Process: 432/2017-T

Date: March 16, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

Process 432/2017-T addresses the critical issue of VAT localization rules for cross-border services related to immovable property under Article 6(7)(a) of the Portuguese VAT Code. A Portuguese company provided medical consultancy services for hospital construction projects in Algeria, involving assessment and adaptation of properties for medical use. The Tax Authority challenged the company's VAT treatment, arguing the services related to property use rather than the property itself, and assessed additional VAT of €19,550 on an €85,000 invoice. The Authority also contested the validity of the UK client's VIES registration number. The company maintained its services directly related to the Algerian properties, involving multiple site visits to analyze spaces, coordinate with architects, define medical equipment locations, and prepare technical specifications for built-in systems. The case examines whether technical consultancy for adapting incomplete buildings constitutes services 'related to immovable property' exempt from Portuguese VAT under territorial rules corresponding to Article 47 of VAT Directive 2006/112/EC. Key issues include: distinguishing property-related services from use-related services; consequences of invalid VIES numbers for B2B transactions; and input VAT deduction rights when suppliers charge tax. The arbitral tribunal must determine if services enabling property adaptation for specific purposes fall within the immovable property exception, considering the direct physical relationship between services and specific identifiable properties abroad, regardless of service provider or recipient location.

Full Decision

ARBITRAL DECISION

I. Report

  1. On 17-07-2017, the company A…, LDA., filed a request for constitution of a single arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law No. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as RJAT), with a view to the annulment of the additional VAT assessments and compensatory interest dated 15-02-2017.

  2. Pursuant to article 6, paragraph 1 of RJAT, the Deontological Council of the Arbitration Center appointed the undersigned arbitrator, notifying the parties.

  3. The tribunal is regularly constituted to appreciate and decide the subject matter of the proceeding.

  4. The allegations supporting the Claimant's request for arbitral decision are, in summary, as follows:

4.1. Following the refund request relating to period 2016/03, in the amount of € 16,905.72, the Claimant was subject to an internal inspection action, in compliance with Service Order No. OI2016…, which culminated in the final tax inspection report and corrections to its tax situation in terms of VAT.

4.2. In that report the Tax and Customs Authority ("TA") states that the services provided by the Claimant to the taxpayer "B…" "do not fall within the exclusion provided for in paragraph a) of paragraph 7 of article 6 of the VAT Code, since we are dealing with services related to the use given to the property, and not services related to the property itself".

4.3. It was also invoked by the TA that the VAT identification number of the taxpayer "B…" which the Claimant included in its invoice is invalid in England, such taxpayer not being registered in the VAT Information Exchange System ("VIES").

4.4. The TA therefore concluded that the Claimant carried out active operations in which it did not charge tax that should have been charged in the amount of € 19,550, relating to invoice No. 6/123, dated 9 March 2016, in the amount of € 85,000.

4.5. The Claimant states that, within the scope of the contract concluded between it and "B…", the services provided involved trips by its medical team (composed of Dr. C… and Dr. D…) to…, in Algeria, in the months of February, March and May 2015.

4.6. Within the scope of such trips, the Claimant's medical team analyzed the properties in question, already erected but not yet completed nor adapted for the purpose to which they were intended, evaluated the conditions and layout necessary for the development of work in each medical specialty (emergency, imaging, dental service, consultation area, functional rehabilitation, intensive care, hemodialysis, wards, morgue, operating room, delivery room) in each of the defined spaces, and proposed suggestions for adaptation of each of those spaces for the development of the activity to which they were intended, work carried out in close coordination with the contractors and architects who also provided services within the scope of the construction contract for the hospitals in question.

4.7. Indeed, the architects E… and F… (of G… Architects), who also provided services within the scope of the contract in question, traveled many times together with the Claimant's medical team.

4.8. This hospital construction contract also involved specific monitoring by the Claimant's medical team in the definition and adaptation of the locations for installation of fixed medical equipment and air conditioning, air circulation and refrigeration systems.

4.9. The aforementioned equipment, insofar as it is necessarily built into the building, requires the preparation of plans defining the specific points for electricity, water, sewage, and medical gas to be installed, which were indeed prepared in the situation at hand following technical opinions of the Claimant's medical team.

4.10. Accordingly, (i) all medical equipment to be applied in the hospitals was studied, (ii) the structure and arrangement of these was studied, (iii) the fitness of the medical devices themselves for the purposes to which they were intended was evaluated, (iv) the location of each of the medical devices at the projected location was studied and, finally, (v) the reorganization and/or resizing of the space and relocation of the medical devices was suggested.

4.11. It follows from the contract already attached and from the amounts charged by the Claimant that the services provided had special focus on the necessary adaptation to the completion of the contract relating to the hospital of…, with such technical work being, to a large extent, replicated in the hospital of….

4.12. The services provided by the Claimant were therefore intended to adapt the properties to the functionality of hospitals, so that the contractor could deliver to the owner of the work – the Algerian Ministry of Defense – the hospitals "turnkey", as had been contracted.

4.13. It is also verified that the Claimant indeed paid the VAT charged by taxpayer H… in the respective invoice-receipt, which is also not contested by the TA.

4.14. Even if the tax was improperly charged in the invoice-receipt issued by the service provider H… (falling within the exemption regime), it is nonetheless deductible – contrary to what the TA seems to want to defend – since it was paid by the Claimant and the service provider became thereby a VAT taxpayer.

4.15. After disregarding the arguments put forward by the Claimant in the mentioned right to be heard, the TA merely mentions the two requirements provided for in article 19, paragraph 4, of the VAT Code, for the purpose of preventing the right to deduction, without properly substantiating and proving the fulfillment of such requirements in the situation under analysis.

4.16. Article 6 of the VAT Code determines the rules for territorial application of VAT, namely, for what concerns us here, those relating to the provision of services.

4.17. The general rules for locating service provisions are provided for in article 6, paragraph 6, of the VAT Code, although certain exceptions are provided for.

4.18. One of the exceptions is contained in article 6, paragraph 7, paragraph a), of the VAT Code, relating to services related to a property located outside the national territory.

4.19. The said localization rule operates independently of where the service provider or the recipient of services is based, established or domiciled, only the location of the properties being relevant.

4.20. Article 6, paragraph 7, paragraph a), of the VAT Code corresponds, in the internal legal order, to article 47 of Directive 2006/112/EC of the Council, of 28 November 2006, relating to the common system of VAT, in its consolidated version (hereinafter merely referred to as "VAT Directive"), of similar content.

4.21. The aforementioned legal provisions do not exhaustively enumerate services related to real property, merely exemplifying some of the service provisions that determine its application, as is clear from the word "including".

4.22. To be considered as related to real property, services must be intended for a specific, identifiable and autonomous property, as occurred with respect to the properties where the hospitals in question were constructed.

4.23. Furthermore, in the situation under analysis, and as is clear from the factual circumstances described in the previous point, the services provided by the Claimant's medical team presented a direct relationship with the properties, which is immediately proven by the trips and stays in…, Algeria, with a view to the concrete and specific characterization of the spaces to be adapted for the specific purpose to which they were intended.

4.24. Enabling the services provided by the Claimant's medical team to adapt erected properties – but still vacant of people and goods – to a specific purpose, one cannot but understand that indeed the properties themselves constituted the object of the service provision.

4.25. There is therefore duly proven the provision of services on properties located outside the national territory (in the case, located in Algeria), by the respective medical team in the capacity of experts, which had as their object to prepare or coordinate the execution of real property works – i.e. the adaptation of the properties in question to the provision of medical care – which as such fall within the localization rule provided for in article 6, paragraph 7, paragraph a), of the VAT Code.

4.26. The Claimant considers it also relevant, for this purpose, to mention art. 31-A, paragraph 1, of Commission Implementing Regulation (EU) No. 1042/2013 of the Council, of 7 October 2013, amending Commission Implementing Regulation (EU) No. 282/2011 of the Council, of 15 March 2011, regarding the place of provision of services related to real property, although the same is only applicable to facts occurring from its entry into force on 1 January 2017 – and therefore, not applicable to the facts under scrutiny which occurred at an earlier date.

4.27. It is, moreover, expressly admitted in Circular Memo No. 30191, dated 8 June 2017 that the said criteria were already applied on an optional basis before that date.

4.28. Now, many of the services provided by the Claimant – and which appear in the documentation provided to the Tax Inspector – are specifically listed in paragraph 2 of article 31-A.

4.29. In conclusion, there remain no doubts whatsoever that the Claimant indeed provided "services related to real property", being evident its classification within the territorial rule provided for in article 6, paragraph 7, paragraph a), of the VAT Code, reason why the additional VAT assessments and compensatory interest in question are vitiated by illegality.

4.30. Embodying such illegality a breach of law, the said assessments are voidable, under the provision of article 163, paragraph 1, of the Administrative Procedure Code ("CPA"), applicable by virtue of article 29, paragraph 1, paragraph d), of RJAT, annulment which is hereby requested.

4.31. Furthermore, the Claimant understands that, as the jurisprudence of the CJEU emphasizes, article 47 of the VAT Directive is opposed to considering that a service such as that provided by the Claimant should be subject to VAT in Portugal because it is not related to the property located in Algeria, but "only" to the use given to the property.

4.32. Finally, the Claimant states that there are no requirements in the VAT Directive nor in the VAT Code, for this territorial rule, relating to the quality of the acquirer or its registration in VIES.

4.33. This is an exemption of objective character and disregards entirely the legal-tax situation of the acquirer of the services.

4.34. There remain therefore no doubts whatsoever that the registration of the acquirer in VIES is not, per se, a requirement to consider the operation not subject to taxation in Portuguese territory, within the scope of paragraph a) of paragraph 7 of article 6 of the VAT Code.

4.35. The service provider H… was classified within the VAT exemption regime, having, however, charged and collected VAT from the Claimant, which the latter understands to be deductible in legal terms, contrary to the TA's understanding, in light of the provision of art. 2, paragraph 1, c) VAT Code.

4.36. There was no mention in the accounting document that does not confer the right to deduct the VAT mentioned therein in the case at hand, the service provider H… merely issuing electronically an invoice-receipt in which it charged VAT, and for which it suffered withholding of Personal Income Tax - which, pursuant to article 101-B, paragraph 1, paragraph a), of the respective Code, is only due for income exceeding € 10,000.00, an annual amount higher than that fixed in paragraph 1 of article 53 of the VAT Code – therefore, the Claimant had no way of knowing what VAT regime such service provider was subject to – something which, as mentioned above, is not even a requirement for the deductibility of the tax.

4.37. It constitutes an abuse of rights by the TA, which – that one, unlike the Claimant – is aware of the tax registry information and classification of taxpayers, to create an electronic invoice-receipt issuance system that permits creating VAT chargebacks in supposed contradiction to the material truth that is within the knowledge of that same TA, and which then seeks to impute such failures to taxpayers such as the Claimant who rely on the correct issuance of an invoice-receipt issued through a computer platform created by that same TA.

4.38. In light of the foregoing, it is not legally admissible to deny the Claimant the right to deduct the VAT that was improperly charged and collected to it by the service provider, insofar as the service provider became a VAT taxpayer by such fact, pursuant to article 2, paragraph 1, paragraph c), of the VAT Code, and is therefore obligated to deliver such tax in favor of the State.

4.39. Allowing art. 19, paragraph 1, paragraph a), of the VAT Code, the deduction by taxpayers of the tax due or paid for the acquisition of goods and services from other taxpayers.

4.40. In turn, paragraph 4 of article 19 of the VAT Code, merely excludes the deduction of tax not delivered to the State's coffers the tax charged, when the taxpayer had or should have knowledge that the transferor of goods or service provider does not have adequate business structure capable of exercising the declared activity,

4.41. Now, in the Tax Inspection Report it is not alleged by the TA the failure to deliver by the service provider of the tax to the State's coffers, and no attempt is even made to demonstrate that the Claimant now had, or should have, knowledge that such service provider did not have adequate structure capable of exercising the declared activity.

4.42. In the situation under analysis, seeking the TA to deny the right to deduct the VAT borne by the Claimant, it was for the former that it was incumbent to substantiate and properly prove the verification of both requirements provided for in article 19, paragraph 4, of the VAT Code, pursuant to article 74, paragraph 1, of the General Tax Law,

4.43. The non-verification and proof of the requirements provided for in article 19, paragraph 4, of the VAT Code, is sufficient to allow the Claimant the respective right to deduction of that VAT borne, reason why the additional VAT assessments and compensatory interest in question are vitiated by illegality.

4.44. Notwithstanding the Claimant's non-conformity with the legality of the assessments in question, to avoid the constraints of the enforcement proceedings meanwhile instituted, it proceeded to the full payment of the amounts determined by the TA, in the total amount of € 2,922.46, an amount which includes the costs of such enforcement proceedings.

4.45. It is noted, however, that in the case under analysis, in addition to the payment of such sums, the TA failed to refund to the Claimant the tax to which it would be entitled, were it not for the correction carried out following the inspection action carried out.

4.46. Reason why, the Claimant understands that indemnatory interest should additionally be calculated on such amount that was – improperly – not refunded to it, pursuant to the provision of article 43 of the General Tax Law, by virtue of articles 24, paragraph 5, and 29, paragraph 1, paragraph a), of RJAT.

4.47. In the case at hand it is all too evident that there was indeed an error attributable to the TA's services, taking into account the illegalities supra identified.

4.46. Indemnatory interest is therefore due on the amount that should be restituted, from the date of the respective undue voluntary payment until the date of issuance of the respective credit note, calculated at the legal rate of interest in force, payment of indemnatory interest which is hereby requested.

  1. For its part, the Respondent Tax and Customs Authority submitted a response, in which it defended itself, in summary, in the following terms:

5.1. The Respondent first contested the value attributed to the case, since, once the assessments issued resulted in the global amount of € 2,847.76, where € 2,761.58 corresponds to the amount of the additional VAT assessment and € 86.18 to the amount of the compensatory interest assessment, it understands that this should be the value of the case, pursuant to art. 3 of the Regulation of Costs of Tax Proceedings, 97-A of the CPPT and 297 of the CPC, and not the amount of € 19,753.48, resulting from the sum of arithmetic corrections.

5.2. Regarding the merits of the case, it stated that the Claimant was subject to an inspection procedure covered by Service Order No. OI2016…, of an internal nature and partial scope, relating to the analysis of the VAT refund request for period 2016/03.

5.3. This order was opened following a VAT refund request filed by the Claimant on 6 May 2016, in its periodic VAT declaration relating to the tax period 2016-03-01 to 2016-03-31, in the amount of €16,905.72.

5.4. In the course of the said inspection, the non-charging of VAT was detected, in the amount of €19,550.00, on the invoice issued on 9 March 2016 in the amount of €85,000.00 to the company "B…" (without valid VAT number in Great Britain), with address in London.

5.5. As a result of the inspection action and identification of irregular situations within the scope of monitoring the application of VAT refund, it was found that the Claimant carried out passive operations in which it improperly deducted VAT pursuant to paragraph 4 of article 19 of the VAT Code, and a correction was made in the amount of €117.30, relating to period 2016/03.

5.6. A total amount of €19,667.30 was then calculated, referring to the total corrections in period 2016/03.

5.7. On the basis of the said corrections, the additional VAT assessment No. 2017… was issued, in the amount of €2,761.58 relating to period 2016/03, an amount which resulted from automatic compensation, on the basis of the correction of €19,667.30 (from the inspection action) and the amount of the VAT refund request €16,905.72.

5.8. The substantiation underlying the said correction is contained in the inspection report identified above which for all purposes is considered herein reproduced.

5.9. Given the fact that payment was not made within the legal time period, the corresponding certificates of debt were issued and the consequent enforcement proceedings were instituted.

5.10. At issue is the non-acceptance of the classification of the services provided by the Claimant to the taxpayer "B…" as services related to the properties themselves, as well as the non-acceptance of the deduction of VAT borne by the claimant due to improper charging of tax by the service provider H…,

5.11. The Respondent understands that one should conclude the lack of merit of the same, in accordance with the substantiation resulting from the tax inspection report.

5.12. The Respondent further adds that Commission Implementing Regulation (EU) No. 282/2011 of the Council of 15 March 2011, as amended by Commission Implementing Regulation (EU) No. 1042/2013 of the Council of 15 March 2011, amended by Commission Implementing Regulation (EU) No. 1042/2013 of the Council of 7 October, which added articles 13-B, 31-A and 31-B, will only be applicable from 1 January 2017.

5.13. However, notwithstanding this non-application, the fact of greater relevance relates to the relationship of the services provided to the property, and in this case we are dealing with services provided within the scope of the application of acts related to medical care, not directly related to the property.

5.14. Which implies concluding that the services provided by the Portuguese company do not fall within the exclusion provided for in paragraph a) of paragraph 7 of article 6 of the VAT Code, since we are dealing with services related to the use given to the property and not services directly related to the property itself.

5.15. Regarding the other question, as is apparent from the tax inspection report, the taxpayer, classified under the exemption regime, article 53 of the VAT Code, did not deliver to the State's coffers the VAT improperly charged.

5.16. Now, the right to deduct the tax borne is regulated in arts. 19, 20 and 21 of the VAT Code, being subject to various substantive and formal requirements, with the exclusion of the right to deduction occurring, either with reference to the nature of certain goods and services (for example, art. 21 of the VAT Code), or with reference to certain specific operations (for example, paragraphs 3 and 4 of art. 19 of the VAT Code).

5.17. The norm on which the corrections carried out by the SIT are based is paragraph 4 of article 19 of the VAT Code, in the version introduced by article 47, paragraph 2 of Law No. 55-B/2004, of 20 December, and therefore with reference to certain specific operations.

5.18. The article in question resulted from the transposition into the national legal order of Directive No. 2003/92/EC of the Council, of 7 October, with the aim of introducing into the national legal order a measure to combat fraud and tax evasion, namely carousel fraud.

5.19. Aimed at this objective, a mechanism was then introduced that would prevent the deduction of VAT in the event that the tax relates to operations in which the service provider does not deliver the charged tax to the State and the taxpayer has or should have knowledge that the said provider does not have business structure capable of exercising the respective business activity.

5.20. In the specific case, it is an established and undisputed fact that the charged tax was not delivered to the State's coffers.

5.21. And, in the present situation, it is indisputable that the Claimant not only has but (even if it did not) should have knowledge that the service provider did not have adequate business structure.

5.22. At issue is the acquisition of translation services and indeed, it is the Claimant itself that, in article 120 of its initial request, acknowledges the lack of business structure of the service provider.

5.23. For it admits that "to provide a translation service there is no need for any business structure beyond a computer and mastery of the languages in question – something that the taxpayer in question manifestly possessed".

5.24. It is therefore manifest that, even if there were no actual knowledge of the non-existence of business structure (knowledge that confessedly existed), any normal recipient placed in the situation at hand should have knowledge that the service provider did not have the business structure.

5.25. The mechanism enshrined in paragraph 4 of article 19 of the VAT Code therefore prevents the deduction of VAT in this situation.

5.26. In light of the foregoing, the services acted properly in promoting the corrections in question, within the framework of the legal regime in effect, and for this reason the tax acts in question should be upheld in the legal order.

5.27. Thus, in light of all the foregoing, one could never consider that error attributable to the services occurred, in the issuance of the assessment in question, a condition indispensable for conviction in the payment of indemnatory interest.

  1. On 27/10/2017, an arbitral order was issued, notifying the Claimant to rule on the incident of the value of the case raised by the respondent, as well as to indicate the factual matters on which it intended to examine the witnesses it had enrolled.

  2. The Claimant ruled on the incident of the value of the case raised by the Respondent and on the factual matters it intended to examine the witnesses, referring, in summary, to the following:

7.1. The value of the case indicated appears to be correct, in the amount of € 19,753.48, pursuant to article 97-A of the Code of Tax Procedure and Process ("CPPT"), by virtue of article 29 of RJAT, insofar as the Claimant considers that to be the value of the amount whose annulment it seeks.

7.2. The Claimant considers it essential to examine the witnesses enrolled to prove the factuality contained in point II.1 of its request for arbitral decision, that the services it provided aimed at the adaptation of properties for the purpose to which they were intended (i.e. to provide medical care).

7.3. Accordingly, the Claimant requested that the witnesses be heard on the facts contained in articles 19, 21 to 29, 31, and 33 to 35, of point II.1, of its request for arbitral decision.

  1. On 06/12/2017, at 10:30 a.m., a meeting of the Arbitral Tribunal took place, in which the examination of the witnesses enrolled by the Claimant was carried out, which dispensed with the examination of witness C…, witness D… having been examined.

  2. The Arbitral Tribunal notified the Claimant and the Respondent to, in this order and successively, submit written submissions within 15 days, and, pursuant to article 18, paragraph 2 of RJAT, 21 March 2018 was set for the purpose of rendering the arbitral decision.

  3. The parties submitted written submissions, where they reaffirmed what had previously been alleged.

II – Proven Facts

  1. On the basis of the documentation attached to the case and based on the testimony given by D…, the following facts are considered proven:

11.1. Following the refund request relating to period 03/2016, in the amount of € 16,905.72, the Claimant was subject to an internal inspection action, in compliance with Service Order No. OI2016….

11.2. In the course of the inspection covered by OI2016…, the SIT detected the non-charging of VAT, in the amount of €19,550.00, on invoice 6/123 issued on 9 March 2016 in the amount of €85,000.00 to the company B…, with address in London.

11.3. The company B… does not have a valid VAT number in VIES in Great Britain.

11.4. The assessments issued resulted in the global amount of €2,847.76, where €2,761.58 corresponds to the amount of the additional VAT assessment and €86.18 to the amount of the compensatory interest assessment.

11.5. The Claimant exercised the right to prior hearing.

11.6. Within the scope of the contract concluded by the Claimant and B…, the services provided by the former involved trips by its medical team (composed of Dr. C… and Dr. D…) to…, in Algeria, in the months of February, March and May 2015.

11.7. Within the scope of such trips, the Claimant's medical team analyzed the said properties, already erected but not yet completed nor adapted to the purpose to which they were intended, evaluated the conditions and layout necessary for the development of work in each medical specialty (emergency, imaging, dental service, consultation area, functional rehabilitation, intensive care, hemodialysis, wards, morgue, operating room, delivery room) in each of the defined spaces, and proposed suggestions for adaptation of each of those spaces for the development of the activity to which they were intended.

11.8. The architects E… and F… (of G… Architects), who also provided services within the scope of the contract in question, traveled many times together with the Claimant's medical team

11.9. The hospital construction contract in question also required specific monitoring by the Claimant's medical team in the definition and adaptation of the locations for installation of fixed medical equipment and air conditioning, air circulation and refrigeration systems.

11.10. The aforementioned equipment, insofar as it is necessarily built into the building, requires the preparation of plans defining the specific points for electricity, water, sewage, and medical gas to be installed, which were indeed prepared, following technical opinions of the Claimant's medical team.

11.11. The construction contract was concluded with another company, not the Claimant, with the services provided by the Claimant intended to adapt the properties to the functionality of hospitals so that the contractor could deliver them "turnkey" to the owner of the work, the Algerian Ministry of Defense.

11.12. The service provider H… did not deliver to the State the VAT improperly charged in the amount of €117.30.

11.13. The service provider H… did not have facilities for the exercise of its activity.

  1. There are no proven facts with relevance for the decision of the case.

III– Law

  1. The following are the legal questions to be resolved:

A) On the incident relating to the value of the case

B) On the possible violation of article 6, paragraph 7 a) of the VAT Code.

C) On the non-acceptance of the deduction of VAT borne by the Claimant due to improper charging of tax by the service provider H…, pursuant to articles 2, paragraph 1, paragraph c) and 19, paragraph 4, both of the VAT Code.

D) On the right to indemnatory interest

These questions shall be analyzed accordingly.

A) On the incident relating to the value of the case.

  1. The Respondent raised the incident of the value, indicating that, once the assessments issued resulted in the global amount of €2,847.76, where €2,761.58 corresponds to the amount of the additional VAT assessment and €86.18 to the amount of the compensatory interest assessment, this would be the value of the case to be considered.

Notified of the incident raised by the Respondent, the Claimant responded, arguing that the amount of € 19,753.48 indicated in the initial petition appears to it to be correct, since it is the value of the amount whose annulment it seeks.

Article 97-A, paragraph 1, a) of CPPT, applicable by virtue of art. 29 of RJAT provides as follows

"1 - The acceptable amounts, for purposes of costs or others provided for in law, for cases that take place in tax courts, are as follows:

a) When a tax assessment is contested, the amount whose annulment is sought".

After analysis of the VAT assessment statement, it is verified that from it results a VAT to be borne by the taxpayer in the amount of € 19,667.30, which does not translate into the requirement for payment of that amount only because the taxpayer has VAT to recover in the amount of € 16,905.72.

In these terms, it seems clear to us that the value of the case was correctly fixed at € 19,667.30, since that is the amount whose annulment the Claimant seeks.

We maintain the value indicated for the case.

B) On the possible violation of art. 6, paragraph 7 a) of the VAT Code.

  1. Let us now inquire whether it can be considered that violation of art. 6, paragraph 7, a) of the VAT Code has occurred.

Article 6, paragraph 6 of the VAT Code states:

"Service provisions are taxable when provided to:

a) A taxable person referred to in paragraph 5 of article 2, whose place of business, permanent establishment or, in its absence, the domicile, to which the services are provided, is located in the national territory, wherever the place of business, permanent establishment or, in its absence, the domicile of the service provider may be located;

b) A person who is not a taxable person, when the service provider has in the national territory the seat of its activity, a permanent establishment or, in its absence, the domicile, from which the services are provided."

However, paragraph 7, paragraph a) of the same statute states:

"The provision of the previous number does not apply with respect to the following operations:

a) Service provisions related to a property located outside the national territory, including services provided by architects, by undertakings responsible for inspecting construction work, by experts and real estate agents, and those which have as their object preparing or coordinating the execution of real property work, as well as the granting of rights of use of real property and the provision of accommodation services carried out within the scope of hotel activity or other activities with analogous functions, such as camping parks".

This norm resulted from the transposition of article 47 of Directive 2006/112/EC of the Council of 28 November 2006, pursuant to which "the place of service provisions related to real property, including services provided by experts and real estate agents, provision of accommodation services in the hotel sector or in sectors with analogous functions, such as holiday camps or land intended for camping, the granting of rights of use of real property and the services of preparation and coordination of work on real property, such as services provided by architects and undertakings responsible for inspecting construction work, is the place where the real property is situated"

Regarding the application of Commission Implementing Regulation (EU) No. 1042/2013 of the Council of 7 October 2013, amending Commission Implementing Regulation (EU) No. 282/2011 of the Council of 15 March 2011, regarding the place of service provisions related to real property, this only entered into force on 1 January 2017, and therefore does not apply to facts that occurred at an earlier date.

Independently of this question, what is discussed in the case under analysis is the connection of the services provided by the Claimant to the properties in question.

Registration of the acquirer in VIES is therefore not relevant here, but only the relationship of the service provided to the properties in question, pursuant to article 6, paragraph 7, paragraph a), of the VAT Code.

We can therefore verify, from the analysis of the factual matter, that the Claimant, although it did not itself proceed to the installation of any equipment in the said properties, the truth is that it provided the necessary technical guidance in medical terms for its completion, and it seems clear to us that without this collaboration it would not be possible to deliver the constructed hospital in working order, as was the object of the said "turnkey" contract.

The Respondent's argument that this is not in this case about services related to the property, but rather services related to the use given to the property, does not hold. In fact, not only does this distinction lack legal support, but it seems manifest to us that a hospital construction contract implies that the building be placed in conditions to function as a hospital, and only with a profound reconversion could that same building subsequently be used for any other purpose. Accordingly, the specialized guidance given by physicians in order to place a constructed property as a hospital in the conditions necessary to function as such is manifestly a provision of services related to that property.

In these terms, it must be considered that the Claimant provided services related to the properties in question, and therefore there is no need to charge VAT, pursuant to article 6, paragraph 7 a) of the VAT Code.

C) On the non-acceptance of the deduction of VAT borne by the Claimant due to improper charging of tax by the service provider H…, pursuant to articles 2, paragraph 1, paragraph c) and 19, paragraph 4, both of the VAT Code-

  1. It now falls to examine the question of the non-acceptance of the deduction of VAT borne by the Claimant due to improper charging of tax by the service provider H…, pursuant to articles 2, paragraph 1, paragraph c) and 19, paragraph 4, both of the VAT Code, since the same charged VAT without delivering it to the State

Article 2, paragraph 1, paragraph c) of the VAT Code provides that taxable persons are "natural or legal persons who improperly mention VAT on an invoice".

Article 19, paragraph 1, a) of the same statute states:

"For determination of the tax due, taxable persons deduct, pursuant to the following articles, from the tax incurred on the taxable operations they carried out:

a) The tax due or paid for the acquisition of goods and services from other taxable persons".

Paragraph 4 of the same article further states:

"Nor can tax resulting from operations in which the transferor of goods or provider of services does not deliver to the State's coffers the charged tax be deducted, when the taxable person has or should have knowledge that the transferor of goods or provider of services does not have adequate business structure capable of exercising the declared activity".

Article 53 of the same statute states:

"Benefit from the exemption from the tax taxable persons that, not having and not being obligated to have organized accounting for purposes of PIT or CIT, and not practicing import, export or related activities, and not exercising activity consisting in the transfer of goods or provision of services mentioned in Annex E of this Code, have not exceeded, in the previous calendar year, a turnover exceeding € 10,000".

It is verified, in the case under analysis, that the service provider H…, being exempt from VAT collection, pursuant to article 53 of the VAT Code, proceeded to charge VAT to the Claimant and did not deliver the amount to the State, as was incumbent upon it to do, even though, pursuant to law, this should not have been charged.

Now, having the service provider not delivered the amount of VAT due to the State, it must be evaluated whether the taxable person should have knowledge that this did not have adequate business structure capable of exercising the declared activity.

The Central Administrative Court of the North, in its Judgment of 15 February 2012, Case 01606/06.0BEVIS, states in this regard: "It is true that the law does not give us a definition of what constitutes "adequate business structure", leaving a wide margin of discretion to the tax administration as to the interpretation of such a concept. However, an adequate business structure capable of exercising the declared activity cannot but be an organization apt for the pursuit of the activity developed by the company, namely, in terms of facilities, equipment, machinery, human and material resources, which allow it to develop this activity. That is, to have a business organization with the necessary material and human means to carry out its activity under appropriate conditions of quality and efficiency."

Further states the Judgment of the South Central Administrative Court of 14 April 2015, Case No. 06525/13:"Article 19, paragraph 4, of the VAT Code, in the version of decree-law 31/2001, of 8/2, established limitations to the right to deduction of VAT, by preventing the deduction of tax in cases of non-existence or inadequacy of the business structure of the supplier or provider to the activity developed, if the payment of the tax to the State does not occur. The law requires, for this purpose, that the acquiring taxable person has knowledge of the fraudulent intention of the supplier, not to deliver the tax to the State's coffers. It will further be stated that the principle of VAT neutrality requires the safeguarding of the right to deduction when there are no objective elements demonstrating that the taxable person knew or should have known that, with its acquisition, it was participating in VAT fraud. In this context, the CJEU has understood that it is not compatible with the deduction right regime provided for in the VAT Directive to refuse this right to a taxable person who did not know, and to whom it could not be required to know, that the operation in question was part of a fraud, or that another operation in the supply chain, prior or subsequent to that carried out by the taxable person, was constitutive of VAT fraud."

In the case at hand, it is not manifest that the Claimant could perceive that the service provider would not deliver the amount of VAT charged or that its structure was manifestly inadequate for the work provided, given that we are dealing with a linguistic translation service, which depends much more on the knowledge of the service provider, than on any facilities or technical equipment whatsoever, and therefore the deduction of VAT in question would have to be accepted.

The claim therefore proceeds equally in this respect.

D) On the right to indemnatory interest.

  1. As stated in paragraph 1 of article 43 of the General Tax Law "when it is determined, in administrative reclamation or judicial contestation, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due".

As also follows from paragraph 5 of art. 24 of RJAT, the right to indemnatory interest may be recognized in arbitral proceedings.

One must, however, determine whether or not there was error attributable to the services.

The Respondent not being correct in what concerns the interpretation of article 6, paragraph 7, paragraph a), of the VAT Code nor in the non-acceptance of the deduction of VAT, in the amount of €117.30, regarding the translation services provided, pursuant to art. 19, paragraph 4, VAT Code, it is manifest that there was violation of those provisions.

Whereas the situation could have been corrected by the Tax Authority, following the right to prior hearing exercised by the Claimant.

We are thus in this case faced with negligence on the part of the Tax Authority, negligence which translates into an "error attributable to the services", as set out in art. 43 of the General Tax Law.

Taking into account what is established in article 61 of CPPT and having verified the existence of error attributable to the services of the Tax Administration, from which resulted payment of the tax debt in an amount greater than legally due (see art. 43/1 of the General Tax Law), we can understand that the Claimant has the right to indemnatory interest at the legal rate.

In this case, however, the interest cannot be calculated on the amount of € 19,753.48, since the Claimant did not pay that amount, but only on the amount of € 2,992.46, which was what was actually paid by the Claimant.

V – Decision

The claim for annulment of the VAT assessments and compensatory interest is granted, resulting from the violation of the provisions of articles 6, paragraph 7, a), 2, paragraph 1, paragraph c), and 19, paragraph 4, both of the VAT Code, and the Claimant is entitled to non-charging of VAT of € 19,550.00, as well as the right to deduct the VAT in the amount of € 117.30, to the annulment of the corresponding compensatory interest and also to indemnatory interest at the legal rate, on the amount of €2,992.46, until the full reimbursement of that same amount.

The value of the case is set at: € 19,753.48 (as per decision on the incident of case value mentioned above) and the value of the corresponding arbitration fee at € 1,224.00 pursuant to Table I of the Regulation on Costs of Tax Arbitration Proceedings.

Since the respondent was almost entirely unsuccessful in the case and the Claimant only partially unsuccessful on the question of indemnatory interest, it is considered equitable to set costs at 98% for the Respondent and 2% for the Claimant.

Lisbon, 16 March 2018

The Arbitrator

(Luís Menezes Leitão)

Frequently Asked Questions

Automatically Created

How are VAT localization rules applied to services related to immovable property located abroad under Portuguese law?
Under Portuguese VAT law, Article 6(7)(a) of the VAT Code establishes that services related to immovable property are taxed at the location of the property, regardless of where the service provider or recipient is established. This rule corresponds to Article 47 of VAT Directive 2006/112/EC. For properties located abroad, such services fall outside Portuguese VAT territorial scope. The localization rule operates independently of the parties' domicile, focusing solely on property location. Services must be intended for a specific, identifiable, and autonomous property to qualify. The provision does not exhaustively enumerate qualifying services, using 'including' to indicate examples rather than a closed list.
When are services considered related to the property itself versus the use of the property for VAT purposes under Article 6(7)(a) of the Portuguese VAT Code?
Article 6(7)(a) distinguishes between services related to the property itself versus its use. Services related to the property itself involve direct physical intervention, analysis, or adaptation of the immovable asset, such as construction, renovation, architectural planning, or technical specifications for built-in systems. Services related to property use involve activities concerning how the property is utilized, such as property management, rental, or operational services. In this case, the Tax Authority argued medical consultancy services concerned hospital use rather than the buildings themselves. However, the claimant demonstrated services involved physical assessment of spaces, coordination with construction teams, technical specifications for fixed equipment installation, and property adaptation before completion, suggesting direct property relationship rather than mere use-related services.
What are the consequences of an invalid VAT identification number in the VIES system for cross-border service transactions?
An invalid VAT identification number in the VIES (VAT Information Exchange System) raises significant concerns for cross-border B2B transactions. When a service recipient's VAT number cannot be verified in VIES, the reverse charge mechanism may not apply, potentially requiring the service provider to charge domestic VAT. In this case, the UK client's VAT number was deemed invalid and not registered in VIES, leading the Tax Authority to challenge the zero-rating of services. However, invalidity alone may not determine tax treatment if services fall outside Portuguese territorial scope under Article 6(7)(a). Service providers must verify VIES registration before applying reverse charge and maintain documentation proving verification attempts. Invalid numbers may trigger assessments, penalties, and require substantive evidence that services genuinely qualify for territorial exemptions.
Can a Portuguese company deduct input VAT on services provided in connection with real estate located in Algeria?
Portuguese VAT law permits input VAT deduction when tax is paid on expenses related to taxable activities, even for services connected to foreign property. The claimant argued that even if VAT was improperly charged by supplier H..., it remains deductible because it was actually paid, making the supplier a VAT taxpayer for that transaction. However, Article 19(4) of the VAT Code establishes conditions preventing deduction in certain circumstances. The Tax Authority must substantiate and prove fulfillment of these requirements. Generally, if services relate to the taxpayer's economic activity and VAT was legitimately charged and paid, deduction rights exist. The key issue is whether expenses support taxable or exempt activities and whether the two cumulative requirements of Article 19(4) are met, which the Authority allegedly failed to properly demonstrate in this case.
What is the procedure for challenging additional VAT assessments and compensatory interest through tax arbitration at CAAD?
Under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011 of 20 January), taxpayers can challenge tax assessments through the Arbitration Center (CAAD). The procedure involves: (1) filing a request for constitution of arbitral tribunal pursuant to Articles 2 and 10 RJAT within the legal deadline; (2) appointment of arbitrator(s) by CAAD's Deontological Council; (3) notification of parties; (4) submission of allegations supporting the annulment request; (5) opportunity for tax authority response; (6) evidence phase if necessary; (7) final decision by arbitral tribunal. In this case, the company filed on 17-07-2017 seeking annulment of additional VAT assessments and compensatory interest dated 15-02-2017, following an internal inspection triggered by a refund request. Arbitration provides a faster, specialized alternative to administrative courts for tax disputes, with binding decisions subject to limited judicial review.