VAT Deduction Right in Corporate Restructuring Operations - CAAD Case 404/2018-T

ARBITRAL DECISION

The Arbitrators Professor Doctor Clotilde Celorico Palma, Arbitrator President, António Nunes dos Reis and João Menezes Leitão, Arbitrators members, who constitute this Arbitral Tribunal, hereby agree:

I. Report

1. A..., SA, with single registration number in the Commercial Registry and collective person identification number ..., with registered office at ..., n.º..., ..., ...-... PORTO (hereinafter the Claimant), presented on 27.08.2018, based on the provisions of article 2.º, n.º 1, al. a) and article 10.º, n.º 1, al. a) and n.º 2 of Decree-Law n.º 10/2011, of 20 January, as subsequently amended (Legal Regime of Tax Arbitration, hereinafter LRTA), a request for arbitral pronouncement on tax matters, with a view to declaring the illegality of the dismissal ruling of the administrative complaint, as per notification subject of Official Letter with n.º 2018..., which it presented based on error in self-assessment evidenced in the periodic VAT declarations filed with reference to the period between the fourth quarter of 2015 and the first quarter of 2017, in order to recognize the right to deduction of VAT borne in the indicated periods, in the total amount of €1,629,753.14.

2. In the request for arbitral pronouncement, based on articles 5.º, n.º 3, al. b), 6.º, n.º 2, al. b) and 10.º, n.º 2, al. g) of the LRTA, the Claimant designated as Arbitrator Mr. Dr. António Nunes dos Reis.

Under the terms of n.º 3 of article 11.º of the same LRTA, the Respondent indicated as Arbitrator João Menezes Leitão.

The Arbitrators designated by the parties, pursuant to the provisions of articles 6.º, n.º 2, al. b) and 11.º, n.º 6 of the LRTA, in compliance with the requirements of article 3.º, n.º 2, al. b) of Regulation n.º 112-A/2011, of 22 March, designated, by agreement, Mrs. Professor Doctor Clotilde Celorico Palma as Arbitrator-President.

In conformity with the provision of n.º 7 of article 11.º of the LRTA, and as per communication from the President of CAAD, the Collective Arbitral Tribunal was constituted on 3.12.2018.

1. The Claimant petitions in the request for arbitral pronouncement (hereinafter initial petition or IP), the declaration of illegality of the decision dismissing the administrative complaint filed based on error in self-assessment evidenced in the periodic VAT declarations filed with reference to the period between the fourth quarter of 2015 and the first quarter of 2017, so that the right to deduction of VAT borne in the aforementioned periods is recognized, in the amount of €1,629,753.14, which was not included in the declarations in question, and the annulment of the indicated acts of VAT self-assessment, with the consequent reimbursement of the tax borne in the said amount of €1,629,753.14 and corresponding compensatory interest.

To this end, the Claimant alleges, essentially (cfr. arts. 23.º et seq. of the IP), that the amount of VAT indicated was borne, as per invoices attached to the IP (cfr. also art. 46.º of the IP), in the acquisition of preparatory work for the acquisition of social participation in company B..., SA, with "direct and concrete repercussion in the exercise of its activity, given that it constituted a strategic acquisition of high added value and indispensable for the growth and expansion of such activity" (art. 53.º of the IP), and for subsequent corporate restructuring of the companies in the group, namely with the merger by incorporation of the aforementioned B..., SA into the Claimant (operation of acquisition and corporate restructuring which was designated, in internal terms, as "Project ..."), whereby it considers that the VAT borne with the costs of advisory services in the acquisition of that company and with the consequent corporate reorganization that followed is deductible under the terms of the provisions of articles 19.º and 20.º of the VAT Code (art. 54.º of the IP).

Finally, the Claimant, although it considers there to be no doubts in light of European Law and prevailing jurisprudence, in the event this is not accepted, further requests eventual referral for preliminary ruling to the CJEU for interpretation of Council Directive 2006/112/EC, of 28 November 2006, relating to the common system of value added tax (VAT Directive or DIVA), regarding the question of whether a company should be recognized the right to deduct VAT borne with preparatory costs directly and immediately related to the totality of its economic activity subject to VAT.

1. The Tax and Customs Authority (hereinafter, Respondent or TA), pursuant to article 17.º, n.º 1 of the LRTA, submitted a response, in which it contested the alleged facts and attached documents, and petitioned, as unproven, for the dismissal of the request for arbitral pronouncement.

It also attached the administrative file constituted by the administrative complaint procedure n.º ...2018... (hereinafter AF).

1. By order of the President of the Arbitral Tribunal, it was decided, based on the principles of the autonomy of the Arbitral Tribunal in conducting proceedings, celerity, simplification and procedural informality (articles 19.º, n.º 2, and 29.º, n.º 2, of the LRTA), to dispense with the meeting provided for in article 18.º of the LRTA, as unnecessary, with the proceeding being determined to continue with optional written submissions, which were submitted only by the Claimant.

In conformity with n.º 2 of article 18.º of the LRTA, 30.4.2019 was set as the date for pronouncing the final decision.

1. The Arbitral Tribunal is competent to judge the request for arbitral pronouncement (art. 2.º, n.º 1, al. a) of the LRTA), is regularly constituted (arts. 5.º, n.ºs 1 and 3, al. a), 6.º, n.º 2, al. a) and 11.º of the LRTA), the parties enjoy legal personality and capacity, have standing (arts. 4.º and 10.º, n.º 2 of the LRTA and art. 1.º of Regulation n.º 112-A/2011, of 22 March), and are properly represented.

2. The cumulation of claims relating to the various acts of VAT self-assessment contested, already resulting, moreover, from the administrative complaint that led to the dismissal decision appealed against (cfr. art. 71.º of the Code of Tax Procedure and Process/CTPP), is admissible in light of art. 3.º, n.º 1 of the LRTA, given that the merit of the claims depends on the assessment of the same circumstances of fact and the interpretation and application of the same rules of law.

3. The proceedings do not suffer from any apparent nullities and no preliminary questions have been raised that prevent the assessment of the merits of the case, with the conditions being met for a final decision to be pronounced.

II. Thema Decidendum

1. The thema decidendum at issue in the present proceedings relates, in substance, to the assessment of the deductibility in VAT, under the terms of the provision in article 20.º of the VAT Code, of expenses subject to VAT with the services reported in the invoices attached to the proceedings by the Claimant, in the global amount of €1,629,753.14, allegedly borne with the acquisition of preparatory work and advisory services for the acquisition of social participation in company B..., SA (hereinafter also B...) and subsequent corporate reorganization, a matter from which arises, thus, the judgment on the legality or illegality of the decision dismissing the administrative complaint and the underlying acts of self-assessment subject to the periodic VAT declarations filed with reference to the period between the fourth quarter of 2015 and the first quarter of 2017 and, consequently, on the reimbursement of the tax borne and corresponding compensatory interest.

2. In these terms, the substantive matter subject to the cognition of this Arbitral Tribunal relates to verifying, in light of the alleged facts and the claims procedurally formulated, whether the expenses borne and the VAT correspondingly incurred with the services subject to the invoices that are presented by the Claimant with its IP as document n.º 14 satisfy the legal requirements necessary for the exercise of the right to VAT deduction in the aforementioned periods between the fourth quarter of 2015 and the first quarter of 2017 within the framework of the material circumstances invoked of acquisition by the Claimant of the social participation in B... and the subsequent corporate restructuring.

III. Decision on the Facts and its Motivation

III-A. Proved Facts

1. In light of the allegations in the procedural documents presented, the documentary evidence produced, both that attached with the IP and that contained in the AF attached to the proceedings, the Tribunal considers proved, with relevance to the decision of the case, the following facts:

I. The Claimant, A..., SA, formerly named C..., SA, collective person n.º ..., was constituted on 25 September 2015, with the corporate purpose of production of electricity from geothermal wind and solar sources and from renewable sources, as per copy of the certificate attached as doc. n.º 9 to the IP.

II. The Claimant acquired on 25.11.2015 all of the social shares representing the capital of company B..., SA, collective person n.º ... (cfr. as per Report and Accounts of 2015 of B..., pp. 2, 7, attached as doc. n.º 11 to the IP and Report and Accounts of 2016 of B..., pp. 2, 6, attached as doc. n.º 16 to the IP), which, for its part, held the social shares representing the totality of the capital of companies Wind Park of D..., SA, E..., SA, F..., SA, G..., SA, H..., SA, I..., SA, J..., SA, K..., SA and L..., SA and the social shares representing 50% or more of the capital of companies Wind Park of M..., a, SA, N..., SA, O..., Lda, P..., SA, Q..., Lda, R..., Lda, S..., Lda, T..., Lda, U... SGPS, SA and V..., Lda (cfr. Annex to the financial statements of 2015 of B..., p. 28, attached in doc. n.º 11 to the IP).

III. The Claimant, as new shareholder, directly or indirectly, of the companies referred to in the preceding number, designated as Group W..., initiated a process of internal corporate reorganization, which involved, initially, the merger by incorporation, by way of global transfer of assets of the incorporated companies to the incorporating company, first, of K..., SA and, then, of L..., SA, in B..., as per copy of the certificate of B... attached as doc. n.º 10 to the IP and registry entries 20 AP.5/..., Av. 1. AP 17/..., and 21 AP 25/..., Av. 2 AP 8/..., merger operations which, according to the merger plan dated 20.6.2016 attached as doc. n.º 12 to the IP (pp. 8 to 11), would enable the "simplification of the corporate structure of the group" with reduction of the "perimeter of companies controlled and directly managed by Group W... to 20 companies and eliminate participations held indirectly at 100%", the "increase in management effectiveness", the "rationalization of financial resources", the "rationalization of administrative resources", the "reduction of administrative, audit and legal costs" and the "reduction of legal, tax and administrative obligations".

IV. The Claimant, as incorporating company, proceeded with the merger by incorporation, by way of global transfer of assets of the incorporated company to the incorporating company, of B..., SA, incorporated company, which was registered on 30.06.2017, as per copy of the certificate of the Claimant attached as doc. n.º 9 to the IP, registry entry 8 AP. 131/..., and copy of the certificate of B..., SA attached as doc. n.º 10 to the IP, registry entry 22 OF. ..., merger operation which, according to the merger plan dated 25.5.2017 attached as doc. n.º 13 to the IP (pp. 8 et seq.), would enable the "increase in management effectiveness", the "rationalization of financial resources", the "rationalization of administrative resources", the "reduction of administrative, audit and legal costs" and the "reduction of legal, tax and administrative obligations".

V. The Claimant incurred expenses with services that are reported in the invoices attached as doc. n.º 14 to the IP as indicated below, having borne the VAT also indicated below:

[Table of invoices with quarters, invoice numbers, dates, provider tax identification numbers, service providers, invoice descriptions, amounts, VAT, VAT self-assessed, and totals - as provided in the original Portuguese document]

VI. The expenses indicated in the preceding point, in the total amount €1,497,866.34, constitute costs with preparatory work and advisory services borne within the operation of acquisition of social participation and corporate reorganization to which the proved facts above under n.ºs II, III and IV refer.

VII. Within the scope of its activity, following the direct or indirect acquisition of social participation in the companies of Group W..., the Claimant is directly involved in the management of its subsidiaries, as per service provision contracts for operation management and maintenance services and advisory and consulting contracts originally celebrated between B..., company incorporated by the Claimant, and its subsidiaries, under the terms of which the services to be provided and the amount of consideration to be paid by the subsidiaries are defined (cfr. the contracts celebrated with G..., SA, H..., SA, J..., SA, V..., Lda, R..., Lda, F..., SA, P..., Lda, Q..., Lda, D..., SA, N..., Lda, E..., SA, O..., Lda, T..., Lda, S..., Lda, attached as doc. n.º 15 to the IP).

VIII. In the VAT self-assessments relating to the 4th quarter of 2015, settlement n.º..., 1st quarter of 2016, settlement n.º..., 2nd quarter of 2016, settlement n.º..., 3rd quarter of 2016, settlement n.º..., 4th quarter of 2016, settlement n.º..., 1st quarter of 2017, settlement n.º..., as per periodic declarations presented on 15.2.2016, 2.5.2016, 2.8.2016, 2.11.2016, 1.2.2017 and 28.4.2017, attached as docs. n.ºs 3 to 8 to the IP, which total the amount of tax settled in favour of the State of €420,079.21, VAT borne was not deducted, in the amount of €1,497,866.34, with the services indicated in the invoices above detailed in V.

IX. The Claimant presented on 30.10.2017 at the Tax Service of Porto ... the administrative complaint that proceeded under n.º ...2018..., as per doc. n.º 2 to the IP and pp. 1 et seq. of the AF (PDF file entitled "Initial Request AC 1st part").

X. On 14.5.2018, the Claimant was notified of the draft decision issued within the aforementioned administrative complaint procedure, as per doc. n.º 17 to the IP and document contained in the AF (PDF file entitled "Initial Request AC 1st part"), in which its respective dismissal is proposed for the reason that "the factual and legal reasons alleged by the complainant do not allow the success of the claim", which was supported, essentially, on the following grounds:

• "it is incumbent upon the taxable person who invokes the right to deduct tax, under the terms of art. 19.º of the CTVA, the burden of proof of the constitutive facts of that right, in accordance with n.º 1 of art. 74.º of the General Tax Law (GTL), in coherence with the general principle enshrined in n.º 1 of art. 342.º of the Civil Code. Facts that are personal to it or within its domain and which no one better than the presumed holder of the right is in a position to know and, subsequently, prove. It therefore falls to it, and first and foremost, the burden of adequate instruction of the claim formulated in the procedure, properly alleging and demonstrating the facts that support the right invoked";

• "the allegation of the constitutive facts of the right and its attempted proof by the complainant is incipient. The complainant does not present the facts in an organized manner, nor does it provide sufficient and structured probative elements, capable of allowing the Tax Authority a detailed perception of the alleged reality";

• "Without any intent on our part to make an exhaustive indication of the facts that it is incumbent upon the complainant to prove, it will always be said that not only is the allegation of the factual context of the restructuring and merger operations made by the taxable person scant, but the documentation gathered (...) does not present itself framed within the operations to which it supposedly will pertain, by relation between the good and/or service inherent to each of the invoices/documents with the development of those operations according to the planning that the complainant refers to having followed, nor does it even allow qualifying those charges as general expenses of the complainant's taxed economic activity with repercussion on the price of goods or services produced in that activity. In the vast majority of invoices attached, the very description does not allow precisely identifying the good or service underlying so as to establish a relation with the said restructuring and merger operations";

• "It is also not demonstrated that in the amount of tax paid to the State in the taxation periods between the 4th quarter of 2015 and the 1st quarter of 2017, the complainant has not made any deduction of VAT borne in the preparatory activities in question";

"Furthermore, when the invoice or equivalent document (...) mentions that the VAT due for the services rendered must be satisfied by the recipient by reverse charge, under the terms of art. 196º of Directive 2006/112/EC, there is no evidence that the VAT that it is intended to deduct was liquidated and paid by the complainant".

XI. The Claimant did not exercise the right to be heard regarding the draft decision indicated in the preceding point (cfr. doc. n.º 1 attached to the IP).

XII. The administrative complaint was subject to the dismissal ruling of 11.6.2018, which made the draft decision indicated in X final, which was notified to the Claimant by Official Letter with n.º 2018..., as per doc. n.º 1 to the IP.

III-B. Facts Considered Not Proved

1. Still with relevance to the decision of the case, in light of the Claimant's allegation, which constitutes a component element of the grounds of action, that the expenses subject to the invoices attached as doc. n.º 14 to the IP pertain to services with the realization of the "operation of acquisition of social participation and subsequent merger operations that followed" (arts. 44.º to 46.º of the IP), the Tribunal considers the following factuality not proved:

A) Not proved that the goods or services described in the invoices mentioned below pertain to the acquisition by the Claimant of social participation in B... and to the subsequent restructuring operation (allegations contained in arts. 44.º, 45.º and 46.º of the IP):

[Table of invoices with quarters, invoice numbers, dates, provider tax identification numbers, service providers, invoice descriptions, amounts, VAT, VAT self-assessed, and totals - as provided in the original Portuguese document]

III-C. Motivation of the Decision on the Facts

1. The Tribunal's conviction, with regard to the proved facts above stated in III-A, was based on the documentary evidence attached to the proceedings, as specified in each of the numbers of the probationary record.

In particular regarding the expenses with services incurred and their connection to the alleged factuality of being at issue activities pertaining to the acquisition of B... and subsequent corporate reorganization, namely with the merger of that company into the Claimant, the Tribunal's probationary conviction on the verified facts was based on the invoices attached to the proceedings and on the descriptions contained therein which were deemed sufficiently demonstrative of that factuality.

These documents constitute the sole means of evidence brought to the proceedings for the Tribunal to be able to assess the nature of the services rendered and their alleged connection with the acquisition of B... and the subsequent corporate restructuring, it obviously not being possible to consider merely simple allegations of facts presented in the procedural documents as demonstrated, namely through a more detailed description of what is referred to in the invoices, without any proof of the fact thus invoked.

1. In this sequence, it is clarified that the factuality above considered not proved in III-B was based, precisely, on the circumstance that, in the absence of any other means of evidence, the descriptions of the invoices do not allow evidencing, in any way whatsoever, at least through the invocation of the said Project ..., their connection with the operations of acquisition of social participation in B... and restructuring of Group W..., and it is certain that it was incumbent upon the Claimant the burden of proof of the right invoked to VAT deduction borne with acquisitions of goods and services from third parties, as the provision of art. 74, n.º 1, of the GTL provides (see, thus, for example, the ruling of the Southern TAC of 16.04.2013, case n.º 06280/12).

The expenses with the services to which the invoices indicated in the referred point III-B pertain do not therefore fall within, the Claimant's allegation that these are advisory costs that occurred in the context of the "operation of acquisition of social participation and subsequent merger operations that followed" and that relate to the realization of such operations (art. 44.º of the IP), reason why such matter was considered not proved.

IV. Legal Justification

Having fixed the matter of fact considered as proved, it is now necessary to determine the applicable law to the underlying facts, in accordance with the above questions. It is particularly important to decide on the main question to be analyzed in the present proceedings, namely: to assess whether the expenses borne and the VAT correspondingly incurred with the services subject to the invoices that are presented by the Claimant with its IP as document n.º 14 satisfy the legal requirements necessary for the exercise of the right to tax deduction in the aforementioned periods in light of the material context invoked of acquisition by the Claimant of social participation in B... and the subsequent corporate restructuring.

This question will be decisive for us to assess whether the Claimant has or does not have the right to deduct the tax borne in relation to these expenses, the nuclear question in these proceedings. Given the matter of fact, it is important to consider in terms of legal matters the questions of the exercise of the right to deduction in the so-called preparatory acts, as well as in operations of acquisition of social participation in the context of corporate reorganization.

It is therefore necessary to inquire whether the expenses in question should or should not be deductible for VAT purposes, taking into account the rules governing this tax in accordance with European Union Law, with its respective transposition at the internal level and with the administrative and judicial interpretation that has been carried out on them, especially by the Court of Justice of the European Union (CJEU). Indeed, as has been peacefully understood by the jurisprudence and is a corollary of the obligation of preliminary ruling provided for in article 267.º of the Treaty on the Functioning of the European Union (which replaced article 234.º of the Treaty of Rome, previously article 177.º), the jurisprudence of the CJEU has binding character for national Courts, when it concerns questions connected with European Union Law. Let us see:

IV-A. Deduction of VAT in Preparatory Acts

1. The Immediate and Broad Nature of the Exercise of the Right to VAT Deduction

In this context, it will be important, essentially, to take into account the main jurisprudence of the CJEU relating to the exercise of the right to deduction.

According to the CJEU, the right to deduction provided for in articles 167.º and following of the VAT Directive is an integral part of the VAT mechanism and cannot, in principle, be limited. This right is exercised immediately in relation to the totality of the taxes that were levied on the operations carried out upstream.[1]

With regard to the aforementioned configuration of the right to deduction as a fundamental characteristic of the common system, guaranteeing the neutrality of the tax, as recognized in the Rompelman Case[2] and in the Commission/France Case[3], "[t]he characteristics of value added tax... make it possible to infer that the deduction regime is aimed at completely freeing the businessman from the burden of VAT, due or paid, in the course of all his economic activities. The common system of value added tax thus ensures perfect neutrality as regards the tax burden of all economic activities, whatever the purpose or results of those activities, provided that the activities in question are themselves subject to VAT."[4]

In this context, it is easily understood that the exclusions to the right to deduction are interpreted restrictively, as emphasized in the Metropol Case[5]. And it is equally understood that the Court is concerned with guaranteeing the total and immediate character of the right to deduction, interpreting this aspect in a broad manner.

Thus, in the referred Commission/France Case, it is emphasized that "…in the absence of a provision allowing Member States to limit the right to deduction conferred on taxable persons, this right must be exercised immediately in relation to the totality of the tax that burdened the operations carried out upstream."[6]

According to the Court, the concept of goods and services used for the purposes of taxable operations should cover all operations that condition the exercise of the activity of the taxable person, such as preparatory acts, marketing, promotional actions, etc., which are reflected in the costs and allow the company to maintain its competitive position in the market. In this context, in the Intiem Case[7] the CJEU clarified that the VAT deduction mechanism regulated by the Sixth Directive "must be applied in such a way that its scope of application corresponds, as far as possible, to the scope of the professional activities of the taxable person".

See also, namely, the Lennartz Case[8], in accordance with which it is concluded that the immediate use of goods for the purposes of taxable operations is not a requirement for the application of the rules of the right to deduction, and the Rompelman Case, under the terms of which it is determined that the right to deduction must be granted in relation to investment expenses incurred before it is known whether taxable operations would be carried out (in the concrete case it was a study on profitability).

Indeed, as we will verify below, the CJEU does not require that the activity has already begun for VAT to be deducted, and it may be deducted in relation to preparatory activities. On the other hand, according to the understanding of the CJEU, a position which has moreover already been subscribed to by the Tax Authority[9], the right to deduction, once acquired, subsists even if the projected economic activity does not give rise to taxable operations or the taxable person, for reasons beyond his control, has not been able to use the goods or services that gave rise to the deduction within the scope of taxable operations[10].

Furthermore, according to the Judgment of 8 March 1988, Intiem[11], the VAT deduction mechanism regulated by the Sixth Directive "must be applied in such a way that its scope of application corresponds, as far as possible, to the scope of the professional activities of the taxable person".

It is also settled jurisprudence of the Court of Justice of the European Union that, as the right to deduction is a fundamental element of the VAT regime, it is only possible to limit this right in the cases expressly provided for by the VAT Directive and, even then, with respect for the principles of proportionality and equality, and one cannot empty the common VAT system of its content.

To cite, for this purpose, the Ampafrance Case, according to which "60. On the other hand, it must be recalled that, for an act of Community law relating to the VAT system to be in accordance with the principle of proportionality, the provisions it contains must be necessary for the achievement of the specific objective it pursues and must affect the objectives and principles of the Sixth Directive as little as possible."[12]

As for the rights conferred on individuals by the norms of the right to deduction, we cite the BP Soupergaz Case, in accordance with which these norms "33. … indicate, with precision, the methods for determining the taxable base and, respectively, the conditions for acquisition and the scope of the right to deduction. They leave no margin of appreciation to Member States as to their application. In this way, they meet the criteria referred to and therefore confer upon individuals rights which they can invoke before the national judge to oppose a national regulation incompatible with them".[13]

Note that national jurisprudence has also been guided by the same principles we have just cited regarding the comprehensive character of the right to deduction. In this sense, see, namely, the Judgment of the Supreme Administrative Court (SAC) of 8 July 2009 (Isabel Marques da Silva)[14], in which it is emphasized that "[t]he right to deduct the tax borne upstream constitutes a fundamental characteristic of the common VAT system, essential to guarantee the neutrality of the tax and a "key piece" of its functioning."

That is, it is clear that the right to VAT deduction is a fundamental right that cannot be limited except in cases expressly permitted by the norms of European Union Law or by the general principles of law accepted in this field, such as the principle of abuse of rights (as the CJEU has emphasized).

As it is clear that the right to VAT deduction must be interpreted broadly and granted immediately, even though the projected activity has not been initiated by the taxable person, in relation to the so-called preparatory acts, it is concluded, with the CJEU, that the Tax Authorities of the Member States should act in accordance with such interpretation (principle of conformity of national law with European law).

1.2. The Right to Deduction in Preparatory Activities

Particular relevance for the case at hand is the settled jurisprudence of the CJEU in the sense that, as we have mentioned, it does not require that the activity has already begun for VAT to be deducted, and it may be deducted in relation to preparatory activities. See, for this purpose, namely, the Rompelman Judgment[15].

In accordance with n.° 23 of the Judgment, the CJEU concluded that the principle of VAT neutrality regarding the tax burden borne by the company requires that the first investment expenses incurred with a view to the formation of a company are considered economic activities, and it would be contrary to that principle that the aforementioned activities only began at the moment when, in that concrete case, an immovable asset is effectively exploited, that is, at the moment when taxable income arises. As it emphasizes, any other interpretation of article 4.° of the Directive would burden the economic operator with the expense of VAT within the scope of its economic activity without giving it the possibility to deduct it, under the terms of article 17.°, and would make an arbitrary distinction between investment expenses incurred before and during the effective exploitation of an immovable asset.

In the Lennartz[16], Inzo[17], and Gabalfrisa[18] Cases, questions similar to those of the Rompelman Case were raised, namely the scope of application of the concept of economic activity and the inclusion of preparatory acts in this concept, with the Court confirming this jurisprudence.

The principle of VAT neutrality, as far as the tax burden of the company is concerned, thus requires that investment expenses incurred for the needs and objectives of a company are considered economic activities that give rise to an immediate right to VAT deduction[19]. In these terms, an individual who acquires goods for the purposes of an economic activity within the meaning of article 9.°, n.° 1, second paragraph, of the VAT Directive, acts as a taxable person, even though the goods are not immediately used for those economic activities[20].

As the CJEU emphasized in the Inzo Case and developed in its later jurisprudence, in the absence of fraudulent or abusive circumstances and subject to possible adjustments in accordance with the conditions provided for in the VAT Directive, the right to deduction, once constituted, remains acquired[21]. As the Court of Justice declared for this purpose, when the taxable person has not been able to use the goods or services that gave rise to deduction within the scope of taxable operations, for reasons beyond his control, the right to deduction is maintained, since in that case there is no risk of fraud or abuse that can justify the later refund of the deducted amounts[22]. On the other hand, in fraudulent or abusive situations, in which, for example, the interested party simulated developing a special economic activity, but in reality sought to bring into his private patrimony goods that may be subject to deduction, the Tax Authority can request, with retroactive effect, the restitution of the deducted sums, since those deductions were granted on the basis of false statements[23].

As the CJEU makes a point of recalling, the verification of the existence of an abusive practice is subject to two conditions. On the one hand, the operations in question, despite the formal application of the conditions provided for in the relevant provisions of the VAT Directive and the national legislation that transposes it, must result in obtaining a tax advantage whose granting is contrary to the objective pursued by those provisions. On the other hand, it must also result from a set of objective elements that the essential purpose of the operations in question is obtaining a tax advantage[24]. The measures that Member States have the power to adopt, pursuant to article 273.° of the VAT Directive, to ensure the correct collection of the tax and prevent fraud, must not, however, go beyond what is necessary to achieve such objectives (principle of proportionality) and must not call into question the neutrality of VAT[25].

In this context, the CJEU concluded that a taxable person, acting in that capacity, who acquired an investment asset and allocated it to the patrimony of the company has the right to deduct the value added tax that burdened the acquisition of that asset during the fiscal year in which the tax became due, regardless of the fact that the aforementioned asset is not immediately used for professional purposes, it being incumbent upon the national court to determine whether the taxable person acquired the investment asset for the purposes of its economic activity and to assess the possible existence of a fraudulent practice.

IV-B. The Concept of Economic Activity and its Relation to the Right to Deduction Relating to the Acquisition of Social Participation

In this respect, we follow the considerations carried out in the Judgment relating to Case n.º 18/2013-T, of 9 October 2013 of an Arbitral Tribunal of this CAAD.

The CJEU has been classifying the operations developed by a VAT taxable person in non-economic activities, which should remain outside the scope of the VAT Directive, conferring no right to deduction, and in economic activities. Only economic activities are covered by the scope of the Directive, distinguishing between non-subject, subject and exempt activities and in subject and non-exempt activities (that is, effectively taxed).

As emphasized by Advocate General Mengozzi in the VNLTO Case[26], taking into account the principle of neutrality that informs the common VAT system, a person should only bear VAT if it was levied on the goods and services that he used for private consumption and not for his taxable professional activities.

That is, it is not possible to deduct the VAT borne upstream if it relates to the activity of the taxable person that does not have the nature of economic activity within the meaning of the DIVA.

For VAT to be deductible, it is required that there be a direct and immediate relationship between the expenses incurred and the exercise of the economic activity of the taxable person.

With regard to the breadth of the concept of "direct and immediate relationship" between the inputs containing VAT subject to deduction and the taxed operations of the taxable person, the CJEU has been adopting an increasingly comprehensive interpretation, namely, regarding the management of social participation, and the establishment of a causal nexus between the deductible VAT and a particular, individualized and concrete operation, cannot be accepted[27].

According to the jurisprudence of the CJEU, "a right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or several downstream operations with right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it renders. These costs have, in fact, a direct and immediate nexus with the totality of the economic activity of the taxable person"[28]. However, it is important to emphasize in particular that it is imperative that there be a relationship with the economic activity of the taxable person, with the necessity of its unequivocal demonstration subsisting.

As noted in the Cibo Case[29], "1) The interference of a holding in the management of the companies in which it took participation constitutes an economic activity within the meaning of article 4.°, n.° 2, of the Sixth Directive 77/388/CEE of the Council, of 17 May 1977, relating to the harmonization of the laws of the Member States with regard to turnover taxes - Common system of value added tax: uniform taxable base, insofar as it implies the realization of transactions subject to value added tax under the terms of article 2.° of that directive, such as the supply, by the holding to its subsidiaries, of administrative, financial, commercial and technical services.

1. The expenses incurred by a holding with the various services it acquired within the scope of taking a participation in a subsidiary form part of its general expenses, whereby they have, in principle, a direct and immediate nexus with the totality of its economic activity. Therefore, if the holding carries out both operations with right to deduction and operations without right to deduction, it follows from article 17.°, n.°5, first paragraph, of the Sixth Directive 77/388 that only the part of the value added tax proportional to the amount relating to the first category of operations can be deducted." (cfr. §§ 1 to 3 of the conclusions)

For the purposes that now concern us, it is particularly important to emphasize that the CJEU, in the Gabalfrisa Case[30], resorting to a "consolidated line of jurisprudence", argued that, in respect to the principle of VAT neutrality regarding the tax burden of a company, investment expenses incurred and necessary for its creation should be qualified as economic activity, with the deductibility of VAT not even being conditioned by the effective exploitation by the company.

On the other hand, as extracted from the conclusions of the I/S Fini and Skateministeriet Case[31], the payments that a company must make during the liquidation period, after the closure of its effective operation, form part of the concept of economic activity, insofar as the time lapse is strictly necessary to successfully complete the liquidation operation and it is believed that there is no intention to act in a fraudulent or abusive manner (in the concrete case the liquidation operation lasted five years). Consequently, one cannot make an arbitrary distinction between the expenses incurred by a company before its effective operation and during it, and the expenses incurred to terminate such operation.

As provided for in article 9.º, n.º1, 2.º paragraph, 2.ª part, of the DIVA, in the definition of VAT taxable person "(…) In particular, the exploitation of a tangible or intangible asset with the purpose of obtaining income with a permanent character (…) is considered an economic activity."

As for the treatment to be given to the management (acquisition, holding and disposal) of social participation beyond the case of holdings, in the context of a parent company's participation in subsidiaries or associates, it follows from the jurisprudence of the CJEU that the operations relating to shares or participation in companies are covered by the scope of application of VAT when carried out within the framework of a commercial activity of trading in securities or when they constitute the direct, permanent and necessary extension of taxable activity[32].

Given that the acquisition of social participation is a passive operation, in order to assess the deductibility of VAT relating to the associated expenses, we will necessarily have to analyze to what extent that participation is held and what are the downstream operations that resulted from those expenses – will they or will they not be such operations economic activities subject and not exempt from VAT?

As referred to by Rui Bastos[33], "Thus, the acquisition of participations in a pure investment perspective, with a view to obtaining income such as dividends, refers its holding outside the concept of economic activity, whereas acquisition in a context of trading in securities would refer to the exercise of a subject activity, although exempt.

The same should not occur in a context of acquisition of a participation that represents the natural and necessary extension of the commercial or industrial activity of the acquiring company, in a context of corporate restructuring or in a process of expansion, opting for the acquisition of a subsidiary, in detriment to the constitution of a permanent establishment, the same not occurring in a context of intervention in the management of the subsidiaries and, concomitantly, in taxed activities exercised by them."

In the SKF Case, the CJEU, invoking the principle of equality of treatment and fiscal neutrality, concludes for the economic nature of the participations accompanied by the interference by the parent company in the management of the subsidiaries which should be extended to situations of transmission of participations that terminate that interference.

In the framework of the transmission of shares, the CJEU considers in the SKF Case that the right to deduct VAT paid upstream on services intended to realize a transmission of shares is conferred, by force of article 168.° of the DIVA, if there exists a direct and immediate relationship between the expenses related to the upstream services and the totality of the economic activities (taxed) of the taxable person, the so-called "general expenses".

In that proceeding, the transmission of shares in question[34], carried out with a view to the restructuring of a group of companies by the parent company, was considered an operation of obtaining income with a permanent character from activities that exceed the framework of the simple sale of shares. This operation presented a direct nexus with the organization of the industrial activity exercised by the group and is thus the direct, permanent and necessary extension of the taxable activity of the taxable person, whereby that operation of sale of shares would be covered by the scope of application of VAT, capable of conferring the right to deduct VAT of the respective inputs.

The CJEU considers that these services have a direct and immediate relationship with the totality of the economic activity of the taxable person, allowing the right to deduct the totality of the VAT of the said services.

There was debate as to whether the inputs associated with the disposal of social participation could be capable of allowing VAT deduction, through their respective qualification as general expenses of the activity, in the case that such disposal is not subject to VAT, a more frequent situation, as we have seen, in holdings, or else is subject but exempt, as happens with the parent company that manages a group of companies.

In the case of non-subjection, the Advocate-General, basing himself on the conclusions of the Krettztechnik Case, n.º 36, considers this type of expenses capable of being qualified as general expenses, thereby possessing a direct and immediate relationship with the totality of the economic activity of the taxable person, enabling their deduction.

On the contrary, in the case that the disposal of social participation qualifies as exempt from VAT, as occurred in the SKF Case, the Advocate-General, basing himself on the conclusions of the BLP Group Case, considered that the VAT paid upstream of the acquired services possess a direct and immediate relationship with the exempt operation, thereby interrupting the VAT chain.

Now the CJEU, in the SKF Case, comes to place the emphasis on the fact of knowing whether the company that is a VAT taxable person is or is not involved in the management of the companies in which there was a participation, companies which develop taxed activities.

In this sense, it considered the Court that refusing the right to deduct VAT paid upstream for advisory expenses linked to a transmission of exempt shares due to the involvement in the management of the company whose shares are transferred and admitting this right to deduction for such expenses linked to a transmission that is outside the scope of application of VAT due to them constituting general expenses of the taxable person, would lead to different tax treatment of objectively similar operations, in violation of the principle of fiscal neutrality[35].

With regard to VAT deduction, the CJEU has already concluded in the Kretztechnik Case[36] that in an issuance of shares (despite being, in itself, an operation that is not covered by the scope of application of VAT, given that it does not qualify as transmission of goods or provision of services) effected in a context of capital strengthening for the benefit of the general economic activity of a company, it is considered that the costs of the services acquired[37] by a company form part of its general expenses and are, as such, constituent elements of the price of its products.

As decided by the CJEU in this Case, "The right to deduct VAT that was levied on the acquisition of goods or services upstream presupposes that the expenses incurred with their acquisition formed part of the constituent elements of the price of the taxed operations downstream with right to deduction (…).

However, the right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate relationship between a particular upstream operation and one or several downstream operations with right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it renders. These costs have, in fact, a direct and immediate relationship with the totality of the economic activity of the taxable person." (cfr. §§ 57 and 58)

"Finally, it is important to recall that the right to deduction is conferred in relation to VAT paid upstream for services rendered within the framework of financial operations if the capital acquired with these latter operations has been allocated to the economic activities of the interested party. On the other hand, the expenses related to the services rendered upstream have a direct and immediate connection with the economic activities of the taxable person in the cases in which they are exclusively attributable to economic activities carried out downstream and, therefore, are only part of the constituent elements of the price of the operations covered by the said activities (v. Securenta judgment, already referred to, n.ºs 28 and 29).

It follows from the foregoing that it must be answered whether to the third question that the right to deduct VAT paid upstream on services intended to realize a transmission of shares is conferred, by force of article 17.°, n.ºs 1 and 2, of the Sixth Directive, as amended by its article 28.° F, n.° 1, and article 168.° of Directive 2006/112, if there exists a direct and immediate relationship between the expenses related to the upstream services and the totality of the economic activities (taxed) of the taxable person." (cfr. §§ 71 to 73)

As emphasized by Rui Bastos[38], "The right to deduct general expenses capable of being imputed to the taxed component of the economic activity of the taxable person (support management services), as may happen with legal assistance contracted from third parties, studies on the internationalization of the group, administrative expenses, etc., should not be seen as conditioned, provided that the allocation of resources, such as human resources, to the said taxed activity is proven, qualifying those charges as expenses general to the activity and, as such, repercussible in the price of taxed operations and, therefore, capable of conferring full VAT deduction, and no reason is seen at this level for differentiated treatment of a mixed holding from an operational company".

As the author notes, whether in a mixed holding, in a parent company, whether at the level of acquisition or holding, or at the level of its disposal, the treatment for VAT purposes of the deductibility of inputs should be the same. Treating differently the deductibility of VAT of inputs depending on the strategic option of business organization or a business plan for expansion of an economic activity, whether by the constitution of a subsidiary or the creation of a mere branch, managing directly a taxed activity or, indirectly, through the intermediation of a participation, would lead to discriminatory treatment of objectively identical situations.

For its part, as the CJEU noted in the Abbey Case[39], "[they] form part of the general expenses of the taxable person and, as such, are constituent elements of the price of the products of a company. Indeed, even in the case of transfer of a universality of assets, when the taxable person does not carry out further operations after the use of the said services, the costs of the latter must be considered inherent to the totality of the economic activity of the company before the transmission." (cfr. § 35)

(…)

"any other interpretation (…) would be contrary to the principle that requires that the VAT system be of perfect neutrality as regards the tax burden of all economic activities of the company, provided that these are themselves subject to VAT, and would place on the economic operator the cost of VAT within the scope of its economic activity without giving it the possibility to deduct it (see in this sense, Gabalfrisa judgment (…)). Thus, an arbitrary distinction would be made between, on the one hand, the expenses incurred for the purposes of a company before the effective operation thereof and those incurred during the said operation and, on the other hand, the expenses incurred to terminate such operation. The various services used (…) for the purposes of the transfer of a universality of assets or part thereof thus maintain, in principle, a direct and immediate relationship with the totality of the economic activity of this taxable person." (cfr. §§ 35 and 36)

Equally in a Proceeding similar to the contested one (Case n.º 128/2012-T) another Arbitral Tribunal of this CAAD had the occasion to rule, on 23 April 2013, on the deductibility of expenses incurred by an operational company, "which has as its main activities the manufacture of … and products intended for its production and acquires participation in other companies and intervenes in their management with the objective of enhancing its main activity, namely by expanding internationally its area of sales to new markets and ensuring conditions for the marketing of its products."

The question that arose was whether the Claimant could deduct the VAT borne with the acquisition of goods and services necessary for the acquisition of these social participation and intervention in other companies.

In this Case, the Judgment of the CJEU of 6 September 2012 pronounced in the Portugal Telecom Case[50] was invoked, which concludes in the sense that the right to deduction arises from a relationship of use: if the resources were used by the Claimant in activities that confer the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity in confrontation with the totality of the income.

As noted, the interference of the Claimant "in the management of the companies in which it took participation constitutes an economic activity" for VAT taxation purposes, with the Claimant being authorized to deduct the VAT paid upstream, on the condition that the services acquired upstream present a direct and immediate nexus with downstream economic operations with right to deduction.

Furthermore, as referred to in the same Judgment, "a right to deduction is equally admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or several downstream operations with right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it renders. These costs have, in fact, a direct and immediate nexus with the totality of the economic activity of the taxable person".

In these terms, that Court concluded that "Thus, there is legal coverage for deduction by the Claimant of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services rendered to its subsidiaries with right to deduction or that, not having a direct and immediate nexus with certain services, is VAT borne with costs that form part of the general expenses of the Claimant that have a direct and immediate nexus with the totality of its economic activity."

IV-C. VAT Deduction Borne in the Context of Company Merger Operations

In light of the reality at issue, it is also important to make a brief reference to VAT deduction in the case of merger operations.

Mergers are covered by the non-subjection rule contained in n.º 4 of article 3.º of the CTVA (whose legal basis is article 19.º of the DIVA), which prescribes that the following are not considered transmissions of goods: "the assignments for consideration or free of the business establishment, the totality of an asset or part thereof that is capable of constituting an independent line of business, when, in either case, the acquirer is, or becomes, by reason of the acquisition, a taxable person of those referred to in subparagraph a) of n.º 1 of article 2.º" (transfer of business as going concern rule)[40].

Considering that the transmission of the establishment constitutes in itself an economic activity, the right to deduct VAT borne upstream is maintained. Indeed, although the acquisition or transmission of the totality of an asset/merger by incorporation configures an operation not subject to VAT under the terms of article 19.º of the DIVA, it is considered that such operation maintains a direct and immediate relationship with the economic activity of the taxable person, affording it, namely, the right to deduct the VAT included in the expenses incurred for the purposes of that operation, even though there is no place for the levying of tax under that norm.

Thus, provided that the companies involved in a merger by incorporation have no limitations on their right to deduction and that the incorporating company is not a mixed taxable person, carrying out only taxed operations that confer the right to deduction, the fact that VAT is not levied in the transmission does not prejudice or produce any impact on the right to deduct VAT borne upstream for the purposes of that asset transmission operation. As noted by Cidália Lança for this purpose, "The non-subjection of the transmission of the universality of assets does not invalidate that the expenses incurred by the transmitter to enable the realization of that operation confer the right to deduction, since they form part of the general expenses of that taxable person, maintaining a direct and immediate relationship with the totality of the economic activity developed by it (cf. Judgment of the CJEU of 22 February 2001, Abbey National, C-408/98, Collect., p. I-1361, n.ºs 35 and 36)."[41]

From the principle of continuity underlying the merger operation it follows that the company resulting from the merger [... document continues but was truncated in the original Portuguese text provided]