Summary
Full Decision
The arbitrators Dr. Jorge Lopes de Sousa (president-arbitrator), Prof. Dr. Maria do Rosário Anjos and Dr. Henrique Nogueira Nunes (member-arbitrators), designated by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 28-09-2017, agree as follows:
1. Report
A…, SGPS, S.A., company registration number …, with registered office at Rua…, n.º …, …, Lisbon, (hereinafter simply "A…" or "Applicant"), came, under the terms of subsection a) of section 1 of article 2 and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January (Legal Framework for Tax Arbitration, hereinafter referred to as "LFTA"), to request the constitution of an Arbitral Tribunal, seeking the declaration of illegality of the VAT assessment with number 2017…, in the amount of € 214,653.20, the consequent act of compensatory interest assessment with number 2017…, in the amount of € 16,937.01, and the acts of account adjustment with numbers 2017… and 2017….
The Applicant further requests reimbursement of the amount paid, indemnifying interest and compensation for the guarantee presented with a view to suspending the tax execution proceedings instituted for recovery of the assessed amounts.
The Tax and Customs Authority is the respondent.
The request for constitution of the Arbitral Tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 27-07-2017.
Pursuant to the terms set forth in subsection a) of section 2 of article 6 and subsection b) of section 1 of article 11 of the LFTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators the undersigned, who communicated acceptance of the appointment within the applicable period.
On 13-09-2017, the Parties were notified of this designation, and neither party expressed an intention to challenge the designation of the arbitrators, in accordance with the combined terms of article 11, section 1, subsections a) and b) of the LFTA and articles 6 and 7 of the Code of Deontology.
Accordingly, in compliance with the provision contained in subsection c) of section 1 of article 11 of the LFTA, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 28-09-2017.
The Tax and Customs Authority submitted a response, in which it argued that the request for arbitral pronouncement should be judged unfounded.
By order of 14-11-2017, the meeting provided for in article 18 of the LFTA was dispensed with and it was decided that the proceedings would continue with written submissions.
The Parties submitted their arguments.
The Arbitral Tribunal was regularly constituted and is competent.
The parties have legal personality and legal capacity, are legitimate and are duly represented (articles 4 and 10, section 2, of the same statute and 1 of Ministerial Order no. 112-A/2011, of 22 March).
The proceedings do not suffer from nullities and there is no obstacle to the examination of the merits of the case.
2. Factual Matters
2.1. Proven Facts
The following facts are deemed proven:
The Applicant (previously designated B…, SGPS) is a company holding partnership manager (SGPS), which results from the merger by incorporation of B… SGPS, SA into C… SGPS, SA., being a commercial company with registered office in national territory, whose corporate purpose is rooted in "Activity of Management of Social Participations" (CAE 70100);
The Applicant receives dividends from its subsidiaries, grants them remunerated loans and provides them with technical services of administration, management and consultancy;
In the year 2014, the Applicant received dividends from its subsidiary D… Portugal in the amount of € 5,300,000;
In the year 2014, the Applicant received interest on financing to its subsidiaries in the amount of € 55,026.187;
In 2014, the Applicant registered the amount of €15,739,716 as remuneration for services provided to its subsidiaries;
To provide these technical services, the Applicant sometimes resorts to third parties, which charge VAT;
With respect to the services provided to its subsidiaries in 2014, the Applicant charged VAT, having made full deduction of the tax in the amount of € 57,039.96 incurred on the acquisition of goods and provision of services wholly dedicated to such service provisions;
Regarding goods and services acquired by the Applicant which it put to mixed use, using them both in the provision of services to its subsidiaries and in the activity related to dividends and loans, the Applicant made partial deduction of VAT borne, opting for the application of the actual allocation method provided for in article 23, section 2, of the VAT Code;
To determine the partial deduction, the Applicant ascertained the expenses and VAT incurred by each of the company's Departments, and taking into account the nature of the specific contribution of each Department to the areas of activity, used the criteria of the number of persons or man-hours dedicated to the operations and areas, or the number of resolutions or the number of accounting records, to determine the actual level of consumption of mixed resources and the inherent VAT in the terms contained in document no. 5 attached to the request for arbitral pronouncement, whose content is given as reproduced, of which the following is stated:
Provisionally, the Applicant had calculated a deduction percentage of 90% for these mixed-use resources, in accordance with section 6 of article 23 of the VAT Code, and it was on the basis of this percentage that the Applicant deducted VAT during the year 2014 with respect to mixed-use resources;
Having taken into account the values and criteria contained in said document no. 5, the Applicant concluded that the deduction values to be applied in the year 2014 with respect to mixed-use resources are as follows:
a) Without right to deduction:
i. Dividends – consumption (insignificant) of VAT relating to mixed resources in the amount of € 5.63;
ii. Financing to subsidiaries – consumption of VAT relating to mixed resources in the amount of € 48,847.71;
b) With right to deduction
i. Provision of technical and management services to affiliated companies – consumption of VAT relating to mixed resources in the amount of € 1,316,668.20;
Finding that from these values results a deduction percentage of 96.42% with respect to these mixed-use resources, the Applicant made the corresponding correction in the December 2014 declaration;
For the purpose of determining transfer prices, the Applicant considered that the total amount of expenses borne which constitute general expenses, susceptible of being incorporated in the value of services invoiced to its subsidiaries, was € 17,975,385.50;
The Applicant did not invoice to its subsidiaries the amount of € 3,468,734.42 of these expenses relating to general expenses;
Being 19.30% the percentage of expenses not invoiced to subsidiaries with respect to the amount determined by the Applicant for transfer pricing purposes, the Tax and Customs Authority applied this percentage to "VAT incurred in common costs," in the amount of € 1,365,521.54, having concluded that the VAT that could have been deducted was € 1,102,015.00 and not € 1,316,668.20;
An external tax inspection was carried out on the Applicant, a general inspection, relating to the fiscal year 2014, carried out under Service Order no. OI2016…, of 23.08.2016, of the Large Taxpayers Unit, in which the Tax Inspection Report was prepared, which is attached as document no. 6 to the request for arbitral pronouncement, whose content is given as reproduced, in which reference is made, among other things, to the following:
III DESCRIPTION OF FACTS AND GROUNDS FOR CORRECTIONS TO THE TAXABLE MATTER AND THE TAX FOUND DIRECTLY IN DEFAULT
III.1 VAT - Value Added Tax - Improper deduction of tax - €214,653.20
a) Description of facts
A… SGPS carries out operations subject to VAT and operations not subject to that tax or exempt from it.
In fact, as a company holding partnership manager, it carries out a non-economic activity and not subject to VAT. When it is granting financing to its subsidiaries, it carries out an economic activity subject but exempt from tax, and in the provision of administration, management and consultancy services, it carries out an activity subject to tax and not exempt from it.
As of 31 December 2014 the statement of results of A…, SGPS is as follows:
The remuneration received with respect to its financial participation management activity in 2014 is dividends received from D…, in the amount of €5,300,000.
As for the activity of granting financing to its subsidiaries, its main remuneration is interest. In 2014 it receives interest in the amount of €55,026.1812 relating to this activity.
And in the provision of administration, management and consultancy services, it carries out an activity subject to tax and not exempt from it. In 2014 it registers the amount of €15,739,716 of remuneration for services provided to its subsidiaries.
For purposes of tax deduction, A… SGPS used, in 2014, the method provided for in section 2 of article 23 of the VAT Code: "(...) the taxpayer may make the deduction according to the actual allocation of all or part of the goods and services used, on the basis of objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right, without prejudice to the General Tax Directorate imposing special conditions on it or terminating that procedure in the event that it is found that they cause or could cause significant distortions in taxation."
At the procedural level, A… SGPS:
Makes a full deduction of tax incurred on expenses that it re-debits to its subsidiaries
A deduction percentage calculated provisionally on the basis of the objective criteria used for application of the actual allocation method with respect to VAT incurred in the remaining expenses, the so-called "common costs."
A regularization of these latter, in the December declaration by the correction of the application of actual allocation calculated on the basis of objective criteria in each of the company's departments.
The table below, provided by A… SGPS, reflects the procedure described with respect to VAT deduction:
The amount of regularizations is included in field 40 of the periodic declaration of December 2014 (in this field there is a value of €632,276.49).
In essence, A… SGPS established objective criteria for the determination of consumption of resources that it considered to be of mixed use (used in the various activities of the company).
As for inputs exclusively dedicated to taxed operations, A… uses the actual allocation method and deducts all of the tax.
The criteria mentioned above are evaluated for each department of the company and a ratio is constructed based on the nature of the respective activity on the basis of the number of persons or number of resolutions or the number of accounting records in order to determine the degree of use of resources as permitted to it by section 2 of article 23 of the VAT Code (Annex 1 - Criteria to be Applied by Departments).
A… SGPS, S.A. also made available the list of all documents that gave rise to the VAT deduction mentioned in the table above (Annex 2 - List of documents).
Accordingly, it is noted in this context that the methodology used for purposes of the present analysis takes into account the content of article 75 of the General Tax Law (LGT), with the heading "Declaration and other elements of taxpayers," according to section 1 of which "The declarations of taxpayers presented in accordance with the provisions of law are presumed to be true and in good faith, as well as the data and assessments entered in their accounts or records, when these are organized in accordance with commercial and tax legislation," from which there also arises a special binding between the elements provided and the results now obtained.
b) Analysis
It is now necessary to assess whether the tax deducted, via deduction percentage and regularization, was ascertained on the basis of an allocation resulting from the use of an objective deduction criterion, in accordance with the provisions of article 23, section 2 of the VAT Code and also whether that allocation was properly applied, so that all the tax deducted meets the requirements specified in article 20 of the said statute.
In this context, as will be seen below, the analysis will be developed in order to identify:
Which expenses were or were not passed on in the price of service provisions invoiced to subsidiaries and, for those not passed on, if any, whether tax was deducted;
Which services acquired, whose VAT was deducted, which, not forming part of the price of services provided, were used in the carrying out of exempt operations.
To assess the legitimacy of the right to deduction, we proceeded to frame its activity in the context of VAT by resorting to the jurisprudence of the CJEU.
i. On the legal framework of A… SGPS's activity
Since A… SGPS is a Company Holding Partnership Manager (SGPS), its activity comes provided for and regulated in Decree-Law no. 495/88, of 30 December, with subsequent amendments introduced by Decree-Law no. 318/94, of 24 December, by Decree-Law no. 378/98, of 2 November and by Law no. 109-B/2001, of 27 December.
In accordance with the said statutes, an SGPS, although it has the sole object of managing the social participations with a permanent character that it maintains in its portfolio, can, accessorily, provide services to its subsidiaries and also grant them credit under the rules set forth in articles 4 and 5 of the said statute regulating this activity.
From this it follows that, many times in the doctrine it has been distinguished between holdings whose sole activity is the management of social participations - called pure (or passive) holdings - and those that, in addition to the holding of participations, actively participate in the management of their subsidiaries, through the provision of technical services of administration and management - the so-called mixed (or active) holdings.
For VAT purposes, "SGPS" in general exercise as principal activity the holding of financial participations in a purely passive perspective whose counterpart is dividends, which does not constitute an economic activity and in this sense is outside the scope of the tax.
As a complementary activity it is permitted for these companies to provide technical and support services to their subsidiaries, an activity that is subject and not exempt from tax and that confers the right to deduction.
Finally, they may also grant credit to their subsidiaries, operations subject but exempt, which do not confer the right to deduction.
In the present case, A… SGPS is a company holding partnership manager, its income consisting of i) results arising from the application of the equity method to its subsidiaries; ii) interest; and iii) provisions of technical administration and management services.
In light of the above, A… SGPS is a holding company that, in addition to managing social participations, provides services to the companies in which it holds participations and simultaneously grants them (the subsidiaries) financing, including itself, therefore, in the so-called "mixed holdings."
ii. Framework under the VAT Code
The provision of services by a holding to its subsidiaries constitute economic activities carried out by a taxable person acting as such and consequently are taxable operations in accordance with articles 1, 2, 4 and 6 of the VAT Code.
As for the right to deduction, it follows from section 1 of article 20 of the VAT Code that it is only possible to deduct the tax that has been incurred on goods and services acquired, imported or used by the taxable person for the carrying out, in particular, of supplies of goods and provisions of services subject to tax and not exempt from it.
Some exempt operations also confer the right to deduction of tax, such as exports or operations located abroad that would be taxed if located in national territory. These are the so-called full exemptions.
Article 23 of the same Code establishes that, in the case of taxable persons who, in the exercise of their activity, carry out operations that confer the right to deduction and operations that do not confer such right, "(...) the deduction of tax borne on the acquisition of goods and services which are used in the carrying out of both types of operations is determined as follows:
a) In the case of a good or service partially dedicated to the carrying out of operations not arising from the exercise of an economic activity provided for in subsection a) of section 1 of article 2, the non-deductible tax as a result of such partial dedication is determined in accordance with section 2;
b) Without prejudice to the provision of the preceding subsection, in the case of a good or service dedicated to the carrying out of operations arising from the exercise of an economic activity provided for in subsection a) of section 1 of article 2, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction."
Section 2 states that "Notwithstanding the provision of subsection b) of the preceding number, the taxable person may make the deduction according to the actual allocation of all or part of the goods and services used, on the basis of objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer such right, without prejudice to the General Tax Directorate imposing special conditions on it or terminating that procedure in the event that it is found that they cause or could cause significant distortions in taxation."
Thus, we have that the application of article 23 above indicated is restricted to the determination of deductible tax relating to goods and/or services of mixed use, that is, goods and/or services used jointly in activities that confer the right to deduction and in activities that do not confer such right for being subject but exempt.
In fact, in the case of goods or services exclusively dedicated to operations with the right to deduction of tax, presenting a direct and immediate relationship with such operations, the respective tax is subject to full deduction, in accordance with article 20 of the VAT Code.
By contrapositive, we can conclude that, if tax is borne on the acquisition of goods and services exclusively dedicated to operations subject to tax but exempt without the right to deduction, or to operations not included in the exercise of an economic activity for VAT purposes, it is not, naturally, admissible to exercise the right to deduction.
iii. Framework under Directive 2006/112/EC, of 28 November 2006 (VAT Directive)
Article 2 of the Directive states that:
"1. The following transactions are subject to VAT:
a) Supplies of goods made against payment in the territory of a Member State by a taxable person acting as such;
b) Acquisitions of goods from other Member States made against payment in the territory of a Member State
(...)
c) Supplies of services made against payment in the territory of a Member State by a taxable person acting as such;
d) Imports of goods."
Pursuant to article 9:
"1. 'Taxable person' means any person who independently exercises, in any place, an economic activity, whatever the purpose or result of that activity.
'Economic activity' means any activity of production, supply of goods or provision of services, including extractive activities and agricultural activities, and activities of the professions. In particular, the exploitation of a tangible or intangible asset with a view to obtaining income on a continuous basis is considered to be an economic activity. (...)"
Included in the chapter on exemptions for other activities, article 135 states that:
"1. Member States shall exempt the following transactions:
(...)
l) Transactions, including negotiation but not including the management or custody, of shares or interests in companies or associations, bonds and other securities, with the exception of documents conferring rights to commodities and of rights and securities referred to in section 2 of article 15."
The right to deduction is provided for in articles 167 to 178. Article 168 states that:
"Article 168
Where goods and services are used for the purposes of the taxable transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out such transactions, to deduct the following amounts:
a) VAT due or paid in that Member State in respect of goods supplied or to be supplied to him and in respect of services supplied or to be supplied to him by another taxable person;
b) VAT due in respect of transactions treated as supplies of goods or services in accordance with subsection a) of article 18 and article 27;
c) VAT due in respect of intra-Community acquisitions of goods, in accordance with article 2, section 1, subsection b), subparagraph i);
d) VAT due in respect of transactions treated as intra-Community acquisitions, in accordance with articles 21 and 22;
e) VAT due or paid in respect of goods imported into that Member State."
iv. Community Jurisprudence
Community jurisprudence is extensive on the matter in question and the Court of Justice, in particular in recent years, with respect to holdings, carries out a case-by-case analysis.
"However, it appears to us that the construction of the Court of Justice does not always register a consistent evolution. It presents some incongruities, advances and setbacks that make it difficult to define a general systematized framework in which, with security and predictability, operations having as their object social participations or equivalent realities can be framed" (Alexandra Martins in Operations relating to social participations and the right to deduct VAT - Studies in memory of Prof. Dr. J.L. Saldanha Sanches - volume IV).
Let us see, for example, the judgment EDM, case C-77/01. EDM is a company holding financial participations that, among other operations, carries out the sale of shares and other securities. The judgment states, in its point 57 that "In this regard, it must first be recalled that it is settled case law that the mere acquisition and simple holding of social participations should not be considered economic activities, within the meaning of the Sixth Directive, which confer on their author the status of taxable person. In fact, the simple taking of financial participations in other companies does not constitute an exploitation of a good with a view to obtaining income on a continuous basis, because any dividend, the fruit of such participation, results from the simple ownership of the asset and is not the counterpart of any economic activity within the meaning of the same directive (see judgments already cited Hamas & Heim, no. 15, as well as Floridienne and Berginvest, no. 21). Thus, if these activities do not themselves constitute an economic activity within the meaning of the said directive, the same is true of those consisting in transferring such participations (see judgments Wellcome Trust, already cited, no. 33, and of 26 June 2003, KapHag, C-442/01, Coll., p. I-6851, nos. 38 and 40)." It continues, in paragraph 58, "Similarly, the simple acquisition and sale of other negotiable securities cannot constitute the exploitation of an asset with a view to production of income on a continuous basis, since the only consideration for these transactions is constituted by any benefit on the sale of such securities."
However, the Court of Justice has come to consider that the situation will be different when the financial participations held are accompanied by interference in the management of the subsidiaries through transactions subject to VAT.
Already in the Judgment Polysar Investments (1991) - Case C-60:90, in which it is questioned, in particular, whether a holding company which exercises no other activities beyond those relating to the holding of shares in subsidiaries should be considered a taxable person. In its points 13 and 14, the judgment states that: "(...) In fact, the simple taking of participations in the capital of other companies does not constitute the exploitation of an asset with a view to obtaining income on a continuous basis, since any dividend, the fruit of that participation, results from the simple ownership of the asset (...) The situation "is different when the participation is accompanied by direct or indirect interference in the management of the companies in which the participation was taken, without prejudice to the rights that the holder of participations has in the capacity of shareholder or member."
The judgments Floridienne, case C-142/99 and Cibo Participations, case C-16/00 reinforce this position.
However, the Judgment AB SKF (2009), case C-291/08 goes further. SKF is the parent company of an industrial group with activities in several countries and actively participates in the management of its subsidiaries and provides them with paid-for services. Within the scope of the restructuring of the Group, it will dispose of one of its subsidiaries (held at 100%) and also a 26.5% stake that it still holds in another company that it had already held at 100% and in which it is sought to determine, first, whether the transfer of participations in a subsidiary company by a taxable person in tax, debtor of tax as a result of the provision of services to that subsidiary, constitutes an operation subject to VAT. The Court states (point 31) "(...) it follows from the case law of the Court of Justice that operations relating to shares or participations in companies are covered by the scope of application of VAT when carried out within the framework of a commercial activity of negotiation of securities or to effect direct or indirect interference in the management of the companies in which the participation was taken or when they constitute the direct, permanent and necessary continuation of the taxable activity (see, in particular, judgments of 20 June 1995 (...) Wellcome Trust, C-155/94, Coll., p. l-3013, no. 35, and Hamas & Heim, already cited, no. 16 and case law referred to therein."
It is stated in point 33 "By the transfer of all the shares held in the subsidiary and in the controlled company, SKF terminates its participation in these companies. The said transfer, carried out with a view to the restructuring of a group of companies by the parent company, can be considered an operation of obtaining income on a permanent basis of activities that exceed the framework of the simple sale of shares (see, in this sense, judgment of 26 May 2005, Kretztechnik, C-465/03, Coll., p. I-4357, no. 20 and case law referred to therein). This operation has a direct nexus with the organization of the activity exercised by the group and thus constitutes the direct, permanent and necessary continuation of the taxable activity of the taxable person within the meaning of the case law referred to in no. 31 of this judgment. This operation is covered, therefore, by the scope of application of VAT."
It seems to us then that the Court of Justice considers as economic activity operations with shares when these are carried out within the framework of a commercial activity of negotiation of securities - a case not applicable in the present situation.
However, not being this the situation, the Court also considers that these operations with shares or participations could still fall within the concept of economic activity and consequently within the scope of application of VAT if they occur:
- to effect direct or indirect interference in the management of the companies in which the participation was taken; or
- when it constitutes a direct, permanent and necessary continuation with the taxable activity.
With respect to the right to deduct the tax, point 57 of the judgment states that "According to settled case law, the existence of a direct and immediate relationship between a given upstream transaction and one or more downstream transactions with the right to deduction is, in principle, necessary for the right to deduct VAT paid upstream to be recognized to the taxable person and to determine the extent of such right (see judgment of 8 June 2000, Midland Bank, C-98/98, Coll., p. I-4177, no. 24, as well as judgments, already cited, Abbey National, no. 26, and Investrand, no. 23). The right to deduct VAT that has been borne on the acquisition of goods or services upstream presupposes that the expenses incurred on their acquisition have formed part of the constituent elements of the price of the taxable transactions downstream with the right to deduction (see judgments, already cited, Cibo Participations, no. 31; Kretztechnik, no. 35; Investrand, no. 23; and Securenta, no. 27)."
The court also considers the possibility of deduction in the absence of the direct and immediate relationship mentioned above:
Point 58: 'However, the right to deduction in favor of the taxable person is also admitted, even in the absence of a direct and immediate relationship between a given upstream transaction and one or more downstream transactions with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, in fact, a direct and immediate relationship with the entirety of the economic activity of the taxable person (see, in particular, judgments, already cited, Midland Bank, nos. 23 and 31; Abbey National, no. 35; Kretztechnik, no. 36; and Investrand, no. 24)."
But it also clarifies that:
Point 59: "On the other hand, where goods or services acquired by a taxable person are used for the purposes of exempt operations or are not covered by the scope of application of VAT, there can be no recovery of the tax downstream nor deduction of it upstream (see, in this sense, judgments of 30 March 2006, Uudenkaupungin kaupunki, C-184/04, Coll., p. l-3039, no. 24; of 14 September 2006, Wollny, C-72/05, Coll., p. I-8297, no. 20; and of 12 February 2009, Vereniging Noordelijke Land-en Tuinbouw Organisatie C-515/07, Coll., p. l-0000, no. 28)."
(...)
v. On the right to deduction in A…
Recovering what was referred to in point a), A… accompanies the holding of social participations by interference in the respective management, in the majority of them, through the provision of services and granting of financing, by means of which it charges interest.
The transactions embodied in the provision of services are economic activities within the terms of the VAT Code and subject to tax and not exempt from it, and as such the respective VAT borne on the goods and services acquired and used in the pursuit of these activities, verified the remaining presuppositions and non-inclusion in the operations of article 21 of the VAT Code, confers the right to deduction in accordance with articles 19 and 25 of the VAT Code.
As for the activity of granting financing to subsidiary companies, it constitutes an economic activity within the scope of VAT liability, however exempt in accordance with section 27 of article 9 of the VAT Code. As this is an exemption not provided for in the exclusions of subsection b) of section 1 of article 20 of the same Code, the tax borne on the acquisition of goods and services intended for the pursuit of this activity does not confer the right to deduction.
In accordance with community jurisprudence, when the holding of participations is accompanied by management in the subsidiaries, it is possible to deduct the upstream VAT on inputs that have a direct and immediate relationship with the active taxable operations and even if such is not the case, provided that these expenses, constituting general expenses, are incorporated in the value of the services provided. (points 23 and 24 of Cases C-108/14 and C-109/14 Judgment Larentia Minerva and point 58 Case C-29/08 Judgment AB SKF).
On the other hand, whenever goods or services are used for the carrying out of exempt operations, the deduction of VAT that burdened such goods or services is not permitted (point 59 Case C-29/08 Judgment AB SKF).
With respect to goods and services used by the taxable person to carry out both operations with the right to deduction and operations without the right to deduction, deduction is only admitted with respect to the part of VAT proportional to the amount relating to the first category of operations (articles 173 of Directive no. 2006/112/EC and 23, sections 1 and 2 of the VAT Code).
The procedure of the tax inspection aimed at defining an objective criterion that would enable the allocation of expenses incurred to the different activities exercised by the taxable person, allowing for proportional deduction of the tax based on the application of an allocation key as precise as possible.
In the present case, A… SGPS indicates, in the Transfer Pricing Dossier, that part of the expenses it incurred are borne in the exercise of an activity subject to VAT and not exempt.
Thus, in the point "2.1 Provision of Management/Shared Services" of Annex 4 to the said dossier, the following can be read:
"... A… SGPS entered into a services agreement with certain subsidiaries of the Group, which includes the following activities: (i) consultancy on management and administration, (ii) corporate communications, (iii) audit of business processes and audit of information systems; (iv) financial and administrative functions; (v) relationship with shareholders, investors, analysts, the financial market and the regulated market; (vi) corporate finance, planning and control; (vii) advisory on setting objectives and human resources policy; (viii) legal advice; (ix) support in administrative and documentary management of the activity of subsidiaries; and (x) studies on the feasibility of business for international development."
In point 3.5 Special Operations for Transfer Pricing purposes, of the Transfer Pricing Dossier, the formation of the price of these services is explained:
"The price applied in this operation is formed starting from a cost identification:
By functional area, the total associated cost is ascertained (designated as direct costs):
Direct costs: actual cost of employees dedicated to the service: salary and social benefits;
Indirect costs: office materials, insurance costs, equipment depreciation, rents and leases, litigation and notarial expenses, costs with other external entities, among other costs inherent to the service provision operations.
Subsequently, the calculation of the respective hourly rates per functional area is carried out based on:
Direct costs;
Indirect costs: allocated based on the total number of employees of the department;
As a rule, a margin of 8.5%, incurring on the costs associated."
In the point "2.1 Provision of Management Services | Shared Services" of Annex 4 to the said dossier, it is read that: "... the Net Profit Margin Method was selected as being the most appropriate with a view to testing the remuneration earned by A… SGPS (...) in the provision of management/shared services to the other entities of the Group." And further that: "Based on the results of the comparables research carried out, it is possible to conclude that the 8.5% mark-up applied by A… SGPS (...) in the management services/shared services is within the arm's length range previously identified". The materiality of these linked operations is shown to us by the following table, taken from the Transfer Pricing Dossier (Point 3.4. Analysis of the materiality of linked operations):
When questioned about which expenses it incurred that it incorporates in the value of services invoiced to its subsidiaries, A… sent the table below, whose content, although it does not demonstrate a direct nexus between inputs and outputs, is able to demonstrate that the identified expenses constitute general expenses of the company and become constituent elements of the price of services provided:
Now, the amount of €17,975,385.50 is, according to the company, the total of expenses incurred by A… SGPS (see Annex 3 - Total amount of operational expenses by document and by account of the trial balance) to be allocated - through a ratio constructed on the basis of the company's human resources - to each of the companies to which it provides services, applying the margin referred to in the transfer pricing dossier of 8.5%. Based on these calculations, the amount of €19,503,293.27 would be obtained.
However, this was not the value invoiced to the subsidiaries.
From the amount of €17,975,385.50, A… SGPS considered that the amount of €3,468,734.42 are company expenses that should not be allocated in the value of the services provided to the subsidiaries.
Thus, according to Annex 4, the amount charged to the subsidiaries relating to A… SGPS management fees for the fiscal year 2014 was €15,739,716.42.
Consequently, the VAT that was incurred on expenses in the amount of €3,468,734.42 does not confer the right to deduction under article 20 of the VAT Code, since it corresponds to service costs that, forming part of A…'s general expenses, are not included in the price of services provided by the taxable person to its subsidiaries, and therefore do not have a direct and immediate relationship with the entirety of the economic activity of the taxable person in accordance with community jurisprudence cited.
Having A… SGPS unequivocally identified that part of the operational costs it incurred refer to costs borne in the exercise of an activity subject to VAT and not exempt, embodied in the provision of support services to some of its subsidiaries, it was opted to consider that proportion in an allocation key that reflects the VAT borne which cannot be deductible. In fact, it is the most precise deduction method.
In this way, the ratio of 19.30% was found, which corresponds to the weight of the company's current expenses not allocated in the service provisions to the subsidiaries relative to the total operational expenses borne.
Accordingly, in order to correct the VAT deducted, the ratio above ascertained was applied to the amount of VAT incurred in common costs, identified by the taxable person in column (4) of the table presented in point a) and Annex 5, for each of the cost centers, in order to obtain an amount of VAT that does not confer the right to deduction, in accordance with article 20 of the VAT Code, to the exact extent that 19.30% of the expenses have no direct nexus with downstream operations nor are they incorporated in the price of services provided.
Thus, the correction proposed corresponds to the difference between the VAT deducted by A… SGPS, identified by the taxable person in column (9) of the table presented in point a) and Annex 5, and the VAT considered legally deductible by the AT" (identified in column 12 of annex 5), in accordance with article 20 of the VAT Code, (Annex 5 presents the calculations carried out).
That is:
c) Conclusion
From the foregoing, it is found that the taxable person proceeded to improper deduction of VAT, in light of what is stated in article 20, in the amount of €214,653.20, corresponding to the proportional part of general expenses that are not dedicated to the activity subject and not exempt (provision of services).
The amount ascertained is included in the regularizations of the periodic declaration of December 2014.
Following the inspection action, an assessment of VAT with number 2017…, in the amount of € 214,653.20, and an assessment of compensatory interest with number 2017…, in the amount of € 16,937.01, and acts of account adjustment with numbers 2017… and 2017… were issued (documents no. 1 to 4 attached to the request for arbitral pronouncement, whose contents are given as reproduced);
The organization chart of the E… group on 31-12-2014 was what is contained in document no. 7 attached to the request for arbitral pronouncement, whose content is given as reproduced;
The Applicant provided bank guarantees in order to obtain suspension of tax execution proceedings nos. …2017… and …2017…, instituted for recovery of the assessed amounts (document no. 8 attached to the request for arbitral pronouncement, whose content is given as reproduced);
On 18-05-2015, the Applicant filed the request for arbitral pronouncement that gave rise to the present proceedings.
2.2. Unproven Facts
It was not proven that the Applicant had paid the assessed amounts.
No evidence of payment was presented.
2.3. Basis for Determination of Factual Matters
The probative conclusions are based on the Tax Inspection Report and on the documents attached to the request for arbitral pronouncement and which are part of the administrative file.
3. Legal Matters
3.1. Essential Terms of the Question to be Examined
In accordance with article 2 of Directive no. 2006/112/EC, of the Council, of 28-11-2006 (DVAT), in addition to others, operations of supplies of goods made against payment in the territory of a Member State by a taxable person acting as such, acquisitions of goods from other Member States made against payment in the territory of a Member State, supplies of services made against payment in the territory of a Member State by a taxable person acting as such, and imports of goods are subject to VAT.
In the same vein, the Value Added Tax Code (VAT Code) establishes in its article 1 that supplies of goods and provisions of services effected in national territory, against payment, by a taxable person acting as such, imports of goods and intra-Community operations effected in national territory are subject to this tax, as defined and regulated under the VAT Regime for Intra-Community Transactions.
In accordance with article 9 of the Directive, "a 'taxable person' means any person who independently exercises, in any place, an economic activity, whatever the purpose or result of that activity" and "an 'economic activity' means any activity of production, supply of goods or provision of services, including extractive activities and agricultural activities and the activities of the professions. In particular, the exploitation of a tangible or intangible asset with a view to obtaining income on a continuous basis is considered an economic activity."
The VAT Code establishes that taxable persons are, in addition to others, "natural or legal persons who, in an independent manner and with habitual character, exercise activities of production, commerce or provision of services, including extractive activities, agricultural activities and those of the liberal professions, and also those who, in the same independent manner, engage in a single taxable transaction, provided that such transaction is connected with the exercise of the said activities, wherever it occurs, or when, independently of such connection, such transaction meets the assumptions of actual incidence of income tax for natural persons (IRS) or for legal entities (IRC)".
As a rule, only the tax that has been borne on goods or services acquired, imported or used by the taxable person for carrying out and supplies of goods and provisions of services subject to tax and not exempt from it can be deducted (article 20, section 1, of the VAT Code, in line with article 168 of the DVAT).
With respect to goods and services used by a taxable person to carry out both transactions with the right to deduction and transactions without the right to deduction, deduction is admitted only with respect to the part of VAT proportional to the amount relating to the first category of transactions (article 173, section 1, of the DVAT).
The Applicant is a Company Holding Partnership Manager that develops the activity of managing participations, receives dividends from its subsidiaries, grants them remunerated loans, and provides them with technical services of administration and management.
With respect to services provided to its subsidiaries in 2014, the Applicant charged VAT, having made full deduction of the tax in the amount of € 57,039.96 borne on acquisitions of goods and provision of services wholly dedicated to such service provisions.
Regarding goods and services acquired by the Applicant which it put to mixed use, using them both in the provision of services to its subsidiaries and in the activity related to dividends and loans, the Applicant made partial deduction of VAT borne, using the actual allocation method.
The use of this actual allocation method is required by subsection a) of section 1 of article 23 of the VAT Code with respect to goods or services partially dedicated to the carrying out of operations not arising from the exercise of an economic activity, as is the case with the receipt of dividends. The Applicant applied this method with respect to the deduction of VAT borne related to the holding of social participations and the respective receipt of dividends, which does not constitute an economic activity for purposes of article 1 of the VAT Code, and therefore is not included in the scope of the objective incidence of the tax.
With respect to the activity related to granting financing to subsidiaries, which is an economic activity included in the scope of the objective incidence of VAT, but which is exempt, by force of what is provided in section 27) of article 9 of the VAT Code, the tax is deductible, as a rule, "in the percentage corresponding to the annual amount of transactions that give rise to deduction" [article 23, section 1, subsection b) of the VAT Code, in line with article 173, section 1, of the DVAT].
However, section 2 of article 23 of the VAT Code permits the taxable person to "make the deduction according to the actual allocation of all or part of the goods and services used, on the basis of objective criteria that allow determining the degree of use of such goods and services in transactions that confer the right to deduction and in transactions that do not confer such right, without prejudice to the General Tax Directorate imposing special conditions on it or terminating that procedure in the event that it is found that they cause or could cause significant distortions in taxation," a possibility which is supported by subsection c) of section 2 of article 173 of the DVAT. ( [1] )
In the present case, the Applicant also opted for the use of the actual allocation method with respect to VAT deduction relating to the activity of financing subsidiaries.
Regarding goods and services acquired by the Applicant which it put to mixed use, using them both in the provision of services to its subsidiaries and in the activity related to dividends and loans, the Applicant made partial deduction of VAT borne, taking into account the nature of the specific contribution of each Department to the areas of activity and using the criteria of the number of persons or man-hours dedicated to the operations and areas, or the number of resolutions or the number of accounting records, to determine the actual level of consumption of mixed resources and the inherent VAT.
Applying this method, the Applicant concluded that there was no right to deduction as to the amount of 5.63 relating to the receipt of dividends, and € 48,847.71 as to resources of mixed use connected with financing the subsidiaries, and there was a right to deduction as to the amount of € 1,316,668.20 of mixed-use resources connected with the provision of technical and management services to the subsidiary companies.
With respect to expenses borne which constitute general expenses, susceptible of being incorporated in the value of services invoiced to subsidiaries, the Tax and Customs Authority understood that the Applicant managed to demonstrate that the expenses in the amount of € 17,975,385.50 "constitute general expenses of the company and become constituent elements of the price of services provided," a value that was determined by the Applicant for transfer pricing purposes.
Finding that the Tax and Customs Authority did not invoice to the subsidiaries the amount of € 3,468,734.42 of these expenses relating to general expenses, it understood that "the VAT that was incurred on expenses in the amount of €3,468,734.42 does not confer the right to deduction in accordance with article 20 of the VAT Code, since it corresponds to service costs that, forming part of A…'s general expenses, are not included in the price of services provided by the taxable person to its subsidiaries, and therefore do not have a direct and immediate relationship with the entirety of the economic activity of the taxable person in accordance with community jurisprudence cited."
Being 19.30% the percentage of expenses not invoiced to subsidiaries (€3,468,734.42) in relation to the amount determined by the Applicant for transfer pricing purposes (€ 17,975,385.50), the Tax and Customs Authority applied this percentage to "VAT incurred in common costs," in the amount of € 1,365,521.54, having concluded that the VAT that could have been deducted was € 1,102,015.00, relating to such costs and not € 1,316,668.20, as deducted, and therefore assessed the difference of €214,653.20.
The Applicant disagrees with this correction, understanding essentially that
– it pursues a true economic activity, which involves the provision of technical services to the subsidiary companies, and that the acquisitions of productive inputs carried out by the Applicant obviously constitute constituent elements of the price of the services it provides;
– what matters is whether the goods and services acquired by the Applicant were used in the taxable activity of provision of support services to the management of subsidiaries and not whether the invoiced value is sufficient to cover the costs or whether it incorporates an adequate margin;
– the overall activity of the Applicant included provisions of technical services to subsidiaries, consumer of 96.42% of the acquired resources, and the granting of financing, consumer of the remaining resources (the resources consumed by receipt of dividends are insignificant and negligible);
– in the provisions of technical and management services to subsidiaries, the Applicant charged VAT in approximately € 4.8 million, and the total amount of VAT borne by the Applicant was approximately € 1.4 million, much lower than the VAT charged.
– even if technical services were provided with a margin lower than that of arm's length, or with negative margin, this would not imply the conclusion of the AT of non-deduction of VAT, since the practice of arm's length prices is only relevant for purposes of IRS.
3.2. Examination of the Question
As has been a uniform understanding of the jurisprudence, it is a corollary of the mandatory referral obligation provided for in article 267 of the Treaty on the Functioning of the European Union (which replaced article 234 of the Treaty of Rome, former article 177), its binding character for national Courts when they have to decide questions related to Union law. ( [2] )
In particular, with respect to the VAT deduction regime, the concern for harmonization is manifested in Directive no. 2006/112/EC in point 39 of the Preamble, in which it is stated that "the deduction regime should be harmonized, as it influences the amounts effectively charged, and the calculation of the pro rata deduction should be carried out in the same manner in all Member States."
Questions concerning the right to deduction of companies holding partnerships that provide services to their subsidiaries have been examined in several decisions of the CJEU, of which the judgment of 06-09-2012, rendered in case no. C-496/11, is an example.
Although this judgment was issued applying the regime of the 6th Directive (no. 77/388/EEC, of 17-5-1977) which was repealed by Directive no. 2006/112/EC of the Council, of 28-11-2006, which entered into force on 1-1-2007, the regime of the latter is essentially similar to the former, in what is relevant here, and therefore that jurisprudence should be applied to the situation of the case at hand.
This judgment states:
34 "The interference of a holding in the management of the companies in which it took participations constitutes an economic activity within the meaning of article 4, section 2, of the Sixth Directive, insofar as it implies the carrying out of transactions subject to VAT under article 2 of that directive, such as the supply of administrative, financial, commercial and technical services by the holding to its subsidiaries";
36 "For VAT to be deductible, upstream transactions must have a direct and immediate nexus with downstream transactions with the right to deduction. Thus, the right to deduct VAT that is incurred on the acquisition of goods or services upstream presupposes that the expenses incurred on their acquisition form part of the constituent elements of the price of the taxable transactions downstream with the right to deduction";
37 "However, a right to deduction in favor of the taxable person is also admitted, even in the absence of a direct and immediate nexus between a given upstream transaction and one or more downstream transactions with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of goods it supplies or of services it provides. These costs have, in fact, a direct and immediate nexus with the entirety of the economic activity of the taxable person (see, in particular, judgments, already cited, Kretztechnik, no. 36, Investrand, no. 24, and SKF, no. 58)".
This jurisprudence was also followed in the judgment of the Supreme Administrative Court of 03-07-2013, case no. 01148/11.
As the Applicant contends, general expenses are, by their nature, used in all activities of the taxable person and therefore have the direct and immediate nexus with the economic activity it carries out which is a requirement of the right to deduction.
In the present case, the expenses constituting general costs of the Applicant were considered for the formation of the prices of services provided to its subsidiaries, and therefore it is to be concluded, in accordance with the aforementioned point 37, that "these costs have, in fact, a direct and immediate nexus with the entirety of the economic activity of the taxable person," and therefore there is a right to deduction of VAT incurred on their acquisition.
On the other hand, as it is relevant for the existence of the right to deduct VAT, this relationship of use of acquired resources to practice taxed transactions, the measure of the right to deduction does not depend on the prices adopted in these transactions, but only on that use. That is, if certain resources were wholly or partially used to carry out the taxed transactions, the VAT borne is wholly or partially deductible to the extent of that use, regardless of the prices of the services provided, in which the purchase prices may not be fully recovered.
The objective criteria spoken of in section 2 of article 23 of the VAT Code must make it possible to determine the degree of use of goods and services acquired in transactions that confer the right to deduction and in transactions that do not confer such right, which does not depend on the percentages of effective prices of services provided nor on the values by which these services should be remunerated in terms of arm's length.
As the Applicant rightly says, "what matters is whether the goods and services acquired by the Applicant were used in the taxable activity of provision of support services to the management of subsidiaries and not whether the invoiced value is sufficient to cover the costs or whether it incorporates an adequate margin."
Thus, it is not appropriate to use the values of invoicing to subsidiaries as a criterion to determine the extent of allocation of goods and services of common use to the Applicant's activities.
Those values could be relevant if the method of "percentage corresponding to the annual amount of transactions that give rise to deduction," provided for in subsection b) of section 1 of article 23 of the VAT Code, were applied, but the Applicant opted for the actual allocation method under section 2 of this article and was entitled to make this choice, as none of the situations provided for in its final part were verified.
Therefore, the Tax and Customs Authority is wrong in arguing, in article 56 of its response, that "in the case of goods and services of mixed use, the deduction of VAT borne is only admissible with respect to the proportional part corresponding to the amount of the taxable transactions that confer the right to deduction," since that proportionality, relevant when the regime of subsection b) of section 1 and section 4 of article 23 of the VAT Code is applied, is not applicable if the taxable person opts for the application of the actual allocation method, as occurred in this case.
On the other hand, adequate and objective appear to be the criteria used by the Applicant to determine the actual allocation of mixed-use resources (criteria of number of persons or man-hours dedicated to the operations and areas, or number of resolutions or number of accounting records) whose quantification is not shown to be inaccurate. In fact, the number of hours of use of goods (machine hours and man-hours) was one of the criteria expressly suggested by Circular Office no. 30103, of 23-04-2008 for determining "actual allocation based on effective use."
Thus, the Applicant's action is in clear harmony with what is provided in article 23, section 2, of the VAT Code, in which reference is made to the possibility of "actual allocation of all or part of the goods and services used, on the basis of objective criteria that make it possible to determine the degree of use of such goods and services in transactions that confer the right to deduction and in transactions that do not confer such right."
From the foregoing, the assessment under review is illegal, as it suffers from a defect of violation of law, which justifies its annulment, under article 163, section 1, of the Code of Administrative Procedure, subsidiarily applicable, by force of what is provided in article 2, subsection c), of the LGT.
4. Compensatory Interest
The Applicant also requests the declaration of illegality of the assessment of compensatory interest.
Under article 35, sections 1 and 8, of the LGT "compensatory interest is due when, by fact attributable to the taxpayer, the assessment of all or part of the tax due or the delivery of tax to be paid in advance, or withheld or to be withheld within the scope of tax substitution, is delayed" and "compensatory interest is merged into the tax debt itself, with which they are jointly assessed."
Thus, as the assessment of compensatory interest has as its prerequisite the assessment of VAT, the illegality of the latter is reflected in the assessment of compensatory interest, which suffers from the same defect.
5. Indemnifying Interest
The Applicant requests that it be recognized the right to indemnifying interest.
The right to indemnifying interest depends, among other things, on payment of undue tax debt, as follows from what is provided in article 43, section 1, of the LGT.
In the present case, it was not proven that the Applicant had paid any of the assessed amounts, and therefore that prerequisite of the right to indemnifying interest is not verified.
Therefore, this claim is unfounded.
6. Compensation for Undue Guarantee
The Applicant requests that it be recognized the right to compensation for undue guarantee.
Article 171 of the CTPT establishes that "compensation in case of bank guarantee or equivalent improperly provided shall be requested in the proceeding in which the legality of the enforceable debt is contested" and that "compensation must be requested in the claim, challenge or appeal or if its ground is supervenient within 30 days after its occurrence."
The arbitral proceeding is an appropriate means for recognition of the right to compensation for improperly provided guarantee, as article 171 of the CTPT is subsidiarily applicable, by force of what is provided in article 29, section 1, subsection c), of the LFTA.
The Applicant provided bank guarantees in order to obtain suspension of tax execution proceedings nos. …2017… and …2017…, instituted for recovery of the assessed amounts.
The regime of the right to compensation for undue guarantee is contained in article 52 of the LGT, which establishes the following:
Article 53
Guarantee in Case of Improper Provision
1. The debtor who, in order to suspend execution, offers a bank guarantee or equivalent shall be compensated in whole or in part for the damages resulting from its provision, if it has maintained it for a period exceeding three years in proportion to the dismissal in administrative appeal, challenge or opposition to execution that has as its object the guaranteed debt.
2. The period referred to in the preceding number does not apply when it is verified, in administrative request or judicial challenge, that there was error attributable to the services in the assessment of the tax.
3. The compensation referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnifying interest provided for in this law and may be requested in the proceeding itself of administrative request or judicial challenge, or autonomously.
4. Compensation for improper provision of guarantee shall be paid by offset against the tax revenue of the year in which the payment was made.
In the present case, the error underlying the assessments under review is attributable to the Tax and Customs Authority, since those were of its initiative and the Applicant in no way contributed to the error being committed.
Therefore, the Applicant is entitled to compensation for the guarantee provided.
As there are no elements that make it possible to determine the amount of compensation, the condemnation must be made with reference to what is to be assessed in execution of this judgment [article 609, section 2, of the Code of Civil Procedure applicable under article 2, subsection d) of the LGT].
5. Decision
Accordingly, the Arbitral Tribunal agrees to:
Uphold the request for arbitral pronouncement as regards the declaration of illegality of the assessments of VAT and compensatory interest nos. 2017… and 2017… respectively;
Annul the assessments referred to;
Reject the request for indemnifying interest and absolve the Tax and Customs Authority of this claim;
Uphold the request for compensation for undue guarantee and condemn the Tax and Customs Authority to pay the Applicant the compensation to be determined in execution of this judgment.
6. Value of the Case
In accordance with the provisions of article 306, section 2, of the CPC and 97-A, section 1, subsection a), of the CTPT and 3, section 2, of the Regulation of Court Costs in Tax Arbitration Proceedings, the value of the case is fixed at € 231,590.21.
7. Court Costs
Under article 22, section 4, of the LFTA, the amount of court costs is fixed at € 4,284.00, in accordance with Table I attached to the Regulation of Court Costs in Tax Arbitration Proceedings, at the charge of the Tax and Customs Authority.
Lisbon, 09-01-2018
The Arbitrators
(Jorge Lopes de Sousa)
(Maria do Rosário Anjos)
(Henrique Nogueira Nunes)
[1] The use of this method may even be mandatory, in the event that the Tax and Customs Authority uses the faculty provided for in section 3 of article 23 of the VAT Code.
[2] In this sense, the following judgments of the Supreme Administrative Court may be seen: of 25-10-2000, case no. 25128, published in Appendix to the Official Journal of 31-1-2003, page 3757; of 7-11-2001, case no. 26432, published in Appendix to the Official Journal of 13-10-2003, page 2602; of 7-11-2001, case no. 26404, published in Appendix to the Official Journal of 13-10-2003, page 2593.
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