where the exemption that occupies us was provided for in its respective no. 10.

The provisions of the VAT Directive are, in essence, identical to the corresponding provisions of the Sixth Directive.

The exemptions of general interest in the area of healthcare are contemplated in paragraphs b) and c) of no. 1 of article 132 of the VAT Directive. In addition to their introductory clause, the exemptions provided for in article 132°, no. 1, paragraphs b) and c), of the VAT Directive are drafted in a manner identical to those of article 13°, A, no. 1, paragraphs b) and c), of the Sixth Directive.

The objective underlying the granting of these exemptions is to not burden the provision of healthcare services, ensuring that the benefit of medical assistance does not become inaccessible by reason of the increase in costs that results from taxation in VAT, i.e., in reducing medical costs to users and promoting healthcare[8]. Indeed, these are exemptions for the benefit of certain activities of general interest, specific activities designed to pursue socially useful purposes, such as medical assistance. It is settled that the common objective both to the exemptions provided for in paragraph b) and those provided for in paragraph c), is to reduce the cost of healthcare and make such care more accessible to individuals[9].

The VAT Directive establishes the exemption regime (incomplete, without right to deduction) as the rule-regime of the provision of hospitalization and medical assistance services when such services are provided by organisms of public law. Additionally, the Directive exempts such services when carried out by hospital establishments and medical care and diagnostic centers in conditions socially analogous to those governing public hospitals.

Thus article 132, no. 1, of the VAT Directive determines the following:

"1. Member States exempt the following operations:

a) (…)

b) Hospitalization and medical assistance, as well as operations closely related thereto, provided by organisms of public law or, in conditions socially analogous to those governing the latter, by hospital establishments, medical care and diagnostic centers and other establishments of the same nature duly recognized;

(…)"

What is the scope of this exemption? For its application it is important to verify the simultaneous fulfillment of objective requirements relating to the nature of the transactions and subjective requirements relating to the quality of the entity that carries them out. As to the former, the services provided are: (i) hospitalization or medical assistance, or (ii) operations closely connected with hospitalization or with medical assistance. With respect to the latter: (iii) the service provider must be an organism of public law, or (iv) must provide the services in conditions socially analogous to those governing organisms of public law and, (v) must be a hospital establishment or a medical care and diagnostic center or other establishments of the same nature duly recognized.

In light of paragraph b) above, outside situations in which the providers are public organisms or those not being, provide medical services in conditions analogous to those of these organisms, the general discipline that results in the first place from the VAT Directive is that of taxation in VAT, at the normal rate, or at the reduced rate if Member States exercise the prerogative enshrined in article 98 of the VAT Directive (in conjunction with Annex III).

Note also that, as we shall subsequently analyze, the EU legislator allowed Member States to provide for the possibility of waiving the exemption.

In order to determine which services are capable of benefiting from these exemptions, it is necessary to consider not only the literal content of the provisions, but also the reason for being of the VAT exemption regimes provided for here. The problem was the subject of several CJEU rulings, which are thus decisive in establishing the exact contours of the exemptions matter of healthcare provisions.

2.3 VAT Exemptions in National Rules

VAT exemptions regarding the provision of healthcare services are contained in nos. 1, 2, 3, 4 and 5 of article 9 of the CIVA, which, in turn, reflect the corresponding provisions of the VAT Directive which are paragraphs b), c), d), e) and p) of no. 1 of article 132.

No. 1 of article 9 requires exemption from VAT "the provision of services carried out in the exercise of the professions of physician, dentist, midwife, nurse and other paramedical professions" and no. 2 "the provision of medical and health services and operations closely related thereto carried out by hospital establishments, clinics, dispensaries and similar".

The scope of some of these exemptions, and especially, in the case that occupies us, those provided for in nos. 1 and 2 of said article 9, has given rise to doubts, not only among us, but in other jurisdictions, and some of these questions have been brought to the Court of Justice of the European Union (CJEU), either in preliminary ruling proceedings, or in actions for failure to comply with the State.

Among us, the problem of interpretation of these rules has been raised especially to determine the legitimacy of the waiver of exemption by private entities with activity in the area of healthcare.

In the Treaty of Accession of Portugal and Spain to the European Communities, it can be read that the Portuguese Republic was authorized to exempt from VAT the operations of the aforementioned no. 10 of Annex F of the Sixth Directive.

It follows from the Sixth Directive, in its article 28, no. 3, paragraph b), that Member States may grant, in a transitional regime, to taxable persons the possibility of opting for taxation in the conditions set out in Annex G, a possibility which the VAT Directive maintained in its respective article 373[10].

The Portuguese legislator used both possibilities. Thus, in article 9, no. 2, of the CIVA, it adopted the exemption of "the provision of medical and health services and operations closely related thereto carried out by hospital establishments, clinics, dispensaries and similar"; and, in article 12, it granted to "hospital establishments, clinics, dispensaries and similar, not belonging to legal persons of public law or to private institutions integrated in the national health system, which carry out provisions of medical and health services and operations closely connected thereto" the possibility of "waiving the exemption, opting for the application of the tax to their transactions".

Portugal, under an exception regime contained in article 377 of the VAT Directive, exercised the possibility of also exempting these private hospital establishments, that is, those that do not pursue their activity in conditions socially analogous to public hospital establishments (cf. article 377 of the VAT Directive).

Given what has been stated, and using the terminology of the VAT Directive, for the purposes of article 12, no. 1, paragraph b), of the VAT Code, only those private institutions "not integrated in the national health system" with the right to waive can be considered as "private institutions not integrated in the national health system" for the right to waive; hospital establishments that do not pursue their activity in conditions socially analogous to those prevailing in public hospital establishments. That is, the Claimant is covered by the stated option to waive exemption if it does not pursue its activity in conditions socially analogous to those mentioned in public establishments.

Now, it so happens that doubts have recently arisen regarding the subjective scope of this waiver of exemption. Which are indeed the hospital establishments, clinics, dispensaries and similar that can waive the exemption? What does the statutory formula mean "not belonging to legal persons of public law or to private institutions integrated in the national health system"?

2.4 Interpretation of Exemption Rules

2.4.1 General Aspects

The CJEU has developed, over these years, relevant case law on the matter of exemptions in general, namely on their respective characteristics and objectives, and, in particular, with respect to the concrete situations covered by the VAT Directive. The Tribunal's case law on exemptions has been founded, essentially, on the general principles of interpretation that it has developed, especially the principle of strict interpretation, the principle of systematic interpretation and the principle of uniform interpretation, also emphasizing, in particular, the need to respect the principle of neutrality.

But it is important to underline from the outset that we are faced with norms of European Union Law and that, as such, as noted by the CJEU, "For the purposes of interpretation of a provision of Community law, account must be taken of its terms, as well as its context and the objectives pursued by the regulation in which it is integrated".[11]

The principle of strict interpretation of exemptions is the one that has most frequently been invoked by the CJEU. It is settled case law that, with some nuances, exemptions must be subject to strict interpretation, both as regards service providers and with respect to the type of activities that must be exempt[12].

According to the CJEU, given that the Sixth Directive designed a very broad base of incidence of VAT, encompassing all economic activities of production, commercialization or provision of services, it is possible to enunciate the general principle according to which the tax on turnover is charged on any and all supply of goods or any provision of services carried out for consideration by a taxable person[13]. In this context, given that exemptions constitute derogations from this principle, the terms used to designate the exemptions aimed at by article 13 of the Sixth Directive must be interpreted in a strict manner[14]. For this purpose, given that the provisions of that article have an exhaustive character[15], and must be expressed and precise[16], in its interpretation principal attention should be paid to the literal interpretation criterion[17]. As a consequence, resort to extensive interpretations that broaden the scope of those provisions whose wording is sufficiently precise should be avoided, since this is incompatible with its objective which is to exempt only and solely the activities set forth and described therein[18].

However, the interpretation of those terms must be made in conformity with the objectives pursued by said exemptions and respect the requirements of the principle of fiscal neutrality inherent in the common VAT system. Thus, this rule of strict interpretation does not mean that the terms used to define the exemptions provided for in said article 132 must be interpreted in such a way as to deprive them of their effects[19].

In the same sense, Advocate-general F. G. Jacobs, distinguishing the notions of interpretation "strict" and "restrictive" interpretation, referred that "VAT exemptions must be strictly interpreted, but must not be minimized through interpretation. […] As a corollary, the limitations of exemptions must not be interpreted restrictively, but also must not be analyzed in a way that goes beyond their terms. Both the exemptions and their limitations must be interpreted in such a way that the exemption applies to what was intended to be applied and no more."[20]

Subsequently to the Stichting Ruling[21], the CJEU repeatedly affirmed, in a general manner, that "the terms used to designate the exemptions aimed at in article 13 of the Sixth Directive must be interpreted restrictively given that they constitute derogations from the general principle according to which the tax on turnover is charged on any provision of services carried out for consideration by a taxable person". On the other hand, it clarified that an extensive scope cannot be given to exemptions in the absence of "interpretative elements" that allow going beyond the letter of the provisions that provide for them[22].

In summary, it may be stated that the CJEU understands that in the interpretation of exemption rules one must pay principal attention to the literal element, but that strict interpretation can never deprive the rules of the VAT Directive of useful effect.

As regards systematic interpretation of exemptions, the CJEU has been affirming that the concepts used in the exemption rules are independent concepts of Community law that must be situated in the general context of the common VAT system[23]. In these terms, it has come to emphasize that the content of exemptions cannot be freely altered by Member States, given that autonomous concepts of Community law are at issue, except in the case where the Council permits[24]. Thus, it is settled case law that the exemptions provided for in article 13 of the Sixth Directive constitute autonomous concepts of European Union Law which have the objective of avoiding divergences in the application of the VAT regime from one Member State to another[25].

It is also customary, in this context, to state that exemptions in VAT assume an objective nature, that is, for the purposes of their granting essentially the nature of the activity pursued is relevant and not the legal nature of the entity that pursues the activity, although, in reality, this is not exactly verified in these terms with respect to the exemptions that interest us for the purposes of our analysis.

2.4.2 The Subjective Scope of Waiver of Exemption in the Area of Health

As we have seen, the objective of the exemption regime applicable to healthcare is to ensure that the benefit of medical assistance does not become inaccessible by reason of the increase in costs that results from taxation in VAT and, therefore, to reduce medical costs to users and thereby promote healthcare.

Thus being, the granting of the possibility of waiving the exemption is a way of restoring the right to deduct the tax which is the cornerstone of the entire VAT system, eliminating "hidden" tax (non-deducted VAT), which penalizes taxable persons, even if these are at the final stage of the production chain, particularly in phases of significant investment, characterized by large acquisitions, allowing them to be taxed under the normal regime (in the present situation at the reduced rate, contained in item 2.7 of List I annexed to the VAT Code) and thereby recover the VAT incurred.

Paragraph b) of no. 1 of article 12 of the CIVA determines that:

"May waive the exemption, opting for the application of the tax to their transactions:

a) ........

b) Hospital establishments, clinics, dispensaries and similar, not belonging to legal persons of public law or to private institutions integrated in the national health system, which carry out provisions of medical and health services and operations closely connected thereto."

To waive exemption, the establishments in question cannot belong to legal persons of public law nor to private institutions integrated in the national health system.

Thus, public hospitals, belonging to the State or to any public legal persons, cannot waive the exemption.

What is understood by establishments not belonging to institutions integrated in the National Health System is precisely what is at issue in the present process.

With respect to establishments belonging to commercial companies, with profit-making purpose, the TA understood until recently that they would not be integrated in the national health system, and could, therefore, waive VAT exemption, applying the tax to their transactions. And this without distinction between establishments of companies that entered into agreements with the Ministry of Health or with Regional Health Administrations or other public health subsystems and those that had not entered into similar agreements.

The change in understanding on the part of the TA is based on the concept of National Health System, contained in the legal text, which determines the subjective scope of the right to exemption.

According to the tax administration's understanding, for the correct interpretation of article 12 the concept of national health system should be sought from the Health Framework Law (Law no. 48/90, of 24 August, with amendments introduced by Law no. 27/2002, of 8 November). And, in accordance with such understanding, the concept to be adapted in the interpretation of article 12 would be that reflected in no. 1 of Base XII of said Health Framework Law:

"The health system is constituted by the National Health Service and by all public entities that develop activities of promotion, prevention and treatment in the area of health, as well as by all private entities and all independent professionals that agree with the first to provide all or some of those activities."

In conformity with the aforesaid understanding, private entities that agree with the State for the provision of activities of promotion, prevention and treatment in the area of health become part of the National Health System, which, in terms of VAT, translates into the fact that they cannot waive the exemption in question.

The Tax Administration further intends that this understanding derives from EU case law, especially the Rulings issued in Processes 141/00 and 45/01, in which it was discussed what should be understood for the purposes of the exemption provided for in the then Sixth Directive, by "organisms duly recognized by Member States".

Now, it does not seem to us that the correct definition of the subjective scope of the waiver of exemption can be determined by an alleged concept of National Health System contained in the Health Framework Law and that the EU case law has that meaning that the TA now intends to attribute to it.

First and foremost, the Health Framework Law does not define National Health System. Base XII deals with "health system" and not with National Health System.

The subjective scope of the exemption in question cannot be determined by simple reference to the Health Framework Law. There is no legal concept of national health system, inherent in the said Health Framework Law. In regulating, in its Chapter II, the "entities providing healthcare in general", the Law defines, at least, three sets: the health system (no. 1 of Base XXII), the National Health Service (no. 2) and the "national network of healthcare provision" (no. 4).

The National Health Service has a univocal definition, in Base XII, no. 2: it is constituted by State organisms that operate in the area of health. Its characteristics are listed in Base XXIV:

"The National Health Service is characterized by:

a) Being universal as to the population covered;

b) Providing integrated global care or ensuring its provision;

c) Being potentially free for users, taking into account the economic and social conditions of citizens;

d) Guaranteeing equity in the access of users, with the objective of mitigating the effects of inequalities economic, geographic and any other in access to care;

e) Having regionalized organization and decentralized and participatory management."

It is known that the General Tax Law, in its article 11, no. 2, determines that "whenever, in tax rules, terms specific to other branches of law are employed, they must be interpreted in the same sense that they have there, unless otherwise directly results from the law." However, there are various elements that demonstrate, in this case, that the tax law did not employ national health service in the technical sense, even ignoring that the expression "national health service" does not have an exact correspondence in the Health Framework Law.

First and foremost, the CIVA is much earlier than the Health Framework Law, and article 12 has not undergone any modification regarding the use of that expression.

As stated by Professor Xavier de Basto in his Opinion in the annex[26], "The legislator of the CIVA – I can state with certainty – did not take as a paradigm any concept of national law in delineating the set of hospital establishments, clinics, dispensaries and similar to which it wanted to attribute the right to waive tax exemption. There was no legislation at the time that delimited the concept of national health system. In the CIVA, the notion of national health system was thus used with a sense parallel to that in which, in the rule of exemption from VAT for education services, the notion of National Education System was used (no. 9 of article 9). Here as there, the right of reference was not national law, but rather EU law.

If any reference to national law could have occurred, it would be for the constitutional norm on the right to health, which is article 64 of the Constitution of the Portuguese Republic. There reference is made (in paragraph a) of no. 2) to a "universal and general national health service and, taking into account the economic and social conditions of citizens, potentially free", which clearly excludes entities with profit-making purposes.

It was, however, above all, a matter of legislating in respect of the EU directive. In the case of health, the rule of reference, to be transposed into national tax law, was the disposition of the then 6th VAT Directive (now Directive 2006/112/CE of the Council, of 28 November 2006) that delimits the scope of VAT exemption for establishments not belonging to organisms of public law and, reflexively, as we have seen, also determines the subjective scope of the exemption.

The national legislator used the expression "private institutions not integrated in the national health system" to encompass, as results from EU law, private entities, working in the area of medical and health services and others connected with these in conditions socially different from those practiced in public establishments. This is the correct interpretation, in our view, of article 12 of the CIVA as to the subjective scope of the right of waiver.

And if we still want further assurance that this is so – and that the expression "not integrated in the national health system" does not have to be understood in the approximate sense that results from the Health Framework Law – it is enough that we note that the legislator of the CIVA itself was not univocal in defining what are the private entities that can waive the exemption. In fact, when it came to, in "item" 2.7 of List I annexed to the CIVA, to establish the reduced rate applicable to the provision of medical and health services and related operations carried out by hospital establishments, clinics, dispensaries and similar which, in accordance with article 12 of the CIVA, can waive the exemption, the legislator used the expression "National Health Service" (with capital letters), and not the alternative national health system (with lowercase letters), which it had used in article 12, no. 1. And the rule contained in that "item" was even introduced later to the publication of the CIVA, which initially did not provide for reduced rate for those service provisions.

Thus being, we conclude that the tax law did not use these expressions in the technical sense in the sense that they have in the branch of law to which they belong.

With no express and case-by-case recognition of the establishments that practice the such "socially analogous conditions" of which the directive speaks, the correct delimitation must take into account the purpose of the legal persons involved, and the way in which the services are provided. The national legislator, taking as a paradigm the relevant rule of the 6th directive, only excluded from the waiver of exemption hospitals, clinics, dispensaries and similar belonging to public legal persons and private institutions that are integrated in the so-called "social economy". In these terms, the rules of the CIVA (no. 1 of article 12 and item 2.7 of List 1) do not exclude from the right to waive commercial companies that have entered into agreements with the National Health Service for the provision of medical services. It is not the existence of these agreements that, without more, integrates these entities in the national health system, for the purposes of the CIVA, transforming them into operators of the social economy sector.

Furthermore, this understanding, contrary to that invoked by the TA, is not called into question by the CJEU's case law on the matter, but rather the opposite."

Although there are no CJEU case law decisions that specifically address the question of when a private hospital establishment carries out services in conditions socially analogous to those prevailing for "organisms of public law", the Court has pronounced itself on several occasions on the requirements that must be met for a private entity to be considered as "another establishment of the same nature [to hospital establishments, medical care and diagnostic centers] duly recognized" practicing conditions analogous to those imposed on legal persons of public law, for the purposes of article 132, no. 1, paragraph b), of the VAT Directive, and consequent application of the exemption regime.

In this context see the Dornier Rulings[27], the L.u.P Ruling[28], and more recently, the Copy Gene Ruling[29]. In all three cases, the issue was the concept of "organism duly recognized" by the Member State as practicing conditions analogous to those imposed by similar organisms of legal persons of public law. Even without express recognition, the Court provided criteria for determining under what conditions a private entity should be considered "another establishment of the same nature duly recognized", for the purposes of article 132, no. 1, paragraph b), of the VAT Directive. In the Copy Gene case the Court, recalling what it had already stated in prior proceedings, came to establish the following criteria for that purpose:

"In this respect, to determine the establishments which should be 'recognized' within the meaning of the said provision, it is for the national authorities, in accordance with European Union law and under the supervision of the national courts, to take into account several elements, among which are the character of general interest of the activities of the taxable person in question, the fact that other taxable persons that have the same activities already benefit from similar recognition, as well as the fact that the costs of the services in question are possibly assumed in large part by health insurance funds or by other social security organisms (see, in this sense, the aforementioned rulings, Kügler, n.ºs 57 and 58; Dornier, n.º 72 and 73; and L.u.P., n.º 53)."[30]

One of the criteria pointed out is who bears the costs of the services. The Court admits that contracting with insurance funds or social security organisms - supposedly public organisms - is an indication to be taken into account for the service provider to have the qualification of organism recognized as practicing conditions analogous to those of public organisms - therefore exempt from VAT for the purposes of the Directive (and, consequently, unable to waive the exemption). But it is clear that it only admits this if the costs of the services are "assumed in large part by health insurance funds or by other social security organisms", since only thus can socially analogous conditions be verified.

The Ines Zimmermann Ruling goes even further, in confirming that an activity that is about two-thirds assumed by social security organisms constitutes "an element that can be taken into account to determine the organisms whose "social character", within the meaning of article 13°, A, no. 1, paragraph g), of the Sixth Directive [current 132º, no. 1, b) of the VAT Directive], should be recognized for the purposes of this provision"[31].

Note that already before this Tribunal also pronounced itself in the same sense in an identical situation in Process 278/2013-T, which it is appropriate to call upon, and whose main conclusions we also go on to reproduce:

"The Portuguese legislator opted for the formulation of a negative requirement applicable to the 'private institutions integ[rate in the national health system]...

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