VAT Exemption Waiver for Private Healthcare Entity in Portuguese NHS – CAAD Case 413/2017-T

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Clotilde Celorico Palma and Nina Aguiar, designated at the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby agree:

I – REPORT

On 5 July 2017, A…, S.A., tax identification number …, with registered office at …Street, no. …, …-… Coimbra, filed a request for the 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 Regime for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, for short, referred to as RJAT), seeking the declaration of illegality of the additional assessments of Value Added Tax ("VAT") and compensatory interest, no. 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017… and 2017…, in the total amount of €797,071.69 (€761,700.38 in tax and €35,371.31 in compensatory interest).

To substantiate its request, the Applicant alleges, in summary, that:

The corrections made by the Tax Authority ("AT"), in the amount of €643,601.86, to VAT deducted by the Applicant in the various periods from April 2014 to March 2016, are illegal by virtue of violation of article 20 of the VAT Code and of articles 12, no. 1, paragraph b), of the VAT Code, as well as of article 132, no. 1, paragraph b), of the VAT Directive, are illegal;

The correction in the amount of €94,748.27 relating to the adjustment of VAT concerning fixed assets is illegal, as it does not meet the provision of no. 3 of article 12, a requirement for the application of article 24, no. 5, of the VAT Code, and consequently illegal in this part is the additional assessment for the period of December 2014 in which it was materialized and the corresponding assessment of compensatory interest;

The correction relating to the adjustment of VAT for the periods from April to June 2016 is illegal by virtue of violation of article 23, no. 6, of the VAT Code and by duplication of collection, and consequently illegal in this part are the additional assessments of VAT and compensatory interest for those periods.

On 6-7-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the AT.

The Applicant proceeded to appoint an arbitrator, designating the Honourable Professor Doctor Clotilde Celorico Palma, in accordance with article 11, no. 2, of the RJAT. In accordance with no. 3 of the same article, the Respondent appointed as arbitrator the Honourable Professor Doctor Nina Aguiar.

The Honourable arbitrating judges appointed by the parties designated the present reporter to preside over the Arbitral Tribunal, and the assignment was accepted within the applicable deadline.

On 8-9-2017, the parties were notified of these designations, and neither manifested the will to refuse any of them.

In accordance with the provision of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 26-9-2016.

On 30-10-2017, the Respondent, duly notified for this purpose, presented its defence by exception and by challenge, also raising various preliminary issues, analysed below.

Given that in the arbitral procedure the general procedural principles of procedural economy and the prohibition of the practice of useless acts apply, under the provisions of paragraphs c) and e) of article 16 and no. 2 of article 29, both of the RJAT, the holding of the meeting referred to in article 18 of the RJAT was waived.

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

A period of 30 days was fixed, after the presentation of submissions by the Respondent, or the end of the respective deadline, for the presentation of the final decision, and assessment of the preliminary issues raised.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality 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 affected by nullities.

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

All considered, it behoves this Tribunal to render

II. DECISION

A. MATTER OF FACT

A.1. Facts Proven

The Applicant is a joint-stock company with private capital and for-profit purposes, which was established and commenced its activity in 2009.

The Applicant has had as its corporate purpose, since the commencement of its activity, the provision of health care services, and such activity includes the provision of health care and medical services on an outpatient and/or inpatient basis, namely, consultations and surgeries in various clinical areas.

The Applicant also provides services to companions of hospitalized users (namely accommodation and food services).

According to its corporate deed, the Applicant engages in "[p]rovision of all medical services, namely clinical and surgical and paramedical services, in a health care establishment with inpatient facilities, operating theatres, emergency ward and other health care provision and related activities".

Such activity has been conducted, since the commencement of the Applicant's activity, at the Clinic … (located at …Street, no. …, …-… Coimbra), which is the property of the commercial company B…, Ltd., holder of the collective identification number …, and which is used by the Applicant by virtue of a service provision contract (transfer of adapted and equipped space, with use of the space and equipment) concluded for this purpose, which is subject to VAT.

Since the beginning of its activity, the Applicant has been classified under the general regime for purposes of Corporate Income Tax ("CIT"), and normal VAT regime, having in the declaration of commencement of activity expressly renounced (in accordance with paragraph b) of no. 1 of article 12 of the VAT Code – "VAT Code") the VAT exemption that would apply to it with respect to the provision of medical and health services and operations closely connected therewith.

The Applicant, since 2009, has assessed VAT on active operations and deducted VAT incurred on passive operations.

On 24 September 2013, the now Applicant concluded an agreement with C… ("C…"), which was the subject of an amendment on 3 February 2014.

On 28 February 2014, the Applicant concluded an agreement with D… ("D…").

Clause 2 of the Agreement concluded between the Applicant and C… for purposes of execution of SIGIC states: "The services to be contracted and their corresponding global values are those contained in Order no. 271/2012, of 22/08, published in the Official Journal, Series I, no. 171, of 04/09."

Clause 9 of the same Agreement states: "Access to health care provided under this Agreement is subject to the payment of co-payments, in accordance with the law".

Clause 10 of the same Agreement states that the services provided by the Applicant to the contracted users "are those contained in the price table approved by Order no. 271/2012, of 22/08, published in the Official Journal, Series I, no. 171, of 04/09".

In clause 1, no. 5, of the Agreement concluded with D…, it is stated that "The price tables in force are those published on the D… Portal" and in clause 5, no. 1 it is stated that: "The charges arising from the provision of health services to beneficiaries shall be paid in accordance with the tables and rules in force."

These agreements gave rise to billing to those entities (C… and D…) from April 2014 onwards.

The aforementioned agreements are contracts of adhesion in which the price of the services covered by the agreement is identical for all establishments adhering to the agreements, regardless of whether they assess VAT or are exempt from it.

The VAT assessed by the Applicant with respect to services provided under such agreements was included in the final price (within the price), not representing an increase to the price.

The relative weight of billing issued with respect to services provided by the Applicant under the agreements with D… and with C…, in the overall computation of its billing, by reference to the years 2014, 2015 and 2016, is as follows in the table below:

The Applicant was subject to an external tax inspection procedure initiated on the basis of service orders nos. OI2016…, OI2016… and OI2016…, covering the years 2014, 2015 and 2016.

On 10 November 2016, the Applicant was notified of the Draft Report of the Tax Inspection.

The Applicant exercised its right to prior hearing on the corrections proposed therein.

On 25 January 2017, the now Applicant was notified of the Final Report.

In the Final Report, the AT accepted the corrections contested by the Applicant during prior hearing with respect to mostly arithmetic oversights, and maintained the other corrections, all of which stemmed from the non-acceptance of the Applicant's VAT classification, and which concern the following situations:

Correction in the amount of €643,601.86 corresponding to the adjustment of VAT which the AT considers to have been incorrectly deducted in the periods from April 2014 to March 2016 relating to passive operations, the AT understanding that, in accordance with the wording of article 12, no. 1, paragraph b), of the VAT Code in force until 31 March 2016, the Applicant could not renounce the VAT exemption it applied, in accordance with article 9, no. 2, of the VAT Code, and therefore treated for purposes of this correction the Applicant as being exempt, thus correcting all VAT deducted in the period in question;

Correction in the amount of €94,748.27, corresponding to the adjustment of 3/5 and 4/5, respectively, of the VAT deducted in the years 2012 and 2013, concerning non-real property assets acquired in such years and whose VAT was fully deducted, the AT understanding that, in accordance with article 24, no. 1, of the VAT Code, as a result of the Applicant's VAT classification which it considered correct, the previously deducted VAT should be adjusted in proportion to the number of years still to elapse; and

Correction in the amount of €20,040.50, corresponding to the partial adjustment of the VAT deducted in the periods from April to June 2016, as a result of the combined application of article 23, no. 1, paragraph b) and article 12, no. 1, paragraph b), of the VAT Code, in force from 1 April 2016.

The aforementioned corrections correspond to the following table:

The Inspection Report (RIT) contains, amongst other matters, the following:

As a consequence of the corrections made, the AT issued the additional assessments of VAT and Compensatory Interest which are the subject of the present request for arbitral pronouncement.

The Applicant did not voluntarily pay the amounts required in such additional assessments, for which reason the corresponding enforcement proceedings were instituted.

The Applicant provided security to suspend the said tax enforcement proceedings.

A.2. Facts Deemed Unproven

Relevant to the decision, there are no facts that should be considered as unproven.

A.3. Substantiation of the Matter of Fact Proven and Unproven

With respect to the matter of fact, the Tribunal need not pronounce on everything alleged by the parties; rather, it has the duty to select the facts that matter for the decision and distinguish the proven from the unproven (cfr. art. 123, no. 2, of the CPPT and article 607, no. 3, of the CPC, applicable ex vi article 29, no. 1, paragraphs a) and e), of the RJAT).

In this manner, the pertinent facts for the judgment of the case are chosen and delineated according to their legal relevance, which is established in attention to the various plausible solutions of the legal question(s) (cfr. previous article 511, no. 1, of the CPC, corresponding to the current article 596, applicable ex vi of article 29, no. 1, paragraph e), of the RJAT).

Thus, having regard to the positions assumed by the parties, in light of article 110, no. 7, of the CPPT, the documentary evidence and the PA attached to the case file, the facts listed above were deemed proven, relevant to the decision.

B. ON LAW

i. Preliminary Issues

a.

The Respondent raises, as a question to be resolved before the examination of the merits of the case, the material competence of this Tribunal to arbitrate the present case, considering that "the first question to be decided concerns the fact that the right of waiver of exemption by the Applicant can or cannot be recognized", and that "By thus being (...) in the present case, the acts of additional VAT assessment carried out should be classified as consequent acts", since "the acts of additional VAT assessment, pending examination in this arbitral instance, are in a relationship of dependence on the recognition or non-recognition of the right on the part of the now Applicant to waive VAT exemption, in accordance with article 12, no. 1, paragraph b), of the VAT Code".

Thus, still from the Respondent's perspective, "given this circumstance, the recognition of the right that the now Applicant has, or does not have, to waive the exemption in the terms referred to, shall determine, or not, the annulment of the additional tax assessments, since this depends directly and exclusively on that", whereby, concludes the latter, "the present arbitral instance is materially incompetent to know of one of the several requests formulated in the present case, namely, whether the now Applicant has or does not have the right of waiver of the exemption provided in paragraph 2) of article 9, as provided in article 12, no. 1, paragraph b), both of the VAT Code".

This same issue was raised, amongst other matters, in process 168/2015-T of the CAAD[1], dealing with matter entirely identical to that of the present case, where the following was written which, with due deference, is now transcribed:

"Order no. 112-A/2011, with respect to the acts that can be classified in article 2, only removed from the scope of the binding of the Tax Authority, in non-customs matters, the claims relating to self-assessment acts, withholding at source and payment on account acts that were not preceded by recourse to the administrative proceedings and the claims relating to acts of determination of the taxable matter and acts of determination of the taxable amount, both by indirect methods, including the decision of the review procedure.

It is manifest that there is no occurrence of any of the situations in which Order no. 112-A/2011 removes the competence of the arbitral tribunals functioning at the CAAD, whereby competence must be assessed solely in light of the RJAT.

As is apparent from article 2 of the RJAT, the competence of the arbitral tribunals functioning at the CAAD was defined by the RJAT only with regard to the type of acts that are the subject of the claims of taxpayers and not in function of the type of issues that need to be examined to decide whether the acts are lawful or unlawful.

There is, in particular, no prohibition on the examination of matters relating to the verification of the requirements for the right of waiver of VAT exemption or any other issues of lawfulness relating to the acts of the types referred to in article 2 of the RJAT. A tax assessment that departs from the disregard of an exemption or a waiver of exemption is no less an act of tax assessment. And the claim to examine the lawfulness or unlawfulness of that disregard underlying an act of assessment is not, therefore, a claim relating to the declaration of illegality of assessment acts, in which that disregard is embodied.

Thus, in the arbitral procedure, similar to what occurs in the process of judicial challenge, any illegality may, as a rule, be imputed to the acts of assessment, as results from article 99 of the CPPT, subsidiarily applicable.

This shall not be the case only in instances in which the law provides for the autonomous challenge of administrative acts that are a prerequisite of the assessment acts, and only to that extent is the examination of the lawfulness of the assessment acts ruled out in all aspects. But, for there to be such autonomous challenge, there must be some administrative act in tax matters, as the challenge pertains to acts and not to legal positions assumed explicitly or implicitly as prerequisites of the assessment acts but not embodied in autonomous tax acts.

The consequent acts, of which the Tax and Customs Authority speaks, are consequent on other previous tax or administrative acts and, in the matter at hand, there is no evidence that any administrative act was carried out assessing whether the Applicant has or does not have the right to waive VAT exemption.

That is, for there to be a limitation on the challenge of the assessment acts impugned, there would have to have been carried out, previously, some administrative act that was a prerequisite of these assessment acts, which did not occur in the matter at hand.

Wherefore, as the assessment acts are injurious to the interests of the Applicant and as they are the only acts carried out by the tax administration on the situation examined in them, their contentious challenge must be ensured on the grounds of any illegality, as results from the principle of effective judicial protection, enshrined in articles 20, no. 1, and 268, no. 4, of the Constitution.

On the other hand, when there is no previously separately challenged autonomous act anterior to an assessment act concerning its prerequisites, any previously committed illegality may be invoked in the challenge of the final decision" (latter part of article 54 of the CPPT), whereby all issues relating to the lawfulness of the assessment acts may be examined in tax tribunals in the process of judicial challenge, as results from paragraph a) of no. 1 of article 97 and article 99 of the same Code.

In fact, in tax tribunals, even when, assessment acts having been carried out, one is in a situation in which it might be more useful for the taxpayer to use an action for recognition of a right or legitimate interest (by enabling, in addition to the examination of the lawfulness of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere faculty, as results from the very text of article 145, no. 3, of the CPPT, in saying that "actions may only be proposed whenever this procedural means is the most appropriate to ensure full, effective and actual protection of the right or legally protected interest". That is, what is provided in this rule is a limitation on the use of the action and not a limitation on the use of the judicial challenge procedure.

Indeed, it is manifest that the judicial challenge procedure includes the possibility of recognition of rights in tax matters, as are the right to the annulment or declaration of nullity of assessments, the right to indemnifying interest and the right to indemnification for unjustified security, whereby the fact that recognition of rights is at issue is not an obstacle to the use of the judicial challenge procedure.

Thus, as the Tax and Customs Authority states, having the tax arbitral process been created as an alternative to the judicial challenge procedure, it is to be concluded that there is no obstacle to the lawfulness of the assessment acts in question in this process being examined by this Arbitral Tribunal, as in tax tribunals that lawfulness could be examined in the process of judicial challenge.

Wherefore, as to the request for annulment of the assessment acts, the exception of material incompetence raised by the Tax and Customs Authority on the ground that recognition of a right in tax matters is at issue is without merit."

Thus, the competence of the Tribunal in the seat of judicial challenge is assessed according to the act(s) that serve as its object, this Tribunal being, unquestionably, competent to know of the lawfulness of the assessment acts that form the object of the present tax arbitral action, in light of their respective grounds[2].

Seeing no reason to depart from the learned exposition in the said judgment, rather fully subscripting to what was expounded therein, the exception of material incompetence raised by the Respondent is deemed without merit.

b.

The Respondent also requests in its response that the case be referred to the CJEU, pursuant to article 267 of the TFEU, for purposes of defining the scope of the waiver of the said exemption regime.

To this end, it alleges that "all the jurisprudence of the CJEU, with some similarity to the case of the present case, resulted from cases that are in an antagonistic position or, if we prefer, in a mirror position vis-à-vis the situation of the present case," since in those cases "the parties sought to benefit from the exemption with respect to the provision of medical services they carried out, when the respective tax administrations sought their subjection/taxation," whereby it will be necessary "to ascertain whether the concept of 'similar social conditions' should be assessed taking into account whether or not such 'implies a violation of the principle of equal treatment with respect to other operators that carry out the same services in comparable situations'".

As is stated in point 7 of the recommendations to national judicial authorities, relating to the submission of preliminary proceedings (2012/C 338/01), of the CJEU[3]:

"the role of the Court in the context of a preliminary reference is to interpret European Union law or to rule on its validity, and not to apply this law to the factual situation underlying the main proceedings. This role falls to the national judge and, therefore, it is not for the Court to rule on questions of fact raised in the context of the dispute in the main proceedings nor on any divergences of opinion as to the interpretation or application of the rules of national law".

Further recalled, in point 12 of those same recommendations, is that preliminary reference to the said Court should not be made when:

There is already jurisprudence on the matter (and when the possibly new framework does not raise any real doubt as to the possibility of applying that jurisprudence to the specific case); or

When the correct manner of interpreting the legal rule in question is unambiguous.

Consequently, it continues in point 13, "a national judicial body may, in particular when it considers itself sufficiently enlightened by the jurisprudence of the Court, decide for itself the correct interpretation of European Union law and its application to the factual situation of which it has knowledge".

Finally, as stated in point 18 of the same recommendations, "The national judicial authority may submit to the Court a request for a preliminary ruling, from the moment it considers that a decision on the interpretation or validity is necessary to render its decision."

In the case at hand, it is not considered that a decision on the interpretation of Community norms is necessary to render its decision, noting that, moreover, the second of the questions formulated by the Respondent has no correspondence in the factual situation established, as the Applicant, in the case, does not operate "proportionally in a minority part, (...) under normal market conditions", but rather in a majority part.

Moreover, and as will be seen below, it is understood that the available jurisprudence of the CJEU sufficiently clarifies, in terms of being able to decide the correct interpretation of European Union law and its application to the factual situation of which knowledge is had.

This has been, moreover, the understanding of the Arbitral Tribunals that have addressed the same question, as can be seen, in this regard, in the arbitral processes 227/2015T and 341/2015T[4], to whose grounds adherence is given here.

In this manner, and by the foregoing, the requested preliminary reference is denied.

ii. On the merits of the case

Having arrived here, it falls to this arbitral Tribunal to verify the lawfulness of the VAT assessments impugned, identified above.

As corrections with three distinct types of grounds are involved, namely:

The corrections made by the AT, in the amount of €643,601.86, to VAT deducted by the Applicant in the various periods from April 2014 to March 2016;

The correction in the amount of €94,748.27 relating to the adjustment of VAT concerning movable fixed assets, relating to the period of December 2014;

The correction relating to the adjustment of VAT for the periods from April to June 2016;

The examination of each shall proceed separately.

a.

With respect to the correction concerning VAT incorrectly deducted in the acquisitions of goods and services related to the activity of providing medical services, in the amount of €643,601.86, in the periods from April 2014 to March 2016, the AT bases it, in summary, on the understanding that "private entities that conclude agreements or conventions with the National Health Service or its respective subsystems are integrated in the national health system (providing services in conditions analogous to those of persons governed by public law), and may not, therefore, waive the tax exemption from the moment they conclude such conventions," and that "the concept of 'national health system' (NHS) encompasses the public entities integrated in the NHS, as well as private entities that, in accordance with the law in force, have concluded agreements or conventions with the NHS or with one of the public health subsystems for the provision of health care," whereby, as the Applicant "concluded, on 24 September 2013, an agreement with C… (...) and on 28 February 2014, an agreement with D… (D…)" it could not, from that moment, be classified in the "normal VAT regime as regards the activity of providing health care to the said entities".

Normatively, the correction in question is based on articles 9 and 12 of the applicable VAT Code (version prior to Law no. 7-A/2016, of 30 March), which provide that:

Article 9

Exemptions in domestic operations

The following are exempt from the tax:

1. Services provided in the exercise of the professions of doctor, dentist, midwife, nurse and other paramedical professions;

2. Medical and health services and operations closely connected therewith provided by hospitals, clinics, dispensaries and the like; (...)

Article 12

Waiver of exemption

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

b) Hospitals, clinics, dispensaries and the like, not belonging to persons governed by public law or to private institutions integrated in the national health system, which provide medical and health services and operations closely connected therewith; (...)

2 - The right of option is exercised by means of the submission, at any tax office or other legally authorized place, of the declaration of commencement or amendments, as the case may be, taking effect from the date of its submission.

3 - Having exercised the right of option in accordance with the preceding numbers, the taxable person is obliged to remain in the regime chosen for a period of at least five years, and once such period has elapsed, in the case of wishing to return to the exemption regime:

a) Submit, during the month of January of one of the years following that in which the period of the chosen regime has been completed, the declaration referred to in article 32, which takes effect from 1 January of the year of its submission;

b) Subject the remaining inventory to taxation and proceed, in accordance with no. 5 of article 24, to the adjustment of deduction as to fixed assets.

The said norms have correspondence in article 132 of Directive no. 2006/112/EC, of 28-11-2006 (VAT Directive), which provides:

1. The Member States shall exempt the following operations: (...)

b) Hospitalization and medical assistance, and operations closely connected therewith, provided by bodies governed by public law or, under conditions socially analogous to those applying to the latter, by hospitals, medical diagnosis and assistance centres and other establishments of the same nature duly recognized;

c) Services in the field of medical and paramedical professions, as defined by the Member State concerned; (…)

Paragraph b) of no. 1 of article 12 of the VAT Code permits only the waiver of exemption for entities exempt and classified under no. 2 of article 9 of that same Code, a classification that is expressly recognized for the Applicant in the RIT (cfr. p. 11).

The Tax and Customs Authority understands, as was seen, that the Applicant is integrated in the National Health System and operates in conditions analogous to those of a public body, whereby the waiver of exemption provided for in paragraph b) of no. 1 of article 12 of the VAT Code would be forbidden to it.

As regards the question concerning the meaning of the reference, in article 12, no. 1, paragraph b), of the VAT Code, to "national health system", and more specifically whether this should be equated with the notion of National Health Service, contained in specific legislation proper to the area in question, this was already the subject of profound and detailed analysis in the context of arbitral processes 278/2013T, 227/2015T and 341/2015T[5], where it was concluded that "The term 'national health system', contained in article 12, no. 1, of the VAT Code must be interpreted in accordance with the criterion imposed by the applicable norms of the VAT Directive," that is, as referring to "hospitals, clinics, dispensaries and the like, not belonging to persons governed by public law or to private institutions (...), which provide medical and health services and operations closely connected therewith" in conditions socially analogous to those applying to the operations ensured by bodies governed by public law.

This question, however, ends up being, in this case, of lateral importance, as, as results from the RIT, the corrections made by the AT, and now in question, are based directly on the understanding that what truly matters, for purposes of assessing the possibility, or not, of waiving the exemption in accordance with the provision of article 12, no. 1, paragraph b), of the applicable VAT Code, is the provision, or not, of the services in question under conditions analogous to those of persons governed by public law, as can be verified, amongst other matters, at p. 12 of the RIT, where it reads: "The scope of application of the waiver depends, then, on the nature of the taxable persons, that is, it applies strictly to those who are not bodies governed by public law or who, not having that nature, do not exercise their activity under conditions socially analogous." as well as at p. 13 and 14, where it reads: "It is the understanding of the Tax and Customs Authority (AT) that entities that conclude agreements or conventions with the National Health Service or its respective subsystems are integrated in the national health system (providing services in conditions socially analogous to persons governed by public law)"[6].

Thus, and taking into account the widely consensual jurisprudential understanding that, as was written in the Judgment of the Administrative Court of Appeal of 23-09-2015, handed down in process 0134/11[7], "It is exclusively in light of the grounds externalized by the AT at the time of the practice of the additional VAT assessment that the lawfulness of that tax act must be assessed," the primary question becomes whether, by force of the conventions concluded with C… and with D… (D…), the now Applicant should be considered as a private institution integrated in the "national health system", in the terms and for the purposes of article 12, no. 1, paragraph b), of the applicable VAT Code, as was the understanding of the AT in the act subject of the present arbitral action.

Indeed, the AT does not call into question that the waiver applies to entities that are not bodies governed by public law and that do not exercise their activity under conditions analogous, accepting expressly, as was seen, that they are encompassed within the scope of the waiver entities that are not governed by public law and that do not exercise their activity under conditions analogous thereto.

In this manner, in order to assess the lawfulness of the correction sub iudice, it falls to this Tribunal to assess whether the Applicant operates, or not, under conditions analogous to those of public entities, in particular by having concluded agreements with the entities referred to above.

Recognizing that the public or private nature of the financing of the activity of the operator that seeks to exercise the right to the waiver of the exemption in question may constitute an indication that the entity exercises its activity under "conditions analogous" to those prevailing for public hospitals, the fact is, on the one hand, in this case, not even the majority of the Applicant's billing derives from revenue relating to the agreement with C… and D…, and, on the other, the verification of an index, amongst other matters, in itself, would never permit, without more, as would be the case, to conclude the analogy of conditions presupposed by the provision of article 12, no. 1, paragraph b), of the VAT Code, as, beyond financing, public entities act within a framework characterized by constraints (such as, for example, budgetary control, public contracting ties) and prerogatives (such as, for example, the authority proper to entities governed by public law, safeguards proper to state involvement) specific, which it would always be necessary to weigh and assess in the sense of demonstrating the claimed analogy in the conditions of exercise of activity.

This understanding does not entail any violation of the principle of VAT neutrality, contrary to what is suggested by the AT (cfr. point 89 of the Response).

Thus, and forthwith, such a question could only be validly formulated if, and to the extent that, it was verified that the Applicant exercised, effectively, its activity under conditions analogous to those of public entities holding hospitals, clinics, dispensaries and the like, which, as was seen, is not demonstrated.

On the other hand, the public entities in question do not operate, in any manner whatsoever, within a framework of competition, as they are, by definition, economically deficit-generating entities, as they are instituted in execution of the constitutional command contained in article 64 of the Constitution, according to which "everyone has the right to protection of health," and this right is realized "through a universal and general national health service, (...) tending towards free provision," "primarily incumbent on the State".

That is, to put it another way, the "public entities integrated in the National Health Service," deprived of the right of waiver of exemption, and with respect to which the analogy of conditions of exercise of activity should be assessed, do not aim, by nature, to ensure their financing through the payment by third parties of the services they provide, as, by legal imposition, such service must tend towards free provision, which is evidently incompatible with operation in a competitive regime.

Put yet another way: since the provision of a public health service by the State, through the public entities that provide it, is a burden on the State, the provision of such services is incompatible with operation in a competitive environment, as, logically, the greater the volume of services provided, the greater the burden, and not the profit, as is natural in a competitive market, whereby, from the side of the public entity, there can never be a violation of the principle of neutrality, by distortion of competition[8].

It should further be noted that in the case, there is no assumption by the State, even in partial form, of the costs of the provision of health care provided by these private entities, insofar as what is comparticipated within the framework of the conventions in question is not the cost of the provision of health care provided by these private entities, but the consideration due by the users of the health services provided to the private provider. That is, and in summary, the beneficiary of the conventions, recipient of the services provided (as counterpart to the comparticipations it bears, or has borne, for that service), is what is comparticipated, and not the service-providing entity.

It is further noted that Law no. 7-A/2016, of 30 March, which amended the norm analyzed above, whereby it now provides that "May waive the exemption, opting for the application of the tax to their operations: (...) b) Taxable persons referred to in no. 2) of art. 9, who are not persons governed by public law, as regards medical and health services and operations closely connected therewith, which do not derive from agreements with the State, within the national health system, in accordance with the respective basic law;," did not have an interpretative character, contrary to what has been recent recurrent practice, which indicates, sufficiently clearly, that the legislator had the notion that, prior to the entry into force of the amendment made by it, such meaning was not contained in the letter of the law.

Thus, and in summary, not having been duly demonstrated that the Applicant provides its services under conditions analogous to public entities holding hospitals, clinics, dispensaries and the like, it must be considered that the corrections now in question are affected by error in the factual prerequisites, and consequent error in the application of Law, and must, as such, be annulled, with the arbitral claim succeeding in this part.

b.

With respect to the corrections in the amount of €94,748.27, relating to the adjustment of VAT concerning movable fixed assets, relating to the period of December 2014, they are based on the understanding that the Applicant ceased to meet the conditions for maintaining the waiver of exemption, in the terms analyzed above, this correction being a consequence of the foregoing.

This correction comprises two operations.

A first operation consists of the correction of the very value of the deductible VAT relating to movable fixed assets, the AT considering that part of the VAT deducted does not relate to movable fixed assets but to services provision, giving rise to the corrections shown in the following table.

Year | Column 1 - VAT deducted as corresponding to fixed assets | Column 2 - VAT that the AT considers corresponds to fixed assets | Column 3 - VAT that the AT considers corresponds to services provision
2012 | 264,002.92 | 250,854.04 | 13,148.88
2013 | 105,803.05 | 81,895.94 | 23,907.11

Next, the Tax Authority makes a correction to the values in Column 2, which consists of the following:

The Tax Authority begins by dividing these values into fifths;

Next, it considers that the Applicant could deduct two fifths of the VAT incurred in 2012, which would correspond to the years 2012 and 2013;

Then it considers that the Applicant could deduct one fifth of the VAT incurred in 2013, which would correspond to the year 2013.

The said corrections were made on the basis of article 24, no. 1, of the VAT Code, which refers to goods of mixed use, that is, goods that are used in exempt and non-exempt activities.

As is stated in the RIT, it was understood there that "By the change that occurred in the VAT treatment regime (changed from normal regime to exemption regime), in obedience to no. 1 of art. 24 of the VAT Code, the taxable person must adjust in favor of the State, 3/5 of the tax deducted in the year 2012 and 4/5 of the tax deducted in the year 2013, concerning goods of fixed physical assets of non-real property assets."

Now, as was concluded above, it was not demonstrated that the Applicant acted under conditions analogous to public entities holding hospitals, clinics, dispensaries and the like, whereby, failing the prerequisites on which the AT based the disregard of the waiver of VAT exemption duly exercised by the Applicant, the prerequisites for considering that it "changed from normal regime to exemption regime" equally fail.

Thus, and by the foregoing, it must be considered that the corrections now in question are also affected by error in the factual prerequisites, and consequent error in the application of Law, and must, as such, be annulled, with the arbitral claim succeeding in this part.

c.

With respect to the correction relating to the adjustment of VAT for the periods from April to June 2016, the same is based, in the first place, on the circumstance, consensual between Applicant and Respondent, that, from April 2016, the Applicant became a mixed taxable person, carrying out exempt and non-exempt operations.

Indeed, the already mentioned Law no. 7-A/2016, of 30-03, which entered into force on 31-03-2016, gave new wording to paragraph b) of no. 1 of article 12 of the VAT Code, which, as was seen, now provides that:

"Taxable persons referred to in no. 2) of article 9, who are not persons governed by public law, as regards medical and health services and operations closely connected therewith, which do not derive from agreements with the State, within the national health system, in accordance with the respective basic law;"

Thus, since 31 March 2016, the Applicant does not have the faculty of waiving the exemption, as regards transactions carried out under agreements with public entities (C… and D…), maintaining such possibility as regards the remainder.

From the said date, the Applicant became a mixed taxable person, in the terms and for the purposes of article 23 of the VAT Code, and it is necessary to calculate, in accordance with that provision, the percentage of operations that confer the right to deduction and those that do not.

The Tax Authority carried out such operation and calculated that the percentage of medical acts carried out within the scope of subject activity amounted to 71.4%.

This percentage was calculated on the basis of the number of medical acts carried out under agreements with D… and C…, on the one hand, and the number of medical acts carried out outside the scope of such agreements.

The Applicant, for its part, contends that article 23, no. 1, of the VAT Code does not require attention to the number of acts but to the monetary amount of transactions carried out in exempt and non-exempt activities.

Let us examine then.

Article 23, no. 1, paragraph b), of the VAT Code, as amended by Law no. 7-A/2016, of 30 March, provides that:

1 - When the taxable person, in the exercise of its activity, carries out operations that confer the right to deduction and operations that do not confer such right, in accordance with article 20, the deduction of the tax incurred in the acquisition of goods and services that are used in the realization of both types of operations is determined as follows:

b) Without prejudice to the provisions of the preceding paragraph, where a good or service is used for the realization of operations arising from the exercise of an economic activity provided in paragraph a) of no. 1 of article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of the operations that give rise to deduction.

Furthermore, no. 4 of the same provision now provides that:

4 - The deduction percentage referred to in paragraph b) of no. 1 results from a fraction comprising, in the numerator, the annual amount, tax excluded, of the operations that give rise to deduction in accordance with no. 1 of article 20 and, in the denominator, the annual amount, tax excluded, of all operations carried out by the taxable person arising from the exercise of an economic activity provided in paragraph a) of no. 1 of article 2, as well as non-taxed subsidies that are not equipment subsidies.

With all due respect to other understandings, it is considered that the application of the provision in paragraph b) of no. 1 of article 23 of the VAT Code as transcribed, in the sense in which the Tax Authority applies it, lacks legal support, as the term "amount of operations" does not have the meaning of "number of operations," as the said Authority considered, but of "monetary value of operations".

If there were any doubt, recourse would have to be had to the meaning of the terms used in the current article 174 of the VAT Directive. Indeed, once the terms used in the Portuguese version are coincident with those of national law, recourse to other versions of the Directive will contribute to the clarification of its meaning.

Now, in the English version, the wording of the provision leaves no doubt that the percentage is calculated on the basis of the monetary value of transactions and not on the basis of the number of transactions:

1. The deductible proportion shall be made up of a fraction comprising the following amounts:

(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;

(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.

It is concluded, thus, that the correction made by the Respondent, as regards the application, to the months from April to June 2016, of the method of allocation established in article 23 of the VAT Code, is illegal by reason of error in the legal prerequisites, and must, therefore, also be annulled.

The Applicant also petitions for the recognition of the right to indemnification for costs suffered with the security provided.

The arbitral decision on the merits of the claim which does not allow for recourse or challenge binds the tax administration from the end of the period provided for recourse or challenge, the said administration having to, in the exact terms of the success of the arbitral decision in favor of the taxable person and until the end of the period provided for spontaneous execution of the judgments of tax tribunals, restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose, as expressly results from paragraph b) of article 24 of the RJAT.

In the same provision, "the legislator made clear that the effects provided there are 'without prejudice to the other effects provided in the Code of Procedure and Tax Process.' It is considered in this regard that the legislator is here referring to all effects that derive from the CPPT, for the taxable person, and that are applicable following the consolidation in the legal order of a certain legal-fiscal situation, deriving from a definitive decision whether it be gracious or judicial."[9]

Notwithstanding the process of judicial challenge being essentially a process of mere annulment, a condemnation of the Tax Administration to the payment of indemnification for unjustified security may be handed down therein, as results from article 171 of the CPPT.

As was stated in the decision handed down in Process no. 28/2013-T[10], "it is unequivocal that the process of judicial challenge encompasses the possibility of condemnation to the payment of unjustified security and is even, in principle, the adequate procedural means for formulating such a claim, which is justified by evident reasons of procedural economy, as the right to indemnification for unjustified security depends on what is decided on the lawfulness or unlawfulness of the act of assessment. The request for constitution of the arbitral tribunal has as its corollary that it becomes in the arbitral process that the «lawfulness of the debt being executed» will be discussed, whereby, as results from the express tenor of that no. 1 of the aforesaid art. 171 of the CPPT, it is also the arbitral process that is adequate for examining the claim for indemnification for unjustified security provided."

It is concluded, thus, that this Tribunal is competent to examine the claim for indemnification for unjustifiably provided security.

The regime for the right to indemnification for unjustified security is contained in article 53 of the General Tax Code, which establishes the following:

"1. The debtor who, to suspend enforcement, offers bank security or equivalent shall be indemnified wholly or partially for the losses resulting from its provision, if it has been maintained for a period exceeding three years in proportion to success in administrative appeal, challenge or opposition to enforcement that have as their object the guaranteed debt.

1. The period referred to in the preceding number does not apply when it is verified, in gracious reclamation or judicial challenge, that there was error attributable to the services in the assessment of the tax.

2. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnifying interest provided in the present law and may be requested in the very process of reclamation or judicial challenge, or autonomously.

3. Indemnification for provision of unjustified security shall be paid by deduction from the revenue of the tax in the year in which payment is made."

In the case at hand, it is manifest that the error that affects the assessment acts is attributable to the Respondent Entity, as the assessments were made at its initiative and the Applicant in no way contributed to that error being committed.

It has, therefore, the Applicant the right to indemnification for the security provided, with reference to the value whose annulment was determined and has not yet been paid.

However, neither the charges that the Applicant incurred to provide the security were alleged nor proven, whereby it is unviable to fix here the indemnification to which it is entitled, which can only be effected in execution of this decision.

C. DECISION

In these terms, it is decided by this Arbitral Tribunal to partially uphold the arbitral claim filed and, in consequence,

Annul the additional assessments of Value Added Tax ("VAT") and compensatory interest, no. 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…, 2017…;

Condemn the Respondent to the payment of indemnification for unjustified security, in the amount that shall be fixed, if necessary, in execution of judgment;

D. Value of the Process

The value of the process is fixed at €797,071.69, in accordance with article 97-A, no. 1, a), of the Code of Procedure and Tax Process, applicable by force of paragraphs a) and b) of no. 1 of article 29 of the RJAT and of no. 2 of article 3 of the Rules of Costs in Tax Arbitration Processes.

Notice is hereby given.

Lisbon 18 February 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrating Judge

(Clotilde Celorico Palma)

The Arbitrating Judge

(Nina Aguiar)

[1] Available at www.caad.org.pt.

[2] Cfr. in this sense Judgment of the Administrative Court of Appeal of 23-09-2015, handed down in process 01034/11.

[3] Available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2012:338:0001:0006:PT:PDF.

[4] Available at www.caad.org.pt.

[5] Available at www.caad.org.pt.

[6] Underlining ours.

[7] Available at www.dgsi.pt.

[8] The situation may be different from the perspective of the private operator, with the considerations of the Judgment The Rank Group (cases C-259/10 and C-260/10), cited by the Respondent in its Response, applying there. In any case, it will always be said that situations such as that which the AT vehemently protests against end up being somewhat common, and it is not necessary to go further than to verify that arbitration, which operates in direct competition with state courts, has its services mandatorily subject to VAT, and without possibility of waiver, whereas the latter provide their services exempt from VAT.

[9] Carla Castelo Trindade – Legal Regime for Arbitration in Tax Matters – Annotated, Coimbra, 2016, p. 122.

[10] Available at www.caad.org.pt.