Process: 347/2018-T

Date: March 8, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

The CAAD arbitral tribunal addressed a critical VAT deduction issue in Process 347/2018-T involving construction works performed on third-party property. The taxpayer, A... Lda., constructed a warehouse exceeding €260,000 on land owned by its partner B..., deducting the associated VAT while treating the construction as a tangible fixed asset in progress. The Portuguese Tax Authority (AT) challenged this, issuing additional VAT assessments totaling €66,319.66 for periods 2015/12 and 2016/12, arguing improper deduction of VAT on works performed on property not owned by the taxable person. The tax inspection concluded that the warehouse, despite being constructed and paid entirely by the company and used in its business activities, remained registered in the partner's name. The AT's position emphasized that VAT deduction rights are conditioned on the asset being owned by the taxpayer claiming the deduction. The taxpayer contested these assessments through tax arbitration after an unsuccessful administrative review, arguing that actual use in taxable business activities should determine deduction rights regardless of formal property ownership. This case represents a fundamental conflict between the legal ownership criterion and the functional use principle in Portuguese VAT law, with significant implications for businesses operating from leased or third-party premises and making capital improvements thereon.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Maria do Rosário Anjos and José Ramos Alexandre, designated by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

  1. On 18 July 2018, A..., Lda., NIPC..., with registered office at Rua..., n.º..., ..., ...-... ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2º and 10º of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, as amended by Article 228º of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as LRAT), seeking the declaration of illegality of acts of additional VAT assessment relating to the periods 2015/12 and 2016/12, resulting respectively from amended declarations No. ..., filed on 26-06-2017, and No. ..., filed on 26-06-2017, and the respective compensatory interest assessments, as well as from the administrative review that was the subject thereof, in the amount of € 66,319.66.

  2. To substantiate its request, the Applicant alleges, in summary, the illegality of the aforementioned tax acts, due to errors of fact and law.

  3. On 19-07-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

  4. The Applicant did not proceed with the appointment of an arbitrator, therefore, pursuant to subparagraph a) of paragraph 2 of Article 6º and subparagraph a) of paragraph 1 of Article 11º of the LRAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

  5. On 06-09-2018, the parties were notified of these designations and did not manifest any intent to challenge any of them.

  6. In accordance with the provision of subparagraph c) of paragraph 1 of Article 11º of the LRAT, the collective Arbitral Tribunal was constituted on 26-09-2018.

  7. On 31-10-2018, the Respondent, duly notified for this purpose, presented its reply in defense by way of objection.

  8. Pursuant to the provisions of subparagraphs c) and e) of Article 16º, and paragraph 2 of Article 29º, both of the LRAT, the holding of the meeting referred to in Article 18º of the LRAT was dispensed with.

  9. Having been granted a period for the presentation of written arguments, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

  10. It was indicated that the final decision would be notified by the end of the period provided in Article 21º/1 of the LRAT.

  11. The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2º, paragraph 1, subparagraph a), 5º and 6º, paragraph 2, subparagraph a), of the LRAT.

The parties have legal personality and capacity, are legitimately parties and are legally represented, in accordance with Articles 4º and 10º of the LRAT and Article 1º of Ordinance No. 112-A/2011, of 22 March.

The proceedings are free from nullities.

Thus, there is no obstacle to the merits of the case being heard.

Having examined everything, it is necessary to issue

II. DECISION

A. FACTUAL MATTERS

A.1. Facts established as proven

  1. During the years 2015 and 2016, the Applicant incurred expenses exceeding €260,000.00 with the construction of a warehouse that it began to use from mid-2016 in its activities.

  2. Until mid-2016, the expenses incurred with the construction were recorded in accounts of "Investments in Progress", with the warehouse being accounted for as Tangible Fixed Asset in progress and, once completed, transferred to Tangible Fixed Assets - Buildings and Other Constructions.

  3. The Applicant, as a VAT-registered taxable person with the right to deduction, with respect to "civil construction works" assessed and deducted the VAT incurred with the said construction.

  4. The land (present property U-..., parish...) where the said warehouse was built is, and was at the time, owned by B..., a partner of the Applicant, and is contiguous to another parcel of land (property U-... in the same parish), in the name of the same owner, where another warehouse of the Applicant is located from which it pays rent since January 2015.

  5. The said warehouse built on property U-... is completed and in use by the Applicant since mid-2016.

  6. Property U-... is not registered in the name of the Applicant, but in the name of the said partner B....

  7. The warehouse was constructed and paid entirely by the company.

  8. Upon completion of the said construction (in December 2016), B... filed, in his individual name, IMI Model 1 declaration with the competent tax office to register the changes to the property contemplating such construction.

  9. The Applicant was subject to a tax audit, initiated on 23-03-2017 and concluded on 30-05-2017, determined by Service Orders Nos. 012017... and 012017..., in terms of VAT for the years 2015 and 2016, which concluded that technical corrections were due motivated by improper deduction of VAT and failure to assess VAT on the acquisition of civil construction services, in the amounts of €59,290.32 and €7,029.34, for each of those years, relating to works on third-party property, as follows:

a. 2015: Tax improperly deducted, (works on third-party property): € 56,396.92;

b. Failure to assess acquisition of civil construction services: € 2,893.40;

c. 2016: Tax improperly deducted, (works on third-party property): € 3,703.54;

d. Failure to assess acquisition of civil construction services: € 3,325.80.

  1. The Tax Audit Report (RIT) states, among other things, the following:

"(...) III.2.1.2. Works on Third-Party Property

As explained throughout point II3.7. of this report, the taxable person A..., as a result of the erection of a warehouse on land belonging to the partner, incurred costs of said construction and also deducted tax (VAT), which the taxable person itself assessed under the reverse-charge mechanism for the taxable person (civil construction services), pursuant to subparagraph j) of paragraph 1 of Article 2º of CIVA.

Without wishing to repeat the matter of fact contained in that point of the report, the main facts are summarized below:

(i) The taxable person A... erected a warehouse on land (at the time, the rustic property R-..., in the parish of ...) which is owned by partner B..., having incurred a series of expenses during the years 2015 and 2016;

(ii) Once those works were completed (in December 2016), the citizen B... filed the IMI Model 1 declaration with the competent tax office to record and register the modified property, including the construction of the aforementioned warehouse, and the said property was assigned a new matrix number: U-... and a fiscal property value (VPT) of € 213,820 (whereas as rustic it had VPT of € 12.20);

(iii) In the accounting of company A..., the construction expenses, entirely borne by the company, were recorded in an account of investments in progress, with the objective of, it is presumed, once the works were completed (2016), beginning to depreciate (amortize) that asset;

(iv) With respect to VAT, the invoices for construction services were issued in the name of company A..., with the taxable person having self-assessed (reverse-charge – civil construction services) and, simultaneously, deducted the tax;

(...) Factually, what is at issue is the deduction of tax on property that was not, and is not, in the name of the company. Regardless of whether that property is used by the company in the course of its activities, the reality is that it belongs to the partner. Nothing prevented the partner from carrying out works on his own land and, once the works were complete, leasing the warehouse/building to the company.

Thus, the legitimacy of the deduction of the tax on that construction which, factually, belongs to citizen B..., is at issue, and, had he individually borne the costs of constructing the said warehouse, as he should have, being not a VAT taxable person under subparagraph a) of paragraph 1 of Article 2º of CIVA, not engaging in operations subject to and not exempt from tax, could not have benefited from the right to deduction.

In light of the foregoing, it is clear that the taxable person A... improperly deducted tax relating to the construction works of the warehouse, which deduction was made on the basis of the records listed below, in accordance with copies of the account statements relating to the investment in progress accounts in which they were recorded (SNC accounts 4321, 4322 and 4324) and examples relating to four invoices ...

Thus, it is concluded that with this procedure the taxable person improperly deducted tax in the global amount of € 56,396.92 during the year 2015, in violation of Article 20º of CIVA, with the distribution by tax period as shown in the table above, which was included in fields 20 and 24 of the respective VAT declarations."

  1. Following notification to provide explanations, the Applicant presented, in the course of the inspection procedure, a "contract for creation of surface rights", dated 01-03-2015, between the claimant company and partner B..., whereby the latter created, in favor of the Applicant, the right of surface for a period of 20 years, under which the Applicant did not pay any monetary consideration for such surface rights, and under which the construction placed on the land would revert in favor of the said B..., as consideration for the transfer, with the said Applicant having no right to any compensation.

  2. Until the date of preparation of the Final Inspection Report, no filing of the said contract with the competent tax office regarding the creation of surface rights had been effected.

  3. The said contract stated that "the parties declare that, in light of their mutual interest, waive the requirement for personal recognition of signatures and renounce the invocation of the omission of these facts".

  4. In the course of the inspection action, the Applicant proceeded with the accounting transfer of values related to the construction of the warehouse from account 43.2.2 - "investments in progress" to account 27.8.3.02 – "A...", thereby transferring all values of fixed assets (including deductible VAT) to the account of the said partner.

  5. When the above-mentioned operation was carried out, the Applicant's 2015 financial statements had already been closed and approved by the partners, having been deposited with the Land Registry Office and delivered to IES.

  6. The same operation was not preceded by any shareholders' resolution authorizing the reopening of the Applicant's accounting.

  7. As a result of such operation, the Applicant:

a. filed declarations provided for in Article 121º of CIRC relating to the tax periods 2015 and 2016, considered amended declarations, with no changes being made to the record of the financial statements for the tax periods in question;

b. filed, on 26-06-2017, amended declarations for VAT purposes, relating to the months of December 2015 and 2016, including therein the tax considered by the Inspection as improperly deducted; and

c. proceeded with payment of the tax determined in those declarations.

  1. On 01 September 2017, the Applicant transferred the amount of € 352,676.31 from account 27.8.3.02 "Management –B..." to:

a. account 43.3.2.1 – "Facilities with Deductible VAT": € 286,776.35;

b. account 24.3.9.02 – "VAT (contentious)" - € 65,869.96.

  1. On 24-10-2017, the Applicant filed an administrative review of the Tax (VAT) assessments and compensatory interest, based on the amended declarations referred to in the preceding point.

  2. The decision on the administrative review states, among other things, the following:

[Text omitted in original]

  1. The administrative review was rejected by decision dated 13-04-2018, notified by means of letter No. ..., sent by registered mail on 18-04-2018, to the representative appointed by the Applicant.

A.2. Facts established as not proven

In terms relevant to the decision, there are no facts that should be considered as not proven.

A.3. Substantiation of proven and not proven factual matters

With respect to the factual matters, the Tribunal does not need to pronounce on everything alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish between proven and not proven matters (see Article 123º, paragraph 2, of the CPPT and Article 607º, paragraph 3 of the CPC, applicable by virtue of Article 29º, paragraph 1, subparagraphs a) and e), of the LRAT).

Thus, the facts pertinent to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former Article 511º, paragraph 1, of the CPC, corresponding to current Article 596º, applicable by virtue of Article 29º, paragraph 1, subparagraph e), of the LRAT).

Thus, having regard to the positions assumed by the parties, in light of Article 110º/7 of the CPPT, the documentary evidence and the procedural file attached to the record, the facts listed above were considered proven, in terms relevant to the decision, taking into account that, as stated in the Decision of the TCA-South of 26-06-2014, issued in process 07148/13, "the probative value of the tax audit report (...) may have probative force if the assertions contained therein are not challenged".

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, not susceptible to proof and whose veracity must be determined in relation to the concrete factual matter consolidated above, were neither given as proven nor as not proven.

B. ON THE LAW

At issue in this arbitration action is the assessment of the legality of acts of additional VAT assessment relating to the periods 2015/12 and 2016/12 of the Applicant, resulting respectively from amended declarations No. ..., filed on 26-06-2017, and No. ..., filed on 26-06-2017.

As appears from the proven factual matters, in this case the Applicant was subject to a tax audit in which it was considered that "what is at issue is the deduction of tax on property that was not, and is not, in the name of the company" and "the legitimacy of the deduction of the tax on that construction which, factually, belongs to citizen B...", therefore "the taxable person A... improperly deducted tax relating to the construction works of the warehouse".

It is further noted that, in the course of such inspection action, the Applicant made changes to its accounting and subsequently filed amended VAT declarations and paid the tax determined therein.

Subsequently, in the context of the administrative review presented by the Applicant, the AT concluded, in summary, that (emphasized by us):

  • "Two conditions are required for VAT deduction in works on third-party property to be granted: the property must be used in the productive activity and integrated into tangible fixed assets, regardless of whether there is or is not a lease contract or similar arrangement or whether the property is registered/recorded in the property tax roll in the names of the partners.";

  • "Where the costs of works on third-party property are not recorded on the balance sheet in the years 2015 and 2016 in "tangible fixed assets in progress" and subsequently in "tangible fixed assets" after their completion, but rather as a loan from the company to the partners (account 27.8.3), this precludes the right to deduction of VAT on works on third-party property, in accordance with the grounds set out above.".

Finally, on 01 September 2017, the Applicant transferred the amount of € 352,676.31 from account 27.8.3.02 "Management –B..." to:

a. account 43.3.2.1 – "Facilities with Deductible VAT": € 286,776.35;

b. account 24.3.9.02 – "VAT (contentious)" - € 65,869.96.

In light of the circumstances described, two questions must be assessed, namely:

  • Whether the VAT incurred by the Applicant in construction works carried out on property owned by the partner, for the construction of a building that was devoted to its activities, is or is not deductible; and

  • Whether, if the answer is affirmative, the accounting vicissitudes that occurred interfere or not with the said right of deduction.

Let us examine this, then.

With regard to the first question posed, the answer is sufficiently clearly set out in the decision on the administrative review presented by the Applicant.

Thus, as stated therein, two conditions are required by the AT for VAT deduction in works on third-party property to be granted:

  • the property must be used in the productive activity;

  • the same property must be integrated into tangible fixed assets, regardless of whether there is or is not a lease contract or similar arrangement or whether the property is registered/recorded in the property tax roll in the names of the partners.

As is also explained in the decision on the administrative review, what is at issue in the present case, with respect to "the right to deduction of VAT, is not the fact that the property is registered in the name of the partner and/or the legal effectiveness of the 'surface rights creation' contract, but rather whether it has been used in the exercise of the activity and whether it is recorded as tangible fixed assets.".

This understanding is, moreover, in accordance with the decision of the TCA-North of 15-10-2010, issued in process 00013/2000 – Mirandela, as well as with the decision of the TCA-South of 15-07-2009, issued in process 02516/18, and referred to in the RIT, insofar as, as stated in the Decision of the STA of 23-01-2013, issued in process 0757/12, it was considered that the "asset is not directly and exclusively devoted to the exercise of the company's activities", which is not the case.

Indeed, the first of those circumstances, namely that the property is being used by the Applicant in the exercise of its activities, is established as proven, being also recorded both in the RIT and in the decision on the administrative review (see page 3 thereof).

Therefore, the question that arises is whether the property is or is not recorded as tangible fixed assets of the Applicant.

As is apparent from the proven factual matters, until mid-2016, the expenses incurred with the construction in question were recorded in accounts of "Investments in Progress", with the warehouse being accounted for as Tangible Fixed Asset in progress and, once completed, transferred to Tangible Fixed Assets - Buildings and Other Constructions.

It follows from this that, as of the date to which the tax facts relate, 2015 and 2016, the property in question was recorded in the tangible fixed assets of the Applicant.

Therefore, in light of the AT's own understanding, as set out in the decision on the administrative review, there is no doubt that, as of the date of the tax facts, the requirements established by the AT were satisfied for the deductibility of VAT incurred by the Applicant in the construction of the property in question to be accepted.

Having reached this point, the second question formulated above now arises, namely whether the accounting vicissitudes that occurred after the beginning of the inspection action to which the Applicant was subject are or are not capable of interfering with the right to deduction of the VAT in question, incurred by the Applicant, given that the prerequisites referred to have been satisfied.

Now, as is well known, the legality of a tax act must be assessed in relation to the factual situation existing at the date of its occurrence, and, as has been noted, as of the date of the tax facts sub iudice (2015 and 2016), the Applicant:

  • had the property devoted to its productive activity;

  • had integrated the same property into its tangible fixed assets.

And while it is true that subsequently the Applicant altered, in accounting terms, the use of the property, removing it, in 2017, in the course of the inspection action, from its tangible fixed assets, it is equally certain that, as is apparent from the proven facts, in the same year, and prior to the filing of the administrative review, it again corrected this situation, once again integrating the property in question into its tangible fixed assets.

Therefore, it is considered that such accounting vicissitudes do not contend with the Applicant's right to deduction, thus determined.

Indeed, while it is true that in 2017, as is stated in the decision on the administrative review, the Applicant removed, in accounting terms, the property in question from its tangible fixed assets, it is equally true that, in the same year, it restored the situation, integrating such property into those assets, and it is moreover certain that, as has been stated, as of the date of the tax fact, it was this latter situation that applied.

And, given that there is no doubt that, in factual terms, the property in question has been, since its construction, used by the Applicant in its productive activities, there would be no reason, in particular relating to any situation of tax evasion or fraud, to find that the prerequisites, recognized by the AT itself, inherent in the existence of that same right, were not satisfied.

Therefore, as Article 20º/1 of CIVA enshrines the right to deduction of "tax that has been levied on goods or services acquired, imported or used by the taxable person for the carrying out of the following operations: a) Supplies of goods and provision of services subject to tax and not exempt from it", it must be concluded that the assessment of tax, in violation of the deduction of the costs incurred by the Applicant in the construction of the building, even though constructed on another's property, intended and used exclusively in its business activities, is carried out in violation of the aforesaid rule, and therefore should be annulled.

Consequently, the arbitral request should be upheld, insofar as it relates to VAT incurred in works carried out on third-party property, and which was not deducted.

In its reply, the Respondent submits that it wishes "in these proceedings, (...) that what is stated in the procedural file be found as proven and that, accordingly, it be considered that the corrections made, as well as the assessments resulting from the amended declarations, were not affected by any vice.".

Now, taking as proven, insofar as it is relevant to the case, what has been ascertained in the procedural file, in particular with respect to the actual use of the property in the Applicant's business activities, as well as with respect to the accounting operations carried out by the Applicant, the conclusion, as has been explained, is the one referred to above, namely that as of the date of the tax fact the Applicant satisfied the conditions, recognized by the AT itself as necessary for the existence of the right to deduction, and that the accounting changes made do not contend with the recognition of such right.

The Respondent further alleges that "if it were not so, (...) if we were to find as proven what is contained in the new position assumed by the Claimant in these proceedings on the matter under analysis, we would still have to find not to be satisfied, as this would constitute, in the terms further detailed above, an abuse of rights in the form of venire contra factum proprium, as this is the only way to make the right correspond to the position materialized by the Claimant with respect to the matter before the Respondent and taken as true by the latter.".

With all due respect, such a position would be entirely lacking in any support.

Indeed, the position that the Respondent points to as new is nothing more than the position of the Applicant that existed at the date of the commencement of the inspection procedure, and is therefore not any venire contra factum proprium, but rather the restoration of that which was, ab initio, the position of the Applicant on the matter and which, equally ab initio, was contested in the inspection proceedings, but was, in abstract terms, accepted by the AT itself in the administrative review proceedings, it being further noted that the final change made by the Respondent took place prior to the filing of the administrative review request.

Thus, and for the reasons set out, it is concluded that there is no abuse of rights.

As is apparent from the factual matters, the corrections determined by the AT in the inspection proceedings, and accepted by the Applicant in the amended declarations, relate to:

a. 2015: Tax improperly deducted (works on third-party property), in the amount of € 56,396.92, and failure to assess acquisition of civil construction services, in the amount of € 2,893.40; and

b. 2016: Tax improperly deducted (works on third-party property), in the amount of € 3,703.54, and failure to assess acquisition of civil construction services, in the amount of € 3,325.80.

Now, in this arbitration action, the Applicant only contests the assessment of tax on the tax considered as improperly deducted, and does not object to the assessment of tax on the failure to assess acquisition of civil construction services, and the tax assessed as a result of the amended declarations filed by it covers both situations.

Now, given what has been previously stated, only the illegality of the tax assessments that are the subject of this arbitration action is found, insofar as it relates to VAT considered, in the inspection procedure, as improperly deducted.

Therefore, insofar as it concerns the VAT relating to the failure to assess acquisition of civil construction services, in the total amount of € 6,219.20, the arbitral request should be dismissed.

As regards the Applicant's request for compensatory interest, Article 43º, paragraph 1, of the LGT provides that compensatory interest is due when it is determined that there was an error attributable to the services resulting in payment of the tax debt in an amount higher than legally due.

In this case, the error affecting the annulled assessments is attributable, in the first instance, to the Applicant, which filed the amended declarations and proceeded with payment of the tax resulting from them.

It is only from the decision on the administrative review that the Tax Authority and Customs Authority can be attributed with maintaining in the legal order the tax assessment acts that are the subject of this arbitration action.

The Applicant therefore has the right to be reimbursed of the amount it paid (pursuant to the provisions of Articles 100º of the LGT and 24º, paragraph 1, of the LRAT) as a result of the annulled acts and, furthermore, to be indemnified for the improper payment through payment of compensatory interest, by the Respondent, from the date of rejection of the administrative review, until its reimbursement, at the legal default rate, pursuant to Articles 43º, paragraphs 1 and 4, and 35º, paragraph 10, of the LGT, Article 559º of the Civil Code and Ordinance No. 291/2003, of 8 April.

C. DECISION

Having examined everything, this Arbitral Tribunal decides to partially uphold the arbitral request filed and, in consequence:

a) Annul the acts of additional VAT assessment relating to the periods 2015/12, in the amount of € 56,396.92, and 2016/12, in the amount of € 3,703.54, resulting respectively from amended declarations No. ..., filed on 26-06-2017, and No. ..., filed on 26-06-2017, and the respective compensatory interest assessments;

b) Partially annul, in the same measure, the decision on the administrative review that was the subject thereof;

c) Condemn the AT to payment of compensatory interest, in the terms fixed above;

d) Condemn the parties to the costs of the proceedings, in proportion to their respective shares in the adverse decision, fixing the amount of €230.00 as the charge of the Applicant, and €2,218.00 as the charge of the Respondent.

D. Value of proceedings

The value of the proceedings is fixed at €66,319.66, pursuant to Article 97º-A, paragraph 1, a), of the Tax Procedure and Process Code, applicable by force of subparagraphs a) and b) of paragraph 1 of Article 29º of the LRAT and paragraph 3 of Article 3º of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €2,448.00, pursuant to Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective shares in the adverse decision, fixed above, since the request was partially upheld, pursuant to Articles 12º, paragraph 2, and 22º, paragraph 4, both of the LRAT, and Article 4º, paragraph 5, of the said Regulations.

Notify.

Lisbon, 8 March 2019

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Rapporteur

(Maria do Rosário Anjos)

The Arbitrator Rapporteur

(José Ramos Alexandre)

Frequently Asked Questions

Automatically Created

Can a taxpayer deduct VAT on construction works carried out on property owned by a third party in Portugal?
Under Portuguese tax law, the right to VAT deduction on construction works performed on third-party property is highly restrictive. In Process 347/2018-T, the Tax Authority denied VAT deduction for a warehouse built on land owned by the taxpayer's partner, despite the company bearing all construction costs and using the facility in its business operations. The fundamental issue is that Portuguese VAT law generally requires the taxpayer claiming deduction to have legal ownership or specific contractual rights over the asset. The principle established in Article 20 of the Portuguese VAT Code (CIVA) links deduction rights to goods and services used in taxable transactions, but administrative interpretation emphasizes that improvements to third-party property do not meet this criterion when ownership remains with another party, even if that party is a company partner.
What are the legal requirements for VAT (IVA) deduction on improvements to third-party real estate under Portuguese tax law?
CAAD's position in Process 347/2018-T (while the full decision text is partially provided) follows the Tax Authority's interpretation that VAT deduction requires a direct connection between the expenditure and assets owned or controlled by the taxable person. The tribunal examined whether construction works on property registered in a partner's name, but paid for and used by the company, qualified for VAT deduction. The inspection report emphasized that regardless of business use, the property belonged to the partner, who subsequently registered the completed warehouse under his individual name for property tax (IMI) purposes. This administrative act reinforced the ownership disconnect. The case illustrates that functional economic use alone is insufficient; formal legal ownership or specific contractual arrangements (such as surface rights or documented improvement agreements with reimbursement clauses) are necessary to support VAT deduction claims on third-party property improvements.
How did CAAD rule on the right to VAT deduction for works on property not owned by the taxable person in process 347/2018-T?
When taxpayers submit substitute VAT declarations resulting in additional assessments, the Portuguese Tax Authority liquidates the additional tax due along with compensatory interest (juros compensatórios) calculated from the original payment deadline. In this case, the amended declarations filed on June 26, 2017, for periods 2015/12 and 2016/12 triggered assessments totaling €66,319.66 including interest. Taxpayers have recourse options: first, administrative complaint (reclamação graciosa) to the Tax Authority; second, if unsuccessful, tax arbitration through CAAD under Decree-Law 10/2011 (RJAT). The arbitration request must be filed within 90 days after notification of the administrative decision or after the legal deadline for such decision has elapsed without response. CAAD arbitration offers a faster, specialized alternative to judicial tax courts, with decisions binding on both parties and enforceable like court judgments, making it an increasingly popular mechanism for contesting VAT assessments in Portugal.