Process: 457/2017-T

Date: April 30, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 457/2017-T) addresses the controversial application of the VAT reverse charge mechanism to equipment purchases incorrectly classified as construction services. The taxpayer challenged three VAT assessments totaling €48,376.66, arguing that the Portuguese Tax Authority (AT) unlawfully reclassified the acquisition of exhaust equipment from supplier B… as civil construction services subject to reverse charge, thereby denying VAT deductions. The core dispute centers on whether equipment supply with installation constitutes a construction service under the VAT Code's self-assessment regime. The applicant contended that the equipment was movable property, not permanently integrated into the building, and therefore should not fall under the reverse charge provisions applicable to construction services. The taxpayer also alleged procedural violations, including breach of the right to be heard (article 60 LGT), insufficient reasoning in the assessment, and violation of EU VAT Directive principles on deduction rights. Critically, the applicant demonstrated that the supplier had already paid the VAT to the State, meaning the denial of deduction resulted in double taxation and violated the neutrality principle fundamental to VAT. The case raises important questions about the boundaries of Portugal's reverse charge mechanism for construction services and whether the AT can deny deductions when suppliers have fulfilled their VAT obligations, potentially creating unlawful economic double taxation contrary to EU law.

Full Decision

ARBITRAL DECISION

I – REPORT

  1. A…, legal entity no. …, with registered office at Avenue …, …, …, submitted, on 31-07-2017, a request for constitution of the arbitral tribunal, in accordance with the provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Regime for Arbitration in Tax Matters, hereinafter referred to only as LRAT), in conjunction with article 102 of the CPTPT, in which the Tax and Customs Authority (hereinafter referred to only as the Respondent) is summoned.

  2. The applicant seeks, with its request, a declaration of illegality of the acts of assessment of Value Added Tax no. 2016…, 2017… and 2017…, with the consequent reimbursement of the tax paid, as well as recognition of the right to compensatory interest.

  3. 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 02-08-2018.

3.1. The applicant did not proceed to appoint an arbitrator, therefore, pursuant to the provisions of subparagraph a) of paragraph 2 of article 6 and subparagraph b) of paragraph 1 of article 11 of the LRAT, the President of the Deontological Council designated the undersigned as arbitrator of the arbitral tribunal, who communicated acceptance of the designation within the legal deadline.

3.2. On 10-10-2017 the parties were notified of the arbitrator's designation, and no impediment was raised.

3.3. In accordance with the provision of subparagraph c) of paragraph 1 of article 11 of the LRAT, the arbitral tribunal was constituted on 31-10-2017.

3.4. In these terms, the Arbitral Tribunal is duly constituted to examine and decide the object of the proceedings.

3.5. Duly notified, the TA submitted a response, within the legal deadline, defending itself by way of challenge and attaching a copy of the administrative file.

  1. By order of 07-02-2017 the meeting provided for in article 18 of the LRAT was dispensed with.

  2. To substantiate the request for arbitral ruling, the applicant alleges, in summary, the following:

Between October 2016 and April 2017, it was subjected to an "internal inspection action," pursuant to "service order no. 012016… of 2016-09-22," as a result of which corrections to deductible VAT were proposed based on three distinct situations:

  • Acquisition of goods and services invoiced by supplier B…, Lda, with deductible VAT of €21,850.00;

  • Acquisition of goods and services invoiced by supplier C…, with deductible VAT of €21,190.66;

  • Acquisition of services rendered invoiced by supplier D…, Lda, with deductible VAT of €5,336.00.

It exercised the right of hearing, alerting to the illegalities of the liquidation procedure, but proceeded to review the classification of the operations mentioned, having acknowledged that the services acquired in the last two situations would be susceptible to classification as civil construction services.

However, it found no minimal explanation for the Corrections Project to equate all situations to "civil construction services," particularly the equipment acquired from supplier B…. The legal basis of the self-assessment regime in question refers to "civil construction services, including the remodelling, repair, maintenance, conservation and demolition of immovable property," in which the proposal regarding the exhaust equipment in question has no place, being the equation unjustified, disproportionate and illegal.

The supplier in question fully and timely complied with all obligations related to the sale of the equipment in question, namely: it invoiced, accounted for, declared in favor of the State in its respective periodic declarations and, consequently, the supplier paid to the State, already in 2014, the VAT invoiced to the Applicant.

There was a violation of the right of hearing and the principle of participation in the decision, to the extent that the TA completely ignored the hearing of the Applicant and the elements provided on that basis, proceeding to acts of liquidation without addressing those elements, nor even truly responding to the exercise of the right of hearing. The Applicant does not accept the TA's conduct inasmuch as it ignored all explanations provided during the hearing, merely maintaining the corrections based on presumptions, since it did not even respond to the Applicant, in disregard of, ultimately, the principle of cooperation to which it was bound.

It is therefore manifest that article 60 of the LGT was disrespected, particularly its paragraph 7, given the failure to properly weigh the elements provided by the taxpayer. Consequently, and because the Applicant was not truly heard, particularly with regard to the characterization of "construction services," having been ignored by the final inspection report, it can be concluded that the acts of assessment in question are absolutely illegal due to violation of that article.

It further understands that there was a form defect due to absence of legally due substantiation, being incomprehensible the classification, not minimally specified, as civil construction, of the purchase of the equipment in question. Rather, this is the sale of equipment, even if supplied with installation, which in itself does not have the power to transform that sale into a service, much less "construction," nor does the legislator of the VAT Code reference it anywhere.

The purchase of the exhaust equipment not only does not constitute acquisition of civil construction services – which is completely removable and easily movable to any other location, both within the Applicant's facilities and in any others – but does not permit application of the exceptional self-assessment regime.

In substantiating the corrections project in the manner in which it did, the Tax Administration disregarded constitutional and legal imperatives (article 268, paragraph 3 of the CRP and article 77, paragraph 1 of the LGT), by substantiating its acts in an incongruous, obscure manner as to the criteria used, absolutely contradictory with the facts on which it is based and merely conclusory.

It understands, in any case, that procedural defects and violations of law occurred.

Namely, the violation of the rules on passive subject status and tax deduction (article 2 and 20 of the VAT Code), the Applicant not having been notified of the specific factual and legal reasons that must be expressed in any act of tax assessment.

It also invokes the violation of EU law, with regard to the norms that enshrine the right to deduction, particularly article 168 of the VAT Directive. Embodied, in this case, in the illegal suppression of the right to VAT deduction based on an alleged "improper deduction of VAT," due to supposed connection to alleged "civil construction services," in circumstances where the delivery of VAT to the State by the supplier is assured. One cannot forget the primacy of community law with regard to the Portuguese tax system which is uncontested in the specific field of VAT.

In this regard, it suggests that, if doubts persist regarding the compatibility of the Portuguese regime to the VAT Code with community law, in the interpretation that the tax borne by a company due to alleged non-compliance with the reverse charge mechanism is summarily non-deductible, the submission of the question to the CJEU on a preliminary basis.

Finally, it maintains that the TA's conduct results in double taxation in VAT and concrete duplication of collection, as occurs in all cases of illegitimate suppression of the right to deduction, offending the principle of neutrality at the base of the tax.

It ends by requesting the annulment of the assessment and the restitution of the tax paid increased by compensatory interest.

  1. The Tax and Customs Authority submitted a response, having maintained in summary:

The Applicant alleges that there was a violation of the right of hearing and the principle of participation in decision-making, an allegation that has no factual support, nor does the Applicant prove it, merely invoking without, however, succeeding in demonstrating or proving any violation, as was its responsibility.

In exercising the right of hearing, the taxpayer came to invoke, briefly, that the acquisition in question constitutes a mere transfer of goods, not subsumable under the passive subject reversal rule, failing, however, to present new facts or arguments that would exclude the position taken by the TA, nor does it do so now in these arbitral proceedings.

As was demonstrated, all arguments presented were duly analyzed and rebutted, and to such extent that the Applicant does not indicate which new facts were not considered, or which arguments were not analyzed.

Therefore, the allegations of the Applicant regarding her lack of participation, in the modality of the right of prior hearing, are devoid of any meaning, it being certain that, although the right of hearing constitutes a manifestation of the principle of contradiction, it is not, however, an absolute right.

It is inevitable to conclude that there is not, in the case sub judice, and contrary to what the Applicant alleges, any violation of the right of hearing and principle of participation. But and if it is considered that there was some glimpse of omission of an essential formality, which is not conceded in the least and which only as a mere academic exercise is considered, it will always be said that the same would be degraded to a non-essential formality to the extent that the interested party intervened in the inspection procedure that gave rise to the assessment and values that are now contested.

Pursuant to the provisions of article 77 of the General Tax Law, the procedural decision must be substantiated by means of a succinct statement of the factual and legal reasons that motivated it, and the substantiation may consist of mere declaration of agreement with the grounds of previous opinions, information or proposals, including those that form part of the tax inspection report, which shall constitute in this case an integral part of the respective act, the lack of substantiation being equivalent to the adoption of grounds that, due to obscurity, contradiction or insufficiency, do not specifically clarify the motivation of the act. In accordance with paragraph 2 of such article, the substantiation of tax acts may be effected in summary form, and must always contain the applicable legal provisions, the qualification and quantification of the tax facts and the calculations of the determination of the taxable matter and the tax.

In the case at hand, the TIR presents the tax treatment of the activity carried out by the applicant - preservation of fishing and aquaculture products in olive oil, vegetable oils and others, CAE 10203, explaining why it considered that the services in question should be considered as civil construction services - subject, to that extent, to the application of the passive subject reversal regime ("reverse charge"), pursuant to subparagraph j), of paragraph 1, of article 2 of the VAT Code (subjective incidence norm), describing the applicable regime, contained in Ordinance 19/2004, of 10/01.

In examining the specific case (pages 7 et seq. of the report), the factual and legal reasons are described that led the Tax Inspection Services of the Finance Directorate of … to conclude that "This acquisition constitutes an acquisition of civil construction services, as established in Circular Order no. 30101 of 2007-05-25 and in Ordinance no. 19/2004 of 10 January," and that the passive subject should therefore "proceed to the assessment of VAT for the acquisition of these services, and only then will it be able to benefit from the right to deduction of the respective VAT that it assesses, in accordance with paragraph 8 of article 19 of the VAT Code."

Therefore, the TA expressed the factual and legal reasons that are the basis of the decision in such a way that they are apprehensible to their recipient and to any normal recipient and, in that manner, complied with that duty of substantiation, that is to say, it can be said that the taxpayer was in perfect conditions to understand the cognitive itinerary that was at the origin of the practice of the contested assessment acts. The substantiation contained in the different assessment acts was clear, consistent and sufficient to allow the Applicant to submit the request for arbitral ruling regarding the proposed corrections, furthermore reiterating, in essence, the reasons already expended during the inspection procedure (without, however, succeeding in proving or demonstrating that the understanding that the TA has, with which it does not agree, is not correct).

With regard to the alleged violation of law, it maintains that pursuant to Decree-Law 12/2004, of 09.01 and Ordinance 19/2004, of 10.01, applicable at the date of the facts, included in the concept of civil construction works are those that entail the category of electrical and mechanical installations, subcategory of heating, ventilation, air conditioning and refrigeration.

In the course of the inspection procedure carried out, it was found that, following the proposal presented in August 2014 by the company "B…, Ldª," the Applicant contracted services for the supply and installation, at its headquarters, of an air extraction system. As emerges from the analysis of the said proposal, and as explained in the inspection report, that system is composed of six extraction units and related material, namely spiral ductwork, anodized aluminum grilles, stainless steel accessories for fixing grilles and accessories necessary for installation (supports, bolts, fans). Moreover, it is an integrated system, composed of several devices operating together, which occupy an area of 2,550 m2, which were incorporated into the immovable property, forming an integral part of the same, with a character of permanence. It is not a mobile piece of equipment that one day operates in a given sector of the manufacturing facility and the next day is moved to another and so on, according to the company's needs.

It is not the mere purchase of equipment that is at issue, but its purchase with installation and assembly on the immovable property.

The taxpayer further alleges that the Corrections Project mentioned characteristics that "transformed" a transfer of goods into an acquisition of civil construction services.

It was not the Corrections Project that transformed the purchase of equipment into civil construction services, but the facts themselves at issue. The Corrections Project merely framed it in the existing Law and in its interpretation already clarified by the VAT Services Directorate, through Circular Order no. 30101 of 2007-05-25 and Ordinance no. 19/2004 of 10 January.

It should be noted that this Ordinance provides as construction services, in the 4th category - Electrical and mechanical installations, in subcategory 10a - Heating, ventilation, air conditioning and refrigeration.

The aforementioned Circular Order clarifies:

"The norm in question is comprehensive, in the sense that it includes all civil construction services, regardless of whether or not they form part of the concept of contracts or subcontracts referred to in articles 1207 and 1213 of the Civil Code.

(...)

Civil construction services are considered all those that have as their object the realization of a work, encompassing the entire set of acts that are necessary for its accomplishment.

(...)

"Whenever, in the context of a work, the service provider invoices civil construction services proper or any others related to it and necessary for its realization, (e.g. rental or placement of scaffolding, rental of cranes and other assets, cleaning services, signaling, supervision, removal of debris, services of engineers or architects, etc.), as well as materials or other goods, the total invoice value is understood to be covered by the passive subject reversal rule, regardless of whether or not there is discrimination of the various items and whether the invoicing is joint or separate. (...)".

The aforementioned Circular Order also contains in its annex an exemplary list of services to which the reversal rule applies (Annex I), which includes reference to air conditioning, refrigeration, heating and communications systems, which are integral parts of the immovable property.

This acquisition, as already referred to in point III.2, for which reference is made, constitutes an acquisition of civil construction services.

For the foregoing reasons, in the situation at issue, we are faced with the acquisition with installation/assembly of an air extraction system, composed of various elements that function in an integrated manner incorporating the immovable property, as it must be fixed and installed therein, with its various components, for it to function. Reason by which we are therefore faced with a device that does not function in isolation.

This acquisition constitutes an acquisition of civil construction services and therefore subject to the passive subject reversal rule, for purposes of VAT.

In light of the foregoing, the correction proposed in the amount of €21,850.00 should be maintained, with respect to the VAT due by virtue of the application of the passive subject reversal rule, pursuant to articles 2, paragraph 1, subparagraphs a) and j), 19, paragraph 8 and 27 of the VAT Code, with reference to acquisitions from supplier B…, Lda, identified in point III.2 above."

  1. No arguments were presented, the Respondent having limited itself to submitting under such articulation the technical description of the equipment in question.

II – PRELIMINARY DETERMINATIONS

8.1. The tribunal is competent and duly constituted.

8.2. The parties have legal personality and capacity, demonstrate themselves as legitimate and are duly represented (articles 4 and 10, paragraph 2, of the LRAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

8.3. The proceedings are not affected by nullities.

III – FACTUAL AND LEGAL MATTER

III.1. Factual Matters

  1. Factual Matters

9.1. Having regard to the positions assumed by the parties and the documentary evidence attached to the proceedings, the following facts are considered proven, having relevance for examination and decision of the issues raised (bearing in mind that the Tribunal does not have to pronounce on everything that was alleged by the parties, it being incumbent on it, rather, the duty to select the facts that matter for the decision and to distinguish proven from unproven matters - cf. article 123, paragraph 2, of the CPTPT and article 607, paragraphs 3 and 4, of the CPC, applicable by virtue of article 29, paragraph 1, subparagraphs a) and e), of the LRAT):

  • The Applicant is a joint-stock company that exercises as its main activity the preservation of fishing and aquaculture products in olive oil, vegetable oils and others (CAE 10203) and, as a secondary activity, the retail sale of fish, crustaceans and mollusks in specialized establishments (CAE 047230).

  • It was, with reference to the year 2014, the subject of an internal inspection, pursuant to service order OI2016….

  • Following that inspection activity, the Applicant was sent a Corrections Project, the content of which is reproduced, from which it appears, in particular:

  • The Applicant timely exercised the right of hearing, the content of which is reproduced, alleging, in summary, that the equipment in question does not form part of the immovable property, being completely removable and easily movable to any other location, both within the Applicant's facilities and in any others, not constituting acquisition of civil construction services, and therefore it is not possible to apply the exceptional self-assessment regime.

  • In response to what was invoked in the right of hearing, following transcription of that statement, the final inspection report was sent, the content of which is reproduced, in which the following is stated, among other things:

Analysis and response to the grounds invoked by the passive subject

The passive subject alleges, in summary, that the acquisition in question constitutes a mere transfer of goods, not subsumable under the passive subject reversal rule.

According to the description of the invoices in question, it is stated that they refer to supply and assembly.

As already mentioned, from the reading of the said proposal, we find that this is the supply and installation of an air extraction system, composed of six extraction units and related material, namely spiral ductwork, anodized aluminum grilles, stainless steel accessories for fixing grilles and accessories necessary for installation (supports, bolts, fans).

Now, we are faced with the supply and assembly of an integrated air extraction system, composed of several devices operating together, in an area of 2,550 m2, which were incorporated into the immovable property, forming an integral part thereof, with a character of permanence. It is not a mobile piece of equipment that one day operates in a given sector of the manufacturing facility and the next day is moved to another and so on, according to the company's needs.

What is at issue is not merely the purchase of equipment, but its purchase with installation and assembly on the immovable property.

The taxpayer further alleges that the Corrections Project referred to characteristics that "transformed" a transfer of goods into an acquisition of civil construction services.

It was not the Corrections Project that transformed the purchase of equipment into civil construction services, but the facts themselves at issue. The Corrections Project merely framed it in the existing Law and in its interpretation already clarified by the VAT Services Directorate, through Circular Order no. 30101 of 2007-05-25 and Ordinance no. 19/2004 of 10 January.

It should be noted that this Ordinance provides as construction services, in the 4th category - Electrical and mechanical installations, in subcategory 10a - Heating, ventilation, air conditioning and refrigeration.

The aforementioned Circular Order clarifies:

"The norm in question is comprehensive, in the sense that it includes all civil construction services, regardless of whether or not they form part of the concept of contracts or subcontracts referred to in articles 1207 and 1213 of the Civil Code.

(...)

Civil construction services are considered all those that have as their object the realization of a work, encompassing the entire set of acts that are necessary for its accomplishment.

(...)

"Whenever, in the context of a work, the service provider invoices civil construction services proper or any others related to it and necessary for its realization, (e.g. rental or placement of scaffolding, rental of cranes and other assets, cleaning services, signaling, supervision, removal of debris, services of engineers or architects, etc.), as well as materials or other goods, the total invoice value is understood to be covered by the passive subject reversal rule, regardless of whether or not there is discrimination of the various items and whether the invoicing is joint or separate. (...)".

The aforementioned Circular Order also contains in its annex an exemplary list of services to which the reversal rule applies (Annex I), which includes reference to air conditioning, refrigeration, heating and communications systems, which are integral parts of the immovable property.

This acquisition, as already referred to in point III.2, for which reference is made, constitutes an acquisition of civil construction services.

For the foregoing reasons, in the situation at issue, we are faced with the acquisition with installation/assembly of an air extraction system, composed of various elements that function in an integrated manner incorporating the immovable property, as it must be fixed and installed therein, with its various components, for it to function. Reason by which we are therefore faced with a device that does not function in isolation.

This acquisition constitutes an acquisition of civil construction services and therefore subject to the passive subject reversal rule, for purposes of VAT.

In light of the foregoing, the correction proposed in the amount of €21,850.00 should be maintained, with respect to the VAT due by virtue of the application of the passive subject reversal rule, pursuant to articles 2, paragraph 1, subparagraphs a) and j), 19, paragraph 8 and 27 of the VAT Code, with reference to acquisitions from supplier B…, Lda, identified in point III.2 above".

  • The invoices no. 02014201, 02014251 and 02014268, issued by the company B…, Lda. to the Applicant, were based on Proposal CHT_V_... /14, of 04-08-2014, which, among other elements, contains the following:

  • … proposal for the supply and installation of an air extraction system for an area of approximately 2,550 m2.

  • Equipment:

Supply and installation of 6 extraction units each dimensioned for a maximum air flow of 47,520m3/h.

  • Installation/Materials:

    Supply and installation of spiral ductwork of various dimensions for extraction ducts

    Supply and installation of 10 anodized aluminum grilles (total of 60 grilles)

  • General conditions for installation:

Number of technicians required on site: 2

Number of days required for installation: 20

  • Following the corrections proposed in the Tax Inspection Report, the Tax and Customs Authority prepared and sent to the Applicant the Value Added Tax assessments no. 2016…, 2017… and 2017…, with payment due by 26-06-2017.

  • The Applicant proceeded to pay the assessed tax.

9.2. There are no other facts with relevance for examination of the merits of the case that have not been proven.

9.3. Substantiation of the factual matter:

The factual matter given as proven is based on critical examination of the documents attached to the proceedings, the administrative file and, particularly, the Corrections Project and the Tax Inspection Report.

III.2. Legal Matters

The applicant seeks to have declared the illegality of the VAT assessment acts resulting from corrections made by the TA which, by understanding that the provision of a civil construction service is involved, concluded that the obligation to proceed to assess the tax falls on the Applicant, as the situation involves a passive subject reversal (reverse charge).

The Applicant, in addition to disagreeing with the application of that self-assessment regime, attributes to the acts practiced a series of defects that will be analyzed below.

Let us see then.

The Applicant begins by invoking the violation of the right of hearing and the principle of participation in decision-making, maintaining that the TA completely ignored the hearing exercised by it and the elements provided on that basis, ignoring the explanations provided then, not responding to what it submitted, in disregard of the principle of cooperation.

Before proceeding, it must be clarified that one thing is the absolute lack of hearing of taxpayers in the event that its possibility is not provided for (as is the case). Another different thing is the effective exercise of that right which should be done in an effective and adequate manner, both by the taxpayer, to whom the possibility of taking a stated position following the analysis of what is proposed by the TA should be given, and by the latter which, particularly in the case of new grounds being invoked by the taxpayer, should mention and appraise them in the final decision.

The Applicant, although it invokes the lack of hearing, does not allege that it was not given that possibility – which also results from the evidence – intending instead to invoke the deficient appraisal of its hearing by the TA. It refers in this regard to "was not truly heard" … "the final inspection report completely ignored them," etc.

But without justification. From the analysis of the prior hearing statement – whose content is replicated in the present request for ruling – it is clear that the Applicant did not invoke any new factual element that could alter what was previously alleged by the TA and which supported the correction proposals. Rather, it merely presented conclusions and considerations of an essentially legal nature that cannot have the virtue of being considered as new elements or grounds. It only brought to the proceedings elements that would tend – and rightly, in the exercise of the adversarial principle – to oppose and contradict both the factual elements and the legal aspects of the Corrections Project and which would support the respective conclusions.

Despite this being the case, the Inspection Report addressed in an unequivocal manner the statement submitted by the Applicant, having, in a clear manner, stated the issues that were raised there and having taken an express position on them.

That is to say, the Applicant was given the possibility of being heard in a prior hearing, a right that it exercised fully and clearly, the TA having analyzed and appraised the grounds invoked by it, so no defect can be pointed out here.

As is stated in the Judgment of the Lisbon Administrative Court of 10-02-2009 – Case 02674/08: "the Tax Administration is not obliged, by virtue of the existence of the right of hearing, to heed the arguments set forth by the challenger, unless it is demonstrated, without room for doubt, that effectively the basic assumptions of the corrections did not exist, it cannot be stated that the principle of participation was not respected."

Indeed, what occurs – and is quite different – is that the Applicant does not agree with the grounds invoked by the TA, which falls within the second, third and fourth defects invoked by it: the absence of legally due substantiation, as well as the violation of the rules of passive subject status and tax deduction and violation of law.

To support the alleged lack of substantiation of the act, the Applicant alleges that what is at issue is the acquisition of equipment, even if supplied with installation, that is to say it is movable property that does not form an integral part of the immovable property. Hence its non-acceptance of the conclusion of the Respondent that "in the situation at issue, we are faced with the acquisition with installation/assembly of an air extraction system which, by its characteristics, forms an integral part of the immovable property. We are not faced with a device that functions in isolation. This acquisition constitutes an acquisition of civil construction services and therefore subject to the passive subject reversal rule, for purposes of VAT."

Again the Applicant is incorrect.

The Applicant may not agree with the substantiation presented – a question we shall examine below – but it is indisputable that it exists, is clear, is not contradictory and is consistent with the conclusion that led to the assessment acts.

The substantiation of the assessment act is nothing more than the way the "TA externalizes the reasons why it proceeded with that assessment and not another, in a clear, consistent and rational manner so as to constitute the basis that supports the decision" (Judgment of the Lisbon Administrative Court of 25-01-2011 – Case 04410/10).

As stated in the Judgment of the Supreme Administrative Court of 2-07-2014 - Case no. 01074/13: "It is unquestionable that the Administration has the duty to substantiate the acts that affect the rights or legitimate interests of those administered – in harmony with the principle enshrined in article 268 of the CRP and adopted in articles 124 of the CPA and 77 of the LGT. Now, as doctrine and case law have exhaustively repeated, substantiation must be expressed, through a succinct statement of the factual and legal grounds for the decision; clear, permitting that, through its terms, the facts and the law on which the decision is based are grasped with precision; sufficient, enabling the taxpayer a concrete knowledge of the motivation of the act; and consistent, so that the decision constitutes the logical and necessary conclusion of the reasons invoked as its justification. It is also uncontroversial that the requirements for substantiation are not rigid, varying according to the type of act and the concrete circumstances in which it was issued, sufficing with the clear expression of the reasons that led to a particular decision-making deliberation. The determination of the scope of the substantiating statement presupposes, therefore, the search for suitable content, which must be, in a broad sense, sufficient to formally support the administrative decision. Thus, substantiation must be understood as the obligation to expressly state (directly or by reference) the factual and legal reasons that determined the decision-making agent or body, clarifying its recipient of the reasons that motivated it and why the sense of the decision, aiming to provide the administered party knowledge of the cognitive and evaluative itinerary of the act. In this manner, the act will be sufficiently substantiated when the administered party, placed in its position as normal recipient - the bonus pater familiae of which article 487, paragraph 2, of the Civil Code speaks – may come to know the factual and legal reasons that are at its genesis, so as to allow it to opt, in an informed manner, for accepting or not the act."

From the analysis of the inspection report, which substantiates the assessment acts in question, it is manifest that this complies with such duty of substantiation. Indeed, the TA described in a clear manner the factual elements it understood to be relevant, expressly invoked the legal norms on which it relied, allowing the Applicant to understand clearly the reasons for its actions, understanding that, moreover, the Applicant itself demonstrates having achieved, by the manner in which it attacked the act.

Indeed, "the formal defect of lack of substantiation does not occur if the challengers themselves expressly reveal having perfectly understood the logical and legal process that led to the decision on taxation, recognizing having perceived the concrete assumptions taken into account by the author of the act and the reasons by which the assessed values were reached, denouncing the cognitive and evaluative path traveled" (…», in (Judgment of the Supreme Administrative Court of 0-01-2013 – Case n.º 0105/12).

The act being duly substantiated is capable of producing its effects.

In addition, for the same reasons, the Applicant is not correct when, on this point, it maintains that "whatever the criterion on which the TA based itself, the Applicant was not notified of the concrete factual and legal reasons that must be expressed in any act of tax assessment, for application of the self-assessment mechanism, inapplicable to the case at issue," reference being made to what was said above regarding the substantiation of the act, it not being seen that there is more to be said.

In summary, we have two antagonistic positions: that of the Applicant which, by understanding that the provision of civil construction services is not involved, maintains that the self-assessment regime for passive subject reversal is not applicable.

A regime that the Respondent understands to be applicable by virtue of the provision of a civil construction service to the Applicant.

As results from the evidence, given the proposal presented by the supplier, the Applicant acquired an air extraction system for an area of approximately 2,550 m2, composed of 6 extraction units each dimensioned for a maximum air flow of 47,520m3/h, which was accompanied by the supply and installation of spiral ductwork of various dimensions for extraction ducts, as well as anodized aluminum grilles, in a total of 60 grilles.

The Applicant maintains that such equipment is mobile and may, indeed, be easily moved to any other location, having no associated civil construction service.

It cannot be projected how such a system of this magnitude could be qualified as mobile and easily movable, it being sufficient to consider that the intervention of two technicians for 20 days is necessary for its installation (subparagraph f) of the proven facts).

The legal instrument that most immediately defines for us which activities are comprised in the scope of civil construction is Ordinance 19/2004, of 10 January, which, regulating Decree-Law 12/2004, of 9 January - which establishes the legal regime for entry into and continuation in civil construction activity – determines that ventilation systems, air conditioning, compressed air and vacuum systems, etc., are comprised in the 4th category (electrical and mechanical installations) of access to civil construction activity.

Similarly, the type of ventilation and extraction of air, fumes and gases from buildings is contemplated in the General Regulations for Urban Buildings, approved by Decree-Law 38282, of 07-08-1951, with successive amendments (see, in particular, article 108).

It should be said, in any event, that it will not be the circumstance that it may be installed in another location that will determine its classification. It is sufficient to note that such possibility also exists with the ventilation or exhaust equipment of any building, or with the doors and windows installed therein, and it is not therefore that their application and installation were not carried out within the scope of civil construction services.

It is therefore unequivocal that the installation of the equipment acquired by the Applicant falls within the scope of a civil construction service.

The question at issue does not raise any interpretative doubts or of application of the norms and, in particular, of non-conformity with the law of the European Union, which would justify recourse to preliminary referral as suggested by the Applicant.

It should be said, in any case, that the application, by the national legislator, of the reverse charge regime (passive subject reversal) in the provision of civil construction services is expressly consented to by Directive no. 2006/69/CE of 24 July. As stated in the preamble of Decree-Law 21/2007 of 29 January:

  • "This decree-law implements in VAT legislation a set of measures intended to combat certain situations of fraud, evasion and abuse that are occurring in the realization of immovable operations subject to taxation, following, in this matter, previously acquired experience and best practices adopted by other Member States of the European Union.

(…) Outside the scope of operations provided for in numbers 30 and 31 of article 9 of the VAT Code, but still in the field of some service provisions relating to immovable property, namely in civil construction work carried out by contractors and subcontractors, this decree-law also adopts another faculty conferred by Directive no. 2006/69/CE, of the Council, of 24 July. Thus, by way of passive subject reversal, it becomes incumbent on the acquirers or recipients of those services, when they are configured as passive subjects with full or partial right to deduction of the tax, to proceed with the assessment of the VAT owed, which may also be the object of deduction in general terms. With this measure, it is intended to protect against certain situations that result in harm to the public treasury, currently resulting from the birth of the right to deduction of VAT borne, without that tax reaching the State's coffers."

Thus, by virtue of the provision of article 2, paragraph 1, j) of the VAT Code, in the wording given by the said Decree-Law 21/2007, "natural or legal persons referred to in subparagraph a) who have a seat, permanent establishment or domicile in national territory and who carry out operations that confer the right to full or partial deduction of the tax, when they are acquirers of civil construction services, including the remodeling, repair, maintenance, conservation and demolition of immovable property, in the regime of contract or subcontract."

Incumbent on the Applicant is the obligation to assess tax on the acquisition effected.

Being manifest that, by virtue thereof, there is no duplication of collection.

As is well stated in the Judgment of the Supreme Administrative Court of 27-02-2013 – Case 1079/12:

"I - By application of general rules, the service provider is the passive subject of VAT, but in the so-called situations of reversal of tax liability or reversal of passive subject status or the passive subject (reverse charge), the acquirer of services or goods becomes the passive subject of the tax for the respective acquisition, and must, accordingly, proceed with the assessment of the tax, being assigned the right to deduction of the VAT paid for the acquisition of services.

II - Duplication of collection, provided for in article 205 of the CPTPT, results from the application of the same provision of law more than once to the same tax fact or concrete tax situation, and the non-requirement of a second payment [from the recurrent/applicant], to which the invocation of duplication of collection is reduced, can only be justified if the first [required from the service provider] was owed, for if it was not, what was paid may subsequently be reimbursed, through the appropriate means of impugnation and review of the tax act, and, in such a situation, it is not justified that one forgo the second payment, which is indeed effectively owed."

In conclusion. The contested assessment acts are not affected by any defect and should, therefore, be maintained.

IV. DECISION

In these terms it is decided in this Arbitral Tribunal:

  • To judge the arbitral request as wholly unfounded and, in consequence thereof, to absolve the Respondent therefrom.

  • To condemn the Applicant to the payment of the costs of the proceedings.

V. VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at €21,850.00, pursuant to article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the Legal Regime for Tax Arbitration and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

VI. COSTS

The value of the arbitration fee is fixed at €1,224.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of the Legal Regime for Tax Arbitration, and article 4, paragraph 4, of the aforementioned Regulation.

Let it be notified.

Lisbon, 30 April 2018

The Arbitrator

(António Alberto Franco)

Frequently Asked Questions

Automatically Created

What is the reverse charge mechanism (inversão do sujeito passivo) for VAT in Portuguese construction services?
The reverse charge mechanism (inversão do sujeito passivo) in Portuguese VAT law for construction services shifts the tax payment obligation from the supplier to the recipient. Under article 2 of the VAT Code (CIVA), when construction services are provided, the service recipient (typically the main contractor or property owner) must self-assess and declare the VAT rather than the service provider charging it on the invoice. This mechanism applies specifically to civil construction services, including remodeling, repair, maintenance, conservation, and demolition of immovable property. The purpose is to combat fraud in the construction sector by ensuring VAT is collected from more established businesses rather than potentially unreliable subcontractors.
When does the supply of goods qualify as construction services subject to VAT reverse charge under Portuguese tax law?
Under Portuguese tax law, the supply of goods qualifies as construction services subject to VAT reverse charge only when the goods are ancillary to a construction service and become permanently incorporated into immovable property. The mere fact that equipment is installed does not automatically transform a goods supply into a construction service. The critical test is whether the transaction's principal object is the supply of movable goods or the provision of construction work. Equipment that remains movable, can be easily relocated, and is not structurally integrated into a building (such as exhaust equipment that can be removed and reinstalled elsewhere) should be treated as a supply of goods taxed under normal VAT rules, not subject to the reverse charge mechanism applicable to construction services under the VAT Code.
Can the Portuguese Tax Authority (AT) deny VAT deductions on invoices from suppliers that do not qualify as construction civil services?
The Portuguese Tax Authority can deny VAT deductions when the formal requirements for deduction are not met, including incorrect application of the reverse charge mechanism. However, such denial must be legally justified and proportionate. When a supplier has correctly invoiced VAT, declared it in periodic returns, and paid it to the State, denying the purchaser's deduction solely because the AT retrospectively reclassifies the transaction creates double taxation that violates the VAT neutrality principle. Under EU VAT Directive article 168 and CJEU jurisprudence, the right to deduct is fundamental and can only be restricted under strict conditions. Portuguese courts and CAAD have held that assessments denying deductions must be properly reasoned (article 77 LGT) and respect the taxpayer's right to be heard (article 60 LGT), with particular attention to whether the denial would result in definitive economic double taxation contrary to EU law principles.
What are the legal consequences of incorrectly applying the VAT reverse charge mechanism to goods supply in Portugal?
Incorrectly applying the VAT reverse charge mechanism to goods supply in Portugal has several legal consequences. First, if the Tax Authority reclassifies a goods supply as a construction service subject to reverse charge, the purchaser loses the immediate VAT deduction and must self-assess the tax, creating cash flow disadvantages. Second, assessments based on incorrect classification are subject to challenge for lack of proper legal basis and insufficient reasoning under articles 77 and 268(3) of the Portuguese Constitution. Third, when the supplier has already paid VAT to the State and the purchaser's deduction is denied, this creates unlawful double taxation violating the neutrality principle fundamental to VAT, potentially rendering the assessment illegal. Fourth, taxpayers may be entitled to compensatory interest (juros indemnizatórios) under article 43 LGT when assessments are annulled, compensating for the financial loss caused by the unlawful tax collection. Finally, such misclassification may constitute a violation of EU law requiring preliminary reference to the CJEU if national law interpretation conflicts with the VAT Directive.
Are taxpayers entitled to compensatory interest (juros indemnizatórios) when unlawful VAT liquidation acts are annulled by CAAD arbitration?
Yes, taxpayers are entitled to compensatory interest (juros indemnizatórios) when unlawful VAT liquidation acts are annulled by CAAD arbitration, pursuant to article 43 of the General Tax Law (LGT). Compensatory interest serves to compensate taxpayers for financial losses resulting from illegal tax collection, recognizing that the State wrongfully held funds that belonged to the taxpayer. The right to compensatory interest is automatic upon annulment of an illegal assessment and accrues from the date of payment until restitution. The interest rate is established by ministerial order. CAAD tribunals consistently recognize this right when annulling assessments, whether for substantive illegality (incorrect application of tax law) or procedural defects (violation of hearing rights, insufficient reasoning). The award of compensatory interest reinforces taxpayer protection and ensures effective remedies for administrative errors, constituting an integral part of the taxpayer's right to restitution when illegally collected taxes are returned.