CAAD 355/2018-T: VAT Exemption in Dentistry & Waiver Under Article 12(1)(b) CIVA Ruled On

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Magda Feliciano and Henrique Nogueira Nunes, designated by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 25 July 2018, A..., S.A., Tax Identification Number..., with registered office at ..., no...., ..., rooms ... to..., ...-... Porto, in its capacity as incorporating company, following a merger operation incorporating the company B..., LDA., holder of Tax Identification Number..., filed an application for constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the following additional VAT assessments and compensatory interest, relating to the years 2013 to 2016, in the total amount of €167,453.79:

To support its claim, the Applicant submits, in summary:

• The thesis presented by the Tax Authority has no support either in the letter or in the spirit of the norm to which it relates, and is furthermore manifestly contrary to the principles governing VAT, in particular the so-called principle of neutrality which opposes the fact that similar service provisions that are in competition with each other should be treated differently from the VAT perspective;

• it is unequivocally clear from the letter of the law that the exemption does not depend on hospitalization/internment, but only on the provision of medical assistance services, provided that they are provided by hospital establishments, medical and diagnostic assistance centres and other establishments of the same nature duly recognized;

• internment/hospitalization is not a requirement of the exemption under subparagraph (b) of Article 11(1) of the Sixth Directive, since dispensaries are not establishments that provide medical services involving the internment of patients, and if the norm covers dispensaries for being establishments of the "same nature", it must also cover, by a fortiori argument, clinics since these are more than establishments of the "same nature" being subsumable in the concept of "medical and diagnostic assistance centres", therefore medical clinics (which include dental clinics) are exempt under Article 9(2) of the VAT Code and, as such, can waive the exemption in accordance with the provisions of subparagraph (b) of Article 12(1) of the same statute.

On 26-07-2018, the application for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Applicant did not appoint an arbitrator, and therefore, pursuant to Article 6(2)(a) and Article 11(1)(a) of the RJAT, the President of the Ethics Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the charge within the applicable period.

On 12-09-2018, the parties were notified of these designations and did not manifest any intention to refuse any of them.

In accordance with Article 11(1)(c) of the RJAT, the collective Arbitral Tribunal was constituted on 02-10-2018.

On 02-11-2018, the Respondent, duly notified for that purpose, submitted its response defending itself solely by way of challenge.

Pursuant to Articles 16(c) and (e) and Article 29(2), both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

After a period for submission of written submissions was granted, these were submitted by the Applicant, commenting on the evidence produced and reiterating and developing its respective legal positions.

It was indicated that the final decision would be notified by the end of the period referred to in Article 21(1) of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2(1)(a), 5 and 6(2)(b) of the RJAT.

The parties have legal standing and capacity, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The proceedings are not subject to any nullities.

Thus, there is no obstacle to the examination of the case.

Having considered all the foregoing, it is necessary to render a decision.

II. DECISION

A. MATTER OF FACT

A.1. Facts established as proven

• The Applicant, following a merger operation registered on 22-12-2016, incorporated into its sphere the company "B..., Lda.".

• As a result of the said merger, the Applicant assumed the status of holder of all the rights and obligations of "B..., Lda.", the incorporated company.

• "B..., Lda." is a commercial company that, in the years in question, and until its incorporation into the Applicant, was engaged in the activity of dental medicine and related activities.

• The now Applicant is engaged in the provision of dental medicine and odontology services in an establishment open to the public, which is embodied in the performance of medical consultations and a whole set of treatments and/or surgical acts within the scope of dental medicine, as well as supplementary diagnostic examinations, such as radiographs, without, in any case, involving the hospitalization or internment of patients.

• On 01-10-2012, "B..., Lda." submitted a Declaration of Changes of Activity, by means of which it waived the VAT exemption.

• Based on that information, the competent Tax Office integrated "B..., Lda." into the normal quarterly regime of that tax.

• As a consequence of that classification, the now Applicant subjected to VAT all operations carried out in the context of the activities developed, as well as deducted all the tax borne in the acquisition of goods and services.

• "B..., Lda." was subject to a general scope tax audit inspection covering the years 2013 to 2016, authorized by Service Orders Nos. OI2017..., OI2017..., OI2017... and OI2017....

• The tax audit inspection was motivated by a request for VAT refund submitted by "B...", in the amount of €8,691.57, relating to the period of 201612T.

• In 2018, the Applicant was notified of the conclusion of the tax audit procedure.

• From the final Report of the tax audit procedure, it appears, among other things, the following: [text omitted in original for brevity]

• As a result of the said inspection, the following additional VAT assessments and compensatory interest were notified to the Applicant, on behalf of "B..., Lda.", in the total amount of €167,453.79: [table as reproduced above]

A.2. Facts established as not proven

• That the Applicant has paid the assessments which are the subject of the present arbitral action.

• That the Applicant has provided security for suspension of enforcement proceedings relating to the assessments which are the subject of the present arbitral action.

A.3. Grounds for the proven and unproven matters of fact

With regard to matters of fact, the Tribunal does not have to pronounce on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to distinguish proven from unproven matters (see Article 123(2) of the Code of Tax Procedure and Process and Article 607(3) of the Code of Civil Procedure, applicable by virtue of Article 29(1)(a) and (e) of the RJAT).

Thus, the facts relevant to the judgment of the case are selected and delineated according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former Article 511(1) of the Code of Civil Procedure, corresponding to the current Article 596, applicable by virtue of Article 29(1)(e) of the RJAT).

Therefore, having regard to the positions taken by the parties, in light of Article 110(7) of the Code of Tax Procedure and Process, the documentary evidence and the administrative file attached to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the Administrative Court of Appeal - Southern Circuit of 26-06-2014, rendered in Case No. 07148/13, "the probative value of the tax audit report (...) may have probative force if the assertions contained therein are not challenged".

The facts established as not proven are due to the lack of evidence regarding them.

Allegations made by the parties and presented as facts, consisting of strictly conclusive statements, not susceptible to proof and whose truthfulness is to be assessed in relation to the concrete matter of fact above consolidated, were neither established as proven nor as unproven.

B. ON THE LAW

In the context of the present arbitral action, this Tribunal must verify the legality of the VAT assessments impugned, identified above.

The question to be decided has already been raised and examined in Cases No. 168/2015-T, No. 782/2015-T, No. 681/2016, No. 682/2016 and No. 169/2017, and the arbitral tribunals have judged matters entirely identical to those of the present proceedings, whose conclusions we follow closely as we concur with them.

First, it is necessary to conclude on the legality of the decision of the Tax and Customs Authority regarding the classification of the Applicant's activity, in the context of VAT, and, thereby, to decide whether the same is susceptible to being covered by the provisions of Article 9(1) or Article 9(2) of the VAT Code and, consequently, whether it is susceptible to waiver of the tax exemption.

For this purpose, it is important to note Articles 9 and 12 of the VAT Code:

Article 9

Exemptions in Internal Operations

The following are exempt from the tax:

1. Service provisions made in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions;

2. Medical and health service provisions and operations closely connected therewith made by hospital establishments, clinics, dispensaries and similar establishments;

(...)

Article 12

Waiver of Exemption

1 - May waive the exemption, opting for the application of the tax to their operations:

(...)

b) Hospital establishments, clinics, dispensaries and similar establishments, not belonging to legal persons governed by public law or to private institutions integrated into the national health system, which make medical and health service provisions and operations closely connected therewith;

(...)

2 - The right of option is exercised by filing, at any tax office or other legally authorized location, a declaration of commencement or changes, as applicable, taking effect from the date of its filing.

3 - Having exercised the right of option in accordance with the preceding numbers, the taxable person is obliged to remain in the regime for which he has opted for a period of at least five years, and after such period, if he wishes to return to the exemption regime:

a) Present, during the month of January in one of the years following that in which the period of the option regime has been completed, the declaration referred to in Article 32, which takes effect from 1 January of the year of its filing;

b) Subject the remaining inventory to taxation and proceed, in accordance with Article 24(5), to the adjustment of the deduction for goods in fixed assets.

Article 9 of the VAT Code transposed into the national legal system Article 132 of Directive No. 2006/112/EC, of 28-11-2006, where it reads that:

1. Member States shall exempt the following operations:

(...)

b) Hospitalisation and medical care, and operations closely related thereto, provided by bodies governed by public law or, under conditions of social assistance comparable to those applying to such bodies, by hospital establishments, medical and diagnostic assistance centres and other establishments of the same nature duly recognized;

c) Service provisions of assistance provided in the exercise of medical and paramedical professions, as defined by the Member State in question; (…)

Thus, subparagraph (b) of Article 12(1) of the VAT Code permits only the waiver of the exemption for entities exempted and classified under Article 9(2) of that same code.

Specifically, and as stated in Case No. 681/2016-T, "the waiver of VAT exemption is only possible if the activity developed by the Applicant is that of 'medical and health service provisions and operations closely connected therewith made by hospital establishments, clinics, dispensaries and similar establishments' and provided that the Applicant comes within the concept of 'hospital establishments, clinics, dispensaries and similar establishments, not belonging to legal persons governed by public law or to private institutions integrated into the national health system, which make medical and health service provisions and operations closely connected therewith.'".

The Tax and Customs Authority argues, based on the Kügler case (judgment of the Court of Justice of the European Union of 10 September 2002, rendered in Case C-141/00) that "the exemption provided for in Article 9(1) of the VAT Code operates independently of the legal nature of the service provider, namely, the fact that it is an individual or legal entity, since that exemption is based on subparagraph (c) of Article 132(1) of Directive 2006/112/EC of the Council, of 28 November. (...)" (Point 22 of the Respondent's Response), and that it is intended to exempt medical and paramedical service provisions provided outside those premises, whether in the private home of the service provider, whether in the home of the patient, whether in any other place. And, on the other hand, that Article 9(2) of the VAT Code, which exempts medical assistance service provisions provided in a hospital environment, including closely connected operations, transposes into the internal legal order subparagraph (b) of Article 132(1) of the aforementioned Directive 2006/112/EC.

Considering that the Applicant's activity is exercised outside the hospital environment, the Tax and Customs Authority comes to argue that the exemption applying to it is in accordance with Article 9(1) of the VAT Code.

However, it does not follow from that judgment that, as the Tax and Customs Authority affirms, only hospitals are covered by the scope of subparagraph (b) of Article 132 cited above.

In our view and following the previous Decisions rendered by CAAD, the Court of Justice of the European Union, in the judgment L.u.P. (of 8 June 2006, rendered in Case No. C-106/05), subsequent to the judgment cited by the Respondent, clarified that "Article 13A(1)(b) of the Sixth Council Directive 77/388/EEC of 17 May 1977, (...) should be interpreted to mean that clinical analyses aimed at the observation and examination of patients for preventive purposes, which are carried out, as are those in the main proceedings, by a private law laboratory external to a medical care establishment under the prescription of general practitioners, are capable of being covered by the exemption provided for by that provision as medical care provided by another".

In this L.u.P. judgment, the Court of Justice of the European Union understood that "since clinical analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care' provided for in Article 13A(1)(b) of the Sixth Directive, a laboratory such as that in the main proceedings should be regarded as an establishment of the 'same nature' as the 'hospital establishments' and the 'medical and diagnostic assistance centres' within the meaning of that provision" (point 35).

This is reinforced by what emerges from point 35 of the De Fruytier judgment, of 02-07-2015, rendered in Case No. C-334/14 of the Court of Justice of the European Union, which cites the L.u.P. judgments, C-106/05, points 18 and 35 and CopyGene, C-262/08, point 60, stating "that a private law laboratory that performs clinical analyses should be regarded as an establishment 'of the same nature' as the 'hospital establishments' and the 'medical and diagnostic assistance centres' within the meaning of that provision, since those analyses are covered, having regard to their therapeutic purpose, by the concept of 'medical care'".

Thus, Community case law is sufficiently clear on this matter, to the effect that, as stated in the decision of the arbitral case 168/2015-T, "the exemption provided for in Article 132(b) covers services provided by entities of the types that the Applicant provides, regardless of whether the provision occurs or not in a hospital environment, an interpretation that is in manifest harmony with the text of this norm, as it makes reference to the exemption of operations closely related to hospitalization and medical care provided by 'medical and diagnostic assistance centres.'".

As already stated, European law permits Member States to exempt either "hospitalisation and medical care, and operations closely related thereto, provided by bodies governed by public law or, under conditions of social assistance comparable to those applying to such bodies, by hospital establishments, medical and diagnostic assistance centres and other establishments of the same nature duly recognized", or "service provisions of assistance provided in the exercise of medical and paramedical professions, as defined by the Member State in question".

In the VAT Code, the following are exempt: "service provisions made in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions", and "medical and health service provisions and operations closely connected therewith made by hospital establishments, clinics, dispensaries and similar establishments".

Service provisions made in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions can be made in any location, including the home of the professional or the patient, without the intermediation of hospital establishments, clinics, dispensaries and similar establishments.

As stated in the CAAD Decision in Case No. 169/2017-T "Medical and health service provisions and operations closely connected therewith made by hospital establishments, clinics, dispensaries and similar establishments are not provided directly by professionals to the patient, nor do professionals invoice them to the patient. Health professionals sell their services to the establishment, and it is this establishment that provides and invoices them to patients".

The Applicant provides, in consultation rooms and clinics – and not in any other location – dental medicine and odontology services, and also performs supplementary diagnostic examinations there.

In this way, the Applicant has the subjective conditions that are fundamental to the exemption in subparagraph (b) of Article 132(1) of the Directive. Being that, as is argued by the Applicant, it is not a body that carries out its activity under conditions of social assistance comparable to the activity of bodies governed by public law.

Regarding its classification in national law, the Tax and Customs Authority incorrectly interprets the reference to "dispensaries and similar establishments" in the exemption provided for in Article 9(2) of the VAT Code. For it is in this reference to "dispensaries and similar establishments" that other establishments are included in which "medical and diagnostic assistance centres and other establishments of the same nature" are also included, in accordance with subparagraph (b) of Article 132(1) of Directive No. 2006/112/EC.

Referring again to the Decision rendered in arbitral case No. 168/2015-T:

"The reference to 'dispensaries' clearly encompasses the provision of health services outside that hospital environment, since the meaning of 'dispensary' is that of 'charitable establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines' (...), or 'establishment to give, free of charge, care and medicines to poor patients who can be treated at home' (...).

Moreover, the reference to 'similar establishments', interpreted in accordance with the parallel norm of Article 132(c) of Directive No. 2006/112/EC, which makes reference to 'medical and diagnostic assistance centres and other establishments of the same nature', permits the conclusion that entities of the type of the Applicant, which provides health services of clinical analyses and diagnosis in connection with hospital establishments, would also fall within that concept.

Thus, there is no textual support for the thesis defended by the Tax and Customs Authority that the exemption applicable to establishments of the type of the Applicant is not provided for in Article 9(2) of the VAT Code.".

Being, thus, the applicable norm Article 9(2) of the VAT Code, and because it comes here to permit the classification in a taxation regime, one cannot exclude the possibility of waiver of the exemption provided for in Article 12(1)(b) of the VAT Code.

As stated in Case 682/2016-T, "The fact that the services provided by the Applicant are provided on an outpatient basis, not including, in any case, hospital internment, is irrelevant, since such internment does not constitute a requirement of either Community or national law – in particular, it is not a factor of exclusion from the provision of Article 9(2) of the VAT Code or of inclusion in that of its Article 9(1).".

Thus, it is concluded that the assessments made by the Tax and Customs Authority are vitiated by an error in the application of the law.

This conclusion is not undermined by the argument of the Respondent in the arbitral proceedings (see points 61 et seq. of its Response), regarding the possible violation of the neutrality principle arising from the option for the exemption regime established in Article 12(1)(b) of the VAT Code, to the extent that such does not form part of the factual and legal grounds of the tax acts whose legality now falls to be scrutinized, given that such acts were based on the non-applicability of that norm, by considering the factual requirements of Article 9(1) of the VAT Code to be fulfilled, and not those of Article 9(2) of the same article.

The Tax and Customs Authority finally argues that "the option for the taxation of the operations carried out by the Applicant would only be admissible if the same were classified within the scope of Article 9(2) of the VAT Code and the same were previously communicated, by means of filing the Declaration of commencement of activity or changes, as applicable, always taking effect from the date of its filing" (point 79 of the Response).

Regarding the first premise of the aforementioned argument, it is verified, as has been seen, that the operations carried out by the Applicant are classifiable within the scope of Article 9(2) of the VAT Code.

Regarding the second premise, it is verified, as results from the facts established as proven, that on 01-10-2012, "B..., Lda." submitted a Declaration of Changes of Activity, by means of which it waived the VAT exemption, in accordance with Article 12(1)(b) of the VAT Code, having been classified in the normal VAT taxation regime, with quarterly periodicity, thereby starting to assess and deduct VAT.

Furthermore, it is not proven that the Applicant indicated in the declaration referred to in point 5 of the facts established as proven that in the exercise of its activity it would make transfers of goods and/or provision of services that confer the right to deduction.

Given the foregoing, the Respondent is also not correct in this respect, and no similarity exists between the situation of the present proceedings and that judged by the Administrative Court of Appeal - Southern Circuit in Case 05235/11, to the extent that, among other things, in the respective judgment it is stated that "the applicant adopted inadequate behavior, incapable of permitting the assertion, conscientiously, of having acted as a 'full taxable person' during the entire time, comprising between January 2000 and June 2006.".

The Applicant formulated, cumulatively, alternative requests for indemnitary interest or compensation for undue provision of security.

However, as it is not proven that the Applicant made any payment by virtue of the illegal assessments, nor that it provided any security to stay the respective enforcement, no recognition of any of those rights is possible.

C. DECISION

Accordingly, this Arbitral Tribunal decides to find the arbitral claim entirely well-founded and, consequently:

1. Annul the assessments which are the subject of the present tax arbitral action;

2. Condemn the Respondent in the costs of the proceedings, fixed below.

D. Value of the Proceedings

The value of the proceedings is fixed at €167,453.79, in accordance with Article 97-A(1)(a) of the Code of Tax Procedure and Process, applicable by virtue of Articles 29(1)(a) and (b) of the RJAT and Article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,672.00, in accordance with Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the claim was entirely successful, in accordance with Articles 12(2) and 22(4), both of the RJAT, and Article 4(4) of the aforementioned Regulation.

Let it be notified.

Lisbon, 8 January 2019

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Magda Feliciano)

The Arbitrator Member

(Henrique Nogueira Nunes)