Summary
Full Decision
ARBITRAL DECISION
The arbitrators Fernanda Maçãs (arbitrator-president), Rita Guerra Alves and Adelaide Moura (arbitrators), appointed by the Deontological Council of the Centre for Administrative Arbitration to form this Arbitral Court, hereby agree as follows:
I - Report
- A..., SA, with registered office at Rua ..., n.º..., ..., ..., ... and ..., ...-... Porto, bearing the tax identification number for legal persons NIPC: ..., hereinafter referred to as the Claimant or taxable person, filed the request for constitution of an Arbitral Court in tax matters and request for arbitral ruling, under the terms of paragraph a) of no. 1 of article 2.º and paragraph a) of no. 1 of article 10.º, both of Decree-Law no.10/2011, of 20 January (Legal Regime of Arbitration in Tax Matters, hereinafter abbreviated as RJAT).
The Claimant requests, firstly (Preamble of p.i.) the declaration of illegality of the additional assessment notices with the following numbers: no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2015, no. ... of 2015, no. ... of 2015, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2017, no. ... of 2017, of the assessment statements with the following numbers: no. 2017 ... of 2017, no. 2017 ... of 2017, and no. 2017 ... of 2017, and of the account reconciliation statements with the following numbers: no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, all concerning Value Added Tax (VAT), resulting in tax payable of € 83,095.54 (eighty-three thousand ninety-five euros and fifty-four cents) as well as the respective compensatory interest.
In a second moment (§ 28 of p.i.) the Claimant requests the declaration of "illegality of VAT assessment acts in the amount of € 83,095.54 and of the offsetting performed at the initiative of the Tax Authority in the amount of € 36,580.66" and the condemnation of the Tax Authority to "pay the value of the assessments annulled by the arbitral decision rendered in the context of case no. 299/2016-T, as well as indemnity interest owed for the assessment acts here under discussion," renewing the request for complete annulment of the assessments and payment of indemnity interest in the petition.
The request for constitution of the Arbitral Court was accepted by the President of the CAAD, in accordance with the terms of paragraph c) of no. 1 of article 11.º of Decree-Law no. 10/2011, of 20 January, as amended by article 228.º of Law no. 66-B/2012, of 31 December.
The Claimant did not proceed with the appointment of an arbitrator, so that, under the terms of no. 1 of article 6.º and paragraph b) of no. 1 of article 11.º of Decree-Law no. 10/2011, of 20 January, as amended by article 228.º of Law no. 66-B/2012, of 31 December, the Deontological Council designated as Arbitrator President Councillor Dr. Maria Fernanda dos Santos Maçãs, Arbitrator Dr. Rita Guerra Alves and Arbitrator Dr. Adelaide Moura, whose appointment was accepted in accordance with legal provisions.
On 2018-03-22, the parties were duly notified, and manifested no intention to refuse the appointment of the arbitrators, under the terms of article 11.º no. 1, paragraphs a) and b), of the RJAT and articles 6.º and 7.º of the Code of Ethics.
The Collective Arbitral Court was regularly constituted on 2018-04-12, to hear and decide the subject matter of the present dispute, and the Tax and Customs Authority was automatically notified on 2018-04-12, as recorded in the respective minutes.
On 19-05-2018, the Claimant was notified to respond, if it wished, to the exception invoked in its response, an opportunity which the Claimant exercised.
No production of witness evidence was requested, so that, in the procedural continuation, the meeting referred to in article 18.º of the RJAT was dispensed with and the parties were notified to present written submissions, if they wished, an opportunity which the parties exercised.
The parties have legal personality and capacity, are legitimate and are represented (articles 4.º and 10.º, no. 2, of the same legal instrument and 1.º of Ordinance no. 112-A/2011, of 22 March).
The proceedings do not suffer from defects that would render them invalid.
- The Claimant, in support of its request for arbitral ruling, alleged in order to obtain the declaration of illegality of tax assessment acts concerning VAT, the following:
B... was a holding company, constituted under Decree-Law no. 495/88, of 30 December, which had as its corporate purpose the holding and management of shareholdings, as an indirect means of exercising economic activities.
In this context, it performed a fundamental role in leading the continuous effort of growth and expansion of the Group to which it belonged, by virtue of its status as a holding company of that business group.
It was thus in this context that B... developed the following activities: i) Provision of management services to the investee companies, ii) Financing to the investee companies, and iii) Holding of shareholdings.
In order to provide management services to the investee companies, B... primarily resorted to the management services provided by C..., Lda.
In this context, B... entered into a management services contract with C..., through which the latter undertook to provide such services to the then-B..., assuming its entire corporate and administrative structure and ensuring its executive management, namely in the provision of advisory services in the context of acquisition processes, in shareholder representation in invested companies and also in the context of co-investment.
B... entered into management services contracts with its invested companies, namely with (i) D..., S.A., (ii) E... SGPS, S.A. and (iii) F..., S.A.
In VAT matters, B... was covered by the normal quarterly regime until 2016, inclusive, having moved to the normal monthly regime after that date.
B... taxed, under VAT, the management services it provided to the investee companies and exempted from that tax the interest received from the investee companies, resulting from the granting of financing.
Thus, B... simultaneously carried out operations subject to VAT, which gave the right to deduct the tax - i.e. provision of management services to the investee companies - and VAT-exempt operations - the granting of financing to its investee companies.
With regard to the exercise of its right to deduct VAT incurred with the expenses necessary for the development of its activity, B... used, simultaneously and in accordance with tax rules (e.g. article 23.º of the VAT Code), for purposes of VAT deduction, the methods of deduction of actual allocation and prorata.
Following a refund request made in the periodic declaration for February 2017 - in the amount of € 196,892.40, the Claimant was subject to an external inspection procedure, which covered the periods between January 2014 and February 2017, in order to ascertain the legitimacy of the VAT credit in question.
In the context of the inspection procedure in question, the Tax Authority notified the Claimant, through Office no. 2017..., of 28 September 2017, of the draft inspection report.
Subsequently, the Claimant was notified, through Office no. 2017..., of 27 October 2017, of the (final) inspection report, in which arithmetic corrections of € 83,730.48 were proposed for the periods between January 2014 and February 2017.
Before the inspection, the Tax Authority considered that the refund amount should reflect the corrections made within the scope of previous inspection procedures (referring to 2011 and 2012), in the amount of € 36,580.66, which is why it paid, not the requested € 196,892.40, but only € 160,310.35.
However, such corrections had been annulled by a decision of CAAD of 7 December 2016, under case no. 299/2016-T.
Subsequently, additional assessments were received in the total amount of € 83,095.54, with reference to the periods between January 2014 and February 2017.
It should be noted that in the (final) inspection report, the correction proposed by the Tax Authority is € 83,730.48, while the additional assessments received total € 83,095.54.
Additionally, the Claimant was also notified of VAT assessment statements with corrections to the value of the tax credit in its current account, with reference to the periods of February and March 2017 and respective account reconciliation statements made in the amount payable of € 46,514.88.
In the calculation of this payable amount, the Tax Authority already took into account the aforementioned decision of CAAD in case no. 299/2016-T (€ 83,095.54 - € 36,580.66 = € 46,514.88), but such offsetting could not be made at the initiative of the Tax Authority while the time limit for the Claimant to contest the aforementioned assessment acts was running (article 89.º, no. 1, al. a), of the CPPT).
The Claimant sustains its disagreement with the inspection report, on the following matters: i) Deduction methods applied; ii) Deductibility of VAT of common resources and iii) Corrections to the year 2013.
With regard to the deduction methods applied, the Claimant alleges that it has followed the principle of primarily using the actual allocation method - i.e. deducting the tax related to activities that confer the right to deduction and not deducting VAT incurred in the acquisition of goods and/or services used for the realization of non-taxable operations - and, residually, deducting VAT incurred in the acquisition of goods and services common to its entire activity, through a proportion based on the volume of business.
With respect to common resources, such as those here under discussion, the VAT in question should be recovered by applying the prorata method.
The Claimant argues that it calculated the prorata for the years 2014, 2015 and 2016, having determined deduction percentages of 79%, 83% and 91% respectively.
With regard to the deductibility of VAT on common resources, the Claimant argues that the Tax Authority's understanding resulted from an incorrect interpretation of the facts – it is the imputation of costs necessary for the provision of services, since the Claimant does not effect re-billing, but rather provides services.
And, as these are general expenses of the Claimant, there is undoubtedly a connection between these expenses and the taxable activity developed.
The Claimant argues that what is at issue is the deduction of VAT for expenses associated, simultaneously, with operations that confer the right to deduct VAT and with operations that do not confer that right.
The Claimant alleges it effectively provides services (of management), subject to VAT, to its investee companies.
Furthermore, it maintains that regardless of its corporate purpose, the Claimant develops an economic activity that confers the right to deduct VAT.
Thus, the expenses in question are associated, simultaneously, with operations that confer the right to deduct VAT and with operations that do not confer that right.
The Tax Authority recognizes that the Claimant develops an activity that confers the right to deduct VAT.
It was from this perspective that the Claimant deducted the upstream tax incurred, by applying the prorata method, since it carried out taxable operations (e.g. provision of services to the investee companies) and also exempt operations that do not confer the right to deduction.
The Claimant argues that it is thus demonstrated that the expenses in question, being general expenses of the Claimant, are constitutive elements of the prices of the services (taxed in VAT) provided by the Claimant.
Whereby these expenses have a direct and immediate nexus with the entirety of the Claimant's economic activity.
The Claimant further alleges that the VAT incurred relating to general expenses is deductible by the prorata method.
The Claimant understands that all the expenses were incurred for the realization of its activity as a whole (taxed and non-taxed), and thus naturally constitute general expenses.
In summary, the Claimant maintains that it is a mixed VAT taxable person and that it simultaneously carries out operations subject to VAT (e.g. provision of services to its investee companies) and also operations not subject to this tax (e.g. granting of financing).
That it follows from the law (as well as from case law and doctrine) that full deduction of tax incurred with expenses related to taxable activity of taxable persons is permitted (including, naturally, holding companies).
With respect to general expenses, i.e., to resources used for the general activity developed by the Claimant (e.g., services relating to the acquisition of shareholdings, audit services, etc.), and in accordance with what follows from law, case law (national and community) and doctrine, these present a direct and immediate nexus with the Claimant's overall activity.
Whereby, as the Claimant's overall activity includes the provision of taxable services to its investee companies, the respective VAT incurred by the Claimant is susceptible to being deducted (even if partially) by applying the prorata method.
Having the Claimant demonstrated the connection of the expenses in question to its overall activity, it was the Tax Authority that had the burden of demonstrating the contrary to justify the assessments under analysis.
But it could never do so because "it is settled case law that all general expenses of a holding company that provides (taxed) services have a direct and immediate nexus with the overall activity of the taxable person".
With regard to the corrections to the year 2013, the Claimant maintains that it was only notified of service orders referring to the periods between January 2014 and February 2017.
However, the Tax Authority issued additional assessments (with reference to the year 2014) in order to correct the VAT deducted by the Claimant during the year 2013.
The Claimant alleges that, as there is no service order for the year 2013, the Tax Authority cannot perform any assessment act concerning the VAT deducted in that period - the taxable event subject to the corrections occurred in 2013.
Finally, it requests indemnity interest because, even though it offered to provide suitable security, the Tax Authority has already executed the security provided in the context of the refund request in the amount of € 46,843.51.
The Claimant ends, after presenting its conclusions, in the following terms: i) that the VAT deducted during the periods between January 2014 and February 2017 is in accordance with tax rules, so that the corrections made by the Tax Authority are illegal and should be annulled; ii) that the offsetting in the amount of € 36,580.66, improperly made at the initiative of the Tax Authority, should be annulled; iii) that the Tax Authority should be condemned to pay the value of the additional assessments annulled in case no. 299/2016-T; iv) that the Tax Authority should be condemned to pay the indemnity interest owed for the assessment acts here under discussion.
Requesting: the annulment of the VAT assessments in the total amount of € 83,095.54, with the consequences arising from the above, including the payment of the tax for which refund was requested and the payment of indemnity interest in accordance with article 100.º of the LGT.
The Respondent, duly notified for this purpose, timely filed its response in which, in brief summary, it alleged the following:
The Claimant does not contest the factual matters established in the Final Report as is evident from the content of its request for arbitral ruling.
In fact, although it makes repeated references to case law to conclude that what is at issue are general expenses common to its entire economic activity, the truth is that this assertion by the Claimant is merely conclusive.
There is no concrete description by the Claimant of the operations in question that is minimally capable of putting into question the factuality established by the tax inspection and of supporting the conclusion, which it defends, that it is a holding company of a mixed nature, whose activity goes beyond the mere management of shareholdings and to which general expenses are associated whose VAT should be considered deductible, even if in part.
In reality, without concrete knowledge of the actual expenses incurred, namely what they are intended for, it is not possible to classify them for purposes of the right to deduction, and that:
"The compensation for services provided by C... was fixed and paid in advance for services provided under the management contract signed, to be supplemented with a report of activities performed to be presented, quarterly, by C..., as agreed between the parties;"
And that "in the absence of those reports or other documentation, the tax inspection cannot identify what services were concretely provided by C...;"
Furthermore, as it is a right whose exercise is sought by the Claimant, the burden of proof regarding the requirements on which the deductibility of the VAT supported rests on the Claimant.
Now, taking up the factuality established by the tax inspection and which is not minimally contested by the Claimant – which understands that it should be considered established in these proceedings – it is forced to conclude that the Claimant has not demonstrated any causal nexus between what it understands to be general expenses and its economic activity subject to and not exempt from the tax, which confers the right to deduct the upstream tax supported.
Thus, the expenses now controversial, whose VAT is not deductible, should respect exclusively operations that do not fall within the concept of economic activity or with the activity subject to VAT but exempt from it.
What the Claimant designates as "general expenses" are, after all, expenses incurred either with the mere acquisition and holding of shareholdings, the main activity that should not be considered economic activity for VAT purposes, or with its financing activity to the investee companies, and in either case the upstream VAT supported is not at all deductible.
The mere holding of shareholdings may generate fruits or dividends but these are the result of the simple ownership of the asset, not to be confused with the exploitation of an asset or the exercise of an economic activity.
To the extent that the Claimant provides services to its investee companies, in the case of management services, there is indeed the exercise of an economic activity, subject to VAT and with the right to deduct the upstream tax supported with charges attributable to the exercise of that activity, whether this activity is exercised directly by the Claimant or indirectly through another company, as is the case in the proceedings.
However, in this part of the activity subject to and not exempt which confers the right to deduction, there are no other charges supported beyond 85% of the invoicing issued by C..., as it follows from the factual matter proved that the invoicing issued to the investee companies comes down to passing on to their legal sphere 85% of the charges debited by C... with the provision of management services, in the manner agreed with C... and with the investee companies to whom the services are provided.
The difference of € 634.94 between the corrections mentioned in the RF and what results from the corrections made derives from the fact that there was an error in the correction document for the taxation period 201403T, having thereby resulted in a value lower than initially corrected, thereby calculating a lower assessment amount.
With regard to the carrying forward of tax credit relating to 2013, the service orders that originated the corrections in question are intended to ascertain the legitimacy of the tax credits reported in the periodic declarations of 2014, 2015, 2016, 201701 and 201702.
Now, "In the analysis carried out within the scope of the inspection procedure it was concluded that there was demonstrated lack of legitimacy of the deduction evidenced in field 61 (carried forward), table 06, of the periodic declaration of 201403T," and that is all that is at issue.
The Tax Authority concludes the following:
"The definition of the VAT regime and corresponding right to deduct the tax applicable resides in the type of operations actually carried out."
"The Claimant exercises activity subject to and not exempt (activity of management of its investee companies in accordance with the contracts entered into with these), activity subject but exempt (financing to the investee companies generating interest) and non-subject activity (non-economic activity for VAT purposes)."
"In harmony with community case law, there is no doubt that the main activity of holding companies cannot be considered as economic, constituting an indirect form of exercise of economic activities."
"The VAT charges supported with this main activity are, therefore, not susceptible of deduction, here included the acquisition of advisory services and or audit services relating to the potential acquisition of strategic participation, the evaluation of investment opportunities, actions aimed at evaluating projects for development and internationalization of the Group, all services indispensable to provide decision-making bodies with all relevant information for decision-making."
"Also by definition, the services for the preparation of the holding company's accounts report, the charges with the audit certification of accounts, cannot be attributed to the investee companies, as they consist of charges of shareholders that cannot be assigned to the affiliates."
"The services contracted by the Claimant were done in its exclusive interest and not for the benefit of any of its investee companies, being related exclusively to the activity of shareholder, of management of shareholdings, thus not subject to VAT."
"Thus, notwithstanding the resources allocated to the main activity, the fact that it does not consist of an economic activity for VAT purposes implies that the upstream tax supported is not deductible."
"In parallel with the main activity, and in accordance with the conditions imposed by the legislature, holding companies may exercise activities merely accessory to that main activity, here framing itself, for what concerns these proceedings."
"The accessory activity of provision of management services to the investee companies, subject to tax and not exempt, which confers the right to deduction."
"As well as the accessory activity of granting credit to the investee companies, exempt from VAT and which does not confer the right to deduction."
"Since the Claimant did not prove that the charges supported, and on which it applied the pro-rata VAT deduction method, respect the activity subject to and not exempt which confers the right to deduction, the respective correction was carried out."
The Respondent concludes by arguing the lack of merit of the arbitral claim.
II - PRELIMINARY ISSUES
EXCEPTION OF LACK OF MATERIAL JURISDICTION OF THE ARBITRAL COURT
As referred to in the Report, the Respondent raised the lack of material jurisdiction of the arbitral court to hear and decide part of the claim that is the subject matter of the dispute sub judice, under the terms of articles 2.º, no. 1, paragraph a), and 4.º, no. 1, both of the RJAT, and of articles 1.º and 2.º, paragraph a), both of Ordinance no. 112-A/2011, which constitutes a dilatory exception preventing knowledge of the merits, under the terms of article 576.º, nos. 1 and 2 of the CPC ex vi article 2.º paragraph e) of the CPPT and article 29.º, no. 1, paragraphs a) and e) of the RJAT, which would prevent, in that part, the knowledge of the claim, and would lead, in that part, to the dismissal of the Tax Authority's case under the terms of articles 576.º, no. 2 and 577.º, paragraph a) of the CPC, ex vi article 29.º, no. 1, paragraphs a) and e) of the RJAT.
The exception of lack of jurisdiction, whether absolute or relative, of the arbitral court as to the material capacity to hear the acts that are the subject matter of the arbitral claim, constitutes a dilatory exception under the terms of article 577.º of the CPC and article 2.º of the RJAT.
Questions of determination of the jurisdiction of courts are matters of priority knowledge and are to be examined ex officio, under the terms of article 13.º of the Code of Administrative Court Procedure (CPTA) and article 578.º of the Code of Civil Procedure (CPC) by subsidiary application of article 29.º of the Legal Regime of Arbitration in Tax Matters (RJAT), so that it is important, given the foregoing, to examine the dilatory exception raised.
The Respondent raises, in its response, the issue of the lack of jurisdiction of the present arbitral court, on the ground that "the refund received, in the amount of € 160,310.35, does not include the carrying forward of € 36,580.66, corrected by the Tax Authority and subsequently annulled by arbitral decision rendered in case no. 299/2016-T," because it is "a matter that concerns the execution of the judgment of that arbitral decision," so that, as such, it is not covered by the ruling powers of the present Arbitral Court.
The Claimant responded to the effect that the request for arbitral ruling concerns only the appraisal of the legality of assessment acts, and that it is not requesting the appraisal of the offsetting act nor the annulment of that offsetting.
In counter-arguments the Claimant reiterated that the request for arbitral ruling concerns only the appraisal of the legality of assessment acts, and that in its request there is no request for the appraisal of the offsetting act nor the annulment of that offsetting.
In any case, having examined the claim and the cause of action in their entirety, in light of what are the powers of the present Arbitral Court, under the terms of the invoked provisions of the RJAT, what is now at issue is only the appraisal of the illegality of the assessment acts, concerning the periods between January 2014 and February 2017 (inclusive), embodied in the additional VAT assessments in the total amount of €83,095.54, as well as in the respective VAT assessment statements with corrections to the value of the tax credit in its current account and in the respective account reconciliation statements (point 9 of the response to the exception matter).
Therefore, this decision will not bear on the legality or illegality of that offsetting act, which is why the exception of lack of jurisdiction of the Court raised by the Tax Authority is without merit with respect to the carrying forward of € 36,580.66.
FIXING THE VALUE OF THE CASE
Under the terms of article 10.º, no. 1, paragraph e) of the RJAT, the request for constitution of the arbitral court must be accompanied by an indication of the value of the economic utility of the claim. Having failed to do so, by order of the Court of 26 August the Claimant was notified to do so within 10 days.
In response the Claimant requested the court to fix the value at € 83,095.54, as it corresponds to the sum of the impugned additional assessments.
The value of the case is thus fixed at € 83,095.54 (eighty-three thousand ninety-five euros and fifty-four cents), corresponding to the value of the impugned assessments and taking into account that the economic value of the case is measured by the value of the impugned tax assessments.
III - ON THE MERITS
III.1. The Facts
a) Established facts
The following facts are considered established:
The Claimant is the company A..., SA, with registered office at Rua ..., n.º..., ..., ..., ... and ..., ...-... Porto, bearing the tax identification number for legal persons NIPC: ... .
The Claimant incorporated by merger the company B... SGPS, S.A. (hereinafter referred to as "B..."), legal person with no. ..., with registered office at Rua ..., ..., ..., ..., ...-... Porto.
By virtue of the merger, A..., SA became the holder of all the rights and duties of the incorporated company B..., in particular with respect to the Tax Authority.
Thus, although the assessments now contested were issued in the name of company B..., it is A..., SA that has standing to file the request for arbitral ruling here decided.
B... was a Holding Company (SGPS) constituted in accordance with the Legal Regime of Holding Companies (RJSGPS) embodied in Decree-Law no. 495/88, of 30 December, successively amended.
B... held shareholdings in, at least, the following companies:
D..., S.A. (hereinafter referred to as "D...");
E... SGPS, S.A. (hereinafter referred to as "E...");
F..., S.A. (hereinafter referred to as "F...").
B... developed the activities of provision of management services to the investee companies, financing to the investee companies, and holding of shareholdings.
B... entered into a management services contract with C..., Lda, through which the latter undertook to provide management services to B..., assuming its entire corporate and administrative structure and ensuring its executive management, namely in the provision of advisory services in the context of acquisition processes, in shareholder representation in invested companies and also in the context of co-investment.
B... entered into management services contracts with its investee companies, respectively with: D..., S.A.; E... SGPS, S.A.; F..., S.A.
B... was covered by the normal quarterly regime until 2016, inclusive, having moved to the normal monthly regime after that date.
B... taxed, under VAT, the management services it provided to the investee companies and exempted from that tax the interest received from the investee companies, resulting from the granting of financing.
B... used simultaneously, in the periods from 2014 to 2017, for purposes of VAT deduction, the methods of actual allocation and prorata deduction.
In the periodic declaration for February 2017, the Claimant requested a VAT refund in the amount of € 196,892.40.
The Tax Authority proceeded to partially refund the amount requested by the Claimant (which was €196,892.40) in the amount of €160,310.35.
The difference of €36,580.66 corresponds to the difference in the value of the corrections made within the scope of inspection procedures prior to the years 2011 and 2012, which had already been annulled by the decision of CAAD, rendered on 7 December 2016, under case no. 299/2016-T.
Following that refund request, the Claimant was subject to an external inspection procedure covering the periods between January 2014 and February 2017, in order to ascertain the legitimacy of the refund requested.
The Tax Authority notified the Claimant, through Office no. 2017..., of 27 October 2017, of the (final) inspection report, in which arithmetic corrections of € 83,730.48 were proposed for the periods between January 2014 and February 2017.
The Tax Authority issued additional VAT assessments and account reconciliations respectively: no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2015, no. ... of 2015, no. ... of 2015, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2017, no. ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017.
The Tax Authority issued additional VAT assessments in an amount reaching €83,095.54 – attributing in its Submissions the difference of € 634.94 "between the corrections mentioned in the RF and what results from the corrections made" to the fact "that there was an error in the correction document for the taxation period 201403T, having thereby resulted in a value lower than initially corrected, thereby calculating a lower assessment amount."
The Tax Authority has already executed the security provided in the context of the refund request for payment of the assessment acts under discussion, in the amount of € 46,843.51 (cfr. doc 23 - "Guarantee Cancellation - N.º..."), attached to the proceedings by the Claimant.
b) Unproven facts
Although it was not proved to whom they were destined, or from what they resulted, the common expenses that the Claimant wished to subject to VAT deduction – and which are itemized in Table 29 of the Inspection Report – as sought by the Tax Authority, the existence, on the one hand, of management services contracts with its investee companies; and, on the other hand, the non-existence of an autonomous cost structure of the Claimant that could justify its absorption, all the more so in light of the case law of the CJEU (and of CAAD), appear to be sufficient to consider as fulfilled the requirements of the Claimant's economic activity and its right to deduction.
It is, strictly speaking, a question of Law and not a question of fact, as will be seen below.
c) Reasoning for the establishment of factual matters
It is not the function of the Court to pronounce on all that was alleged by the parties within the scope of the factual matters, and the facts relevant to the judgment of the case should be selected and considered by the Court, which should also discriminate between established and unproven facts (cf. art.º 123.º, no. 2, of the CPPT and article 607.º, no. 3 of the CPC, applicable ex vi article 29.º, no. 1, paragraphs a) and e), of the RJAT).
With respect to the established facts, the conviction of the Arbitral Court was based on the set of documents attached to the proceedings, as well as on the administrative inspection procedure which includes the final inspection report mentioned in p.i., it being certain that the documents presented were not impugned.
III.2. THE LAW
III.2.1. As to the deduction methods applied and the deductibility of VAT on common resources
The current article 23.º of the VAT Code[1] provides:
Article 23.º
Deduction Methods Relating to Goods of Mixed Use
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 that right, in accordance with article 20.º, the deduction of the tax supported in the acquisition of goods and services that are used in carrying out both types of operations is determined as follows:
a) In the case of a good or service partially allocated to the performance of operations not arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2.º, the non-deductible tax as a result of that partial allocation is determined in accordance with no. 2;
b) Without prejudice to the foregoing paragraph, in the case of a good or service allocated to the performance of operations arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2.º, 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.
2 - Notwithstanding the provisions of paragraph b) of the previous number, the taxable person may effect the deduction according to the actual allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of those goods and services in operations that confer the right to deduction and in operations that do not confer that right, without prejudice to the Tax Authority being able to impose special conditions on it or bring an end to that procedure in the event that it verifies that they do or may cause significant distortions in taxation.
3 - The tax administration may require the taxable person to proceed in accordance with the provisions of the previous number:
a) When the taxable person exercises distinct economic activities;
b) When the application of the procedure referred to in no. 1 leads to significant distortions in taxation.
4 - The deduction percentage referred to in paragraph b) of no. 1 results from a fraction which has, in the numerator, the annual amount, tax excluded, of the operations that give rise to deduction in accordance with no. 1 of article 20.º 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 for in paragraph a) of no. 1 of article 2.º, as well as non-taxed subsidies that are not equipment subsidies.
5 - In the calculation referred to in the previous number, transfers of fixed assets that have been used in the enterprise's activity are not, however, included, nor are real estate or financial operations that have an accessory character in relation to the activity exercised by the taxable person.
6 - The deduction percentage referred to in paragraph b) of no. 1, provisionally calculated on the basis of the amount of operations carried out in the previous year, as well as the deduction made in accordance with no. 2, provisionally calculated on the basis of the objective criteria initially used for application of the actual allocation method, are corrected according to the final values relating to the year to which they refer, giving rise to the corresponding regularization of the deductions made, which should be recorded in the declaration of the last period of the year to which it relates.
7 - Taxable persons who begin the activity or substantially alter it may practice the deduction of tax on the basis of an estimated provisional percentage, to be entered in the declarations referred to in articles 31.º and 32.º.
8 - For determination of the deduction percentage, the quotient of the fraction is rounded up to the next hundredth.
9 - For purposes of the provisions of this article, the Minister of Finance may, with respect to certain activities, consider as non-existent operations that give rise to deduction or those that do not confer that right, whenever the same constitute an insignificant part of the total turnover and the procedure provided for in nos. 2 and 3 is not viable.
Holding companies may provide administration and management services to the invested companies (mixed holding companies) and may therefore fall within the scope of no. 1 of article 23.º of the VAT Code.
The provision of the so-called accessory services constitutes a relevant factor for the inclusion of part of its activity within the scope of VAT and, in particular, within the scope of activities subject to and not exempt from VAT, which confer the right to deduction.
In the case under decision, what is at issue is the deductibility of VAT supported by the Claimant in expenses improperly deducted (and identified in Table 29 of the Inspection Report – Doc. 21) as a result of alleged provision of services to its investee companies, which the Tax Authority considers has not been demonstrated.
In fact, already in the context of the inspection procedure the Tax Authority considered that it was not permitted to the Claimant, as a holding company, to deduct the VAT paid on the acquisition of goods and services intended to be used in an exempt activity, and as B... had not demonstrated the existence of a nexus between the goods and services acquired and the services provided to the investee companies, it could not be considered that they were not used in an exempt activity. Basically, what the Tax Authority did was to reason by process of elimination: taking into account that B... invoiced to the investee companies 85% of the amounts contracted with C..., those amounts would correspond to the entirety of the services attributable to them. Thus, unless there was proof of the direct and immediate nexus of the other expenses with the activity of the investee companies, and taking into account the presumption drawn from the structure of the allocation of costs between B... and the investee companies, such expenses should be presumed to be linked to the activity of financing those investee companies by B... (which is an exempt activity that does not confer the right to exemption from VAT), or to expenses attributable to the management of the portfolio of shareholdings, which is not considered an economic activity subject to taxation for VAT purposes (which also does not confer the right to exemption from VAT).
To the contrary, as was written in the Judgment of the CJEU of 16 July 2015, in the joined cases C-108/14 and C-109/14 (Larentia+Minerca and Marenave Schiffahrts), cited in Case 299/2016-T,
"21. The interference of a holding company in the management of the companies whose shareholdings it acquired constitutes an economic activity within the meaning of article 4, no. 2, of the Sixth Directive, insofar as it implies the carrying out of transactions subject to VAT by virtue of article 2 of the same directive, such as the provision of administrative, financial, commercial and technical services by the holding company to its subsidiaries (see, in particular, Cibo Participations judgments, C-16/00, EU:C:2001:495, no. 22 and Portugal Telecom, C-496/11: EU:C:2012:557, no. 34)."
Now, the very existence of the contracts between B... and C..., on the one hand, and B... and its investee companies, on the other, demonstrates that there were needs of B... and of each of the investee companies – and certainly more of these than of B... (which, as noted in the Report of the Tax Authority's Inspection, has no "human resources and physical structure") – that were satisfied by C.... That those needs were exclusively those that gave rise to the actual allocation of expenses between B... and its investee companies is the Tax Authority's premise, but it is not inevitable.
From these evidences it results that B... did indeed provide, without any doubt, services to its investee companies (albeit indirectly), not being merely a conclusion devoid of evidentiary support, as was also established in the decision rendered in Case 299/2016-T, between the same Parties and on account of the same essential question, on that occasion citing the arbitral decision of 2015-10-20 in the context of arbitral case no. 15/2015-T (emphasis added):
"(...) the CJEU, regarding the acquisition of financial stakes, has already decided that the situation is different, falling within the scope of the exercise of an economic activity, in the case where the acquisition of a financial stake in a company is accompanied by '(...) direct or indirect interference in the management of the company (...), insofar as such interference involves the carrying out of transactions subject to VAT in accordance with the VAT Directive, such as the provision of administrative, accounting and computer services.
The CJEU distinguishes, in this respect, holding companies that interfere, directly or indirectly, in the management of the investee companies, from those that do not."
Moreover, already in the same decision rendered in Case 299/2016-T, between the same Parties and on account of the same essential question, the following was written:
"the fact that the Claimant is the sole client of C..., and between both entities there is a contract entered into on 2009-07-10, under the terms of which the latter 'undertakes to provide all management services that by A... SGPS, S.A., may be requested of it, assuming its entire corporate and administrative structure and ensuring the executive management of A... SGPS, S.A. and reporting directly to its administration, including in that regard, but not exhaustively: Advisory in the context of acquisition processes – identification and selection of targets (...), management of the negotiation process (...), final structuring of the operation and closing (...)- Shareholder representation in companies invested in A... SGPS, S.A., and Co-Investment' and, on the other hand, there are contracts between the Claimant and various of its investee companies, did not contribute to inferring therefrom, without more, that the tax supported by the Claimant with the services provided by said C... is only deductible to the exact extent of the part that was 'passed on' to its investee companies, in the expression used by the Tax Authority."
And this because the Court of Justice of the European Union had already established (namely in Judgment C-496/11- Portugal Telecom), as was also recalled in that decision, that
"in the event that it is to be considered that all upstream services acquired have a direct and immediate nexus with downstream economic operations with the right to deduction, the taxable person in question would have the right, under article 17, no. 2 of the Sixth Directive, to deduct the entirety of the VAT that has burdened the upstream acquisition of the services in question in the main proceedings. This right to deduction cannot be limited by the mere fact that national regulation, by reason of the corporate purpose of the said companies or their general activity, qualifies the taxed operations as accessory to their main activity."
In that decision rendered in Case 299/2016-T, it was thus concluded that
"if the resources were used by the Claimant in activities that confer the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity in comparison with the totality of the proceeds."
And that
"Furthermore, as mentioned in the same judgment* 'the right to deduction is also allowed in the taxable person's favor, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constitutive elements of the price of the goods it supplies or of the services it provides. These costs do indeed have a direct and immediate nexus with the entirety of the taxable person's economic activity.'"
In other words: contrary to what appears to be understood by the Tax Authority, no additional proof appears necessary with respect to the expenses invoiced, with VAT, by C... to B..., and by B... to its investee companies, even if such expenses refer to the remainder of what was already charged through the method of separation and actual allocation, insofar as it is only in that excess that there can be common expenses to be allocated according to the prorata rule.
In the decision rendered by CAAD in Case no. 18/2013, the following was written:
As Rui Bastos points out [*The right to deduct VAT, The particular case of mixed-use inputs], "The right to deduct general expenses capable of being attributed to the taxed component of the taxable person's economic activity (management support services), such as may occur with legal assistance contracted to third parties, studies on group internationalization, administrative expenses, etc., should not be seen as conditioned, provided that the allocation of resources, such as human resources, to the said taxed activity is demonstrated, qualifying those charges as general expenses of the activity and, as such, capable of being reflected in the price of the taxed operations and, therefore, capable of conferring full VAT deduction, and there is no reason to see at this level any reason for different treatment of a mixed holding company from an operational company."
As [...] notes the author, whether in a mixed holding, whether in a parent company, whether at the level of acquisition or holding, or at the level of its alienation, the treatment in VAT of the deductibility of inputs should be the same. Treating differently the deductibility of VAT on inputs depending on the strategic choice of business organization or a business plan for the expansion of an economic activity, either by the constitution of a subsidiary or the creation of a mere branch, managing directly a taxed activity or, indirectly, through the intermediation of a shareholding, would lead to discriminatory treatment of objectively identical situations.
It is noted that this solution appears to be consensual in doctrine: Mariana Gouveia de Oliveira wrote in "VAT and Portuguese holding companies" (RFPTD, Vol. 1, no. 1, pp. 22-23):
"Also with respect to expenses that are not in a direct and immediate relationship with the taxed outputs but which are, however, general expenses of the activity of the holding company, the right to deduct VAT should be recognized, because:
a) The holding company is an economic operator and as such is not, per se, susceptible to carrying out private consumption. Its consumption will be productive and as such should not bear VAT;
b) The operations related to its taxed activity, namely, operations on the shareholdings (among which the sale), are operations also subject to taxation, as they constitute the direct, permanent and necessary extension of the taxable activity. Otherwise, a holding company that actively engages in the management of its investee companies will have to consider as taxable operations those operations that passive holdings carry out outside the scope;
c) Even in the case where the holding company carries out exempt operations (such as the sale of shares) the right to deduct VAT supported in general operating expenses may not be limited, in accordance with the case law of the SKF Judgment."
In the same decision of CAAD (Case no. 18/2013) the following was also written (bold added), transcribing the decision of the CJEU of 6 December 2012 in the case Portugal Telecom:
"the deduction by the Claimant of all VAT supported with services and goods acquired that have a direct and immediate nexus with the services provided to its investee companies with the right to deduction or that, not having a direct and immediate nexus with certain services, is VAT supported with costs that form part of the Claimant's general expenses that have a direct and immediate nexus with the entirety of its economic activity, has legal coverage."
The Claimant's claims for annulment of the corrections, assessment statements and account reconciliation statements thus proceed insofar as, even if they do not have a direct and immediate nexus with certain services provided to its investee companies (insofar as these were already expressly charged and considered in the 85% that were debited to them), they form part of the Claimant's general expenses that have a direct and immediate nexus with the entirety of its economic activity.
III.2.2. Prejudiced Issues
As to the corrections to the year 2013, the Claimant further alleged that it was only notified of Service Orders concerning the periods between 2014 and February 2017 and that, therefore, the 2013 corrections refer to a taxable event that occurred in a period that fell outside the mandate of the inspection activity.
The Tax Authority responded that "the service orders that originated the corrections in question are intended to ascertain the legitimacy of the tax credits reported in the periodic declarations of 2014, 2015, 2016, 201701 and 201702."
The arbitral claim proceeding based on the defect of illegality resulting from the admissibility of deduction of general expenses of a holding company with mixed holding functions, which ensures effective and stable protection of the Claimant's rights, prejudices the examination of the other defects that are attributed to the tax act in question.
In fact, it follows from the establishment of an order of examination of defects, in article 124.º of the CPPT, that when a defect that prevents the renewal of the impugned act is judged to exist, there is no need to examine the others that may be attributed to it. If it were always necessary to examine all the defects, the order in which their examination was carried out would be immaterial.
III.2.3. As to Indemnity Interest
The Claimant refers to a claim for indemnity interest in only two moments of its p.i.: in § 28.º, in which it requests the declaration of "illegality of VAT assessment acts in the amount of € 83,095.54 and of the offsetting performed at the initiative of the Tax Authority in the amount of € 36,580.66" and the condemnation of the Tax Authority to "pay the value of the assessments annulled by the arbitral decision rendered in the context of case no. 299/2016-T, as well as the indemnity interest owed for the assessment acts here under discussion," and in the petition, when it requests "the payment of the tax for which refund was requested and the payment of indemnity interest in accordance with article 100.º of the LGT."
The Claimant further argues that it intended to provide suitable security, under the terms of article 199.º of the Code of Tax Procedure and Process ("CPPT") ex vi article 29.º, no. 1 of the Legal Regime of Voluntary Arbitration, but "the Tax Authority has already executed [without the consent or notification of the Claimant] the security provided in the context of the refund request for payment of the assessment acts here under discussion, in the amount of € 46,843.51, which, as shown above, are illegal – see in this regard Doc. no. 23 attached to the PPA."
The Claimant thus requests the refund of the tax paid and respective indemnity interest owed, in accordance with article 100.º of the LGT.
Here too the Claimant's petition is not noted for clarity, following, moreover, what was seen in preliminary issues.
Let us see.
In accordance with the provisions of paragraph b) of art. 24.º of the RJAT, the arbitral decision on the merits of the claim to which no appeal or challenge lies binds the Tax Administration from the end of the time limit set for appeal or challenge, and this Administration must, in the exact terms of the success of the arbitral decision in favor of the taxable person and until the end of the time limit set for voluntary execution of sentences of tax courts, "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose," which is in keeping with the provision of art. 100.º of the LGT [applicable by virtue of the provision in paragraph a) of no. 1 of art. 29.º of the RJAT] which establishes that "the tax administration is obliged, in the case of full or partial success of a complaint, judicial challenge or appeal in favor of the taxable person, to immediately and fully restore the legality of the act or situation subject to the dispute, including the payment of indemnity interest, if applicable, from the end of the execution time limit of the decision."
As has been established, among others, in the Arbitral Judgment rendered in case no. 686/2017-T, "Although art. 2.º, no. 1, paragraphs a) and b), of the RJAT uses the expression 'declaration of illegality' to define the jurisdiction of arbitral courts operating within CAAD, making no reference to condemning decisions, it should be understood that the powers that in judicial challenge proceedings are attributed to tax courts are included in its jurisdiction, this being the interpretation that is in tune with the meaning of the legislative authorization on which the Government based itself to approve the RJAT, in which it proclaims, as the first guideline, that 'the tax arbitration process should constitute an alternative procedural means to judicial challenge and to the action for the recognition of a right or legitimate interest in tax matters.'"
"The judicial challenge procedure, despite being essentially an action for annulment of tax acts, admits the condemnation of the Tax Administration in the payment of indemnity interest, as can be inferred from art. 43.º, no. 1, of the LGT, in which it is established that 'indemnity interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than that legally due' and from art. 61.º, no. 4 of the CPPT (as amended by Law no. 55-A/2010, of 31 December, which corresponds to no. 2 in the original wording), which states that 'if the decision that recognized the right to indemnity interest is judicial, the time limit for payment is counted from the beginning of the time limit for its voluntary execution.'"
"Thus, no. 5 of art. 24.º of the RJAT, in saying that 'payment of interest, regardless of its nature, is due in accordance with the terms provided for in the general tax law and in the Code of Tax Procedure and Process,' should be understood as allowing the recognition of the right to indemnity interest in the arbitration process."
"On the other hand, as the right to indemnity interest depends on the right to refund of amounts paid unduly, which are its basis of calculation, included in the possibility of recognition of the right to indemnity interest is the possibility of examination of the right to refund of those amounts."
For this reason, the Claimant has the right to be refunded the amount unduly paid, by virtue of the aforementioned arts. 24.º, no. 1, paragraph b), of the RJAT and 100.º of the LGT, as this is essential to "restore the situation that would exist if the tax act that is the subject of the arbitral decision had not been carried out."
In the case at hand, the VAT assessment acts (thirteen assessments and three account reconciliation statements) suffer, as we have already seen, from the defect of violation of law, which renders invalid the impugned assessments, and these were undertaken exclusively at the initiative of the Tax Administration, without the Claimant contributing to their being made and, much less, in the manner in which they were made.
Thus, with the success of the claim, the Claimant has the right to be placed in the situation in which it would be if those assessments had not been issued by the Respondent, in accordance with article 100.º of the LGT.
Consequently, the Claimant has the right to refund of the improperly paid tax and to indemnity interest, in accordance with articles 43.º, no. 1, of the LGT and 61.º of the CPPT, with respect to the amount executed by the Respondent for payment of the assessment acts here under discussion, in the value of € 46,843.51.
Indemnity interest will be paid from the date on which the Respondent executed the security until full payment of the amount that must be refunded, at the legal supplementary rate, in accordance with articles 43.º, no. 4, and 35.º, no. 10, of the LGT, article 61.º of the CPPT, article 559.º of the Civil Code and Ordinance no. 291/2003, of 8 April.
IV - DECISION
In light of all the foregoing, the Arbitral Court hereby agrees:
-
To find merit in the dilatory exception of lack of material jurisdiction of the Arbitral Court raised by the Tax Authority with respect to the carrying forward of € 36,580.66;
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To annul the tax assessment acts with the following numbers: no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2014, no. ... of 2015, no. ... of 2015, no. ... of 2015, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2016, no. ... of 2017, no. ... of 2017, the assessment statements with the following numbers: no. 2017 ... of 2017, no. 2017 ... of 2017, and no. 2017 ... of 2017, and the account reconciliation statements with the following numbers: no. 2017 ... of 2017, no. 2017 ... of 2017, no. 2017 ... of 2017, all concerning Value Added Tax (VAT) concerning the period between January 2014 and February 2017, resulting in tax payable by the Claimant of € 83,095.54 (eighty-three thousand ninety-five euros and fifty-four cents) as well as the respective compensatory interest;
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To condemn the Respondent to pay the improperly paid tax and indemnity interest accrued and accruing, calculated at the legal rate and until full and complete payment.
V - VALUE OF THE CASE
The value of the case is fixed at € 83,095.54 (eighty-three thousand ninety-five euros and fifty-four cents), in accordance with article 97.ºA of the CPPT, applicable by virtue of article 29.º, no. 1, paragraph a), of the RJAT, and article 3.º, no. 2, of the Regulation of Costs in Arbitration Proceedings.
VI - COSTS
The costs are fixed, to be borne by the Respondent, at €2,754.00 (two thousand seven hundred fifty-four euros), in accordance with article 12.º, no. 2 of the Tax Arbitration Regime, article 4.º of the RCPAT and Table I attached thereto. – no. 10 of art.º 35.º, and nos. 1, 4 and 5 of art.º 43.º of the LGT, arts. 5.º, no. 1, al. a) of the RCPT, 97.º-A, no. 1, al. a) of the CPPT and 559.º of the CPC).
Notification shall be made.
Lisbon, 21 September 2018
Fernanda Maçãs (Arbitrator-President)
Rita Guerra Alves (Arbitrator)
Adelaide Moura (Arbitrator)
[1] The numbers that are not relevant are written in smaller type.
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