VAT Deduction on Tourist Accommodation Units – Right to Full Input VAT Recovery (CAAD 471/2015-T)

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Ethics Council of the Administrative Arbitration Center ("CAAD") to form the Sole Arbitral Tribunal, constituted on 6 October 2015, hereby decides as follows:

I. REPORT

The company A…, LDA., NIPC…, with registered office at Rua..., n.º..., ...-..., Lisbon, hereinafter "Claimant", hereby, pursuant to the provisions of article 2.º, n.º 1, paragraph a), of articles 10.º et seq. of Decree-Law n.º 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], requests the constitution of an Arbitral Tribunal to pronounce on the illegality and consequent annulment of the VAT assessment n.º 2014..., in the total amount of € 11,606.99, relating to the third quarter of 2012, and the corresponding compensatory interest.

To support its request, the Claimant considers, in summary, that it is entitled to the full deduction of the VAT incurred on the purchase of two autonomous units, which it qualifies as accommodation units integrated in a tourist operation, acquired for the purpose of carrying out operations subject to VAT.

Thus, it argues that having exercised the waiver of VAT exemption at the moment of acquisition of said autonomous units, these should be considered as integrated in the tourist operation, even though the owner reserved for itself the right to use them for a period not exceeding 90 days per year, in accordance with the terms of the tourist operation assignment contract concluded by the Claimant. It further adds that it acted in accordance with the provisions of n.º 3 of article 30.º of Regulatory Decree n.º 36/97, according to which "accommodation units shall not be considered withdrawn from tourist operation by reason of the fact that the respective owners have reserved the right to use them for their own benefit for a period not exceeding 90 days in each year, in accordance with the terms established in a contract concluded between them and the entity operating the tourist accommodation."

Therefore, the Claimant concludes that, since the autonomous units are integrated in a tourist operation, even though the tourist-owner uses them 90 days per year, these should always be considered as intended for the provision of tourist accommodation services and entirely destined to the purposes of the activity for which the taxpayer, now Claimant, is assessed, and consequently, the deduction of the entirety of the VAT assessed should be considered legitimate, and the acts of additional VAT assessment relating to the third quarter of 2012 should be annulled, with the legal consequences, in the amount of € 11,606.99.

On 7 August 2015, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Respondent in accordance with legal procedures.

The Claimant did not appoint an Arbitrator.

Thus, pursuant to and for the purposes of the provisions in paragraph a) of n.º 2 of article 6.º and paragraph b) of n.º 1 of article 11.º of the RJAT, by decision of the Honorable President of the Ethics Council, duly communicated to the parties within the legally prescribed periods, Dr. Filipa Barros was appointed as arbitrator of the Sole Arbitral Tribunal, who communicated, to the Ethics Council and to the Administrative Arbitration Center the acceptance of the appointment within the period stipulated in article 4.º of the Ethics Code of the Administrative Arbitration Center.

In accordance with the provision in paragraph c), of n.º 1, of article 11.º of Decree-Law n.º 10/2011, of 20 January, as amended by article 228.º of Law n.º 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 6 October 2015, followed by the relevant legal procedures.

The Respondent, duly notified for this purpose, submitted its response in which it defends the dismissal of the request for arbitral pronouncement.

For this purpose, it invokes that within the scope of a tax inspection procedure conducted by the Tax Office of …, on 28 March 2014, it was found that the Claimant acquired by public deed of purchase and sale two autonomous units, integrated in an urban property, having for this purpose waived the VAT exemption. Subsequently, the Claimant allocated such units to its secondary tourist operation activity through the conclusion of an operation assignment contract, through which it reserved for itself the right to use them, annually, for a period of 90 days, for its own purposes or such other purposes as it deemed convenient.

In these terms, the Respondent understands that if during the 90-day period per year, the service provisions carried out by the Claimant are not taxed at the downstream level, given the rules of the tax, namely those established regarding the right to deduction, the Claimant could not deduct the VAT incurred at the upstream level, making it necessary to proceed with the regularization of the deducted tax, which, in the case at hand, shall be assessed by the proportion of time in which the units are not allocated to the exercise of tourist activity but to the private use of the owners of the units.

Such conclusion results from the application of the principle inherent to the right to deduction, as provided in paragraph a) of n.º 1 of article 20.º of the VAT Code, and which translates into the fact that it is only possible to deduct the tax that is connected with the exercise of operations subject to tax and not exempt from it.

Finally, according to the understanding of the Respondent, this would not be the case only regarding the free provision of operations if we were in the field of situations of internal or external self-consumption provided for in paragraph b), of n.º 2 of article 4.º of the VAT Code, presupposing that the Claimant had assessed the corresponding tax, which was not the case in the matter sub judice.

Subsequently, and once both parties were notified for this purpose, they came to the proceedings to communicate that they waived the holding of the meeting referred to in article 18.º of the RJAT, therefore, it was dispensed with in accordance with and for the purposes of the provisions of article 18.º of the RJAT, since in this case, none of the purposes legally assigned to it were verified, and in arbitral proceedings the principles of procedural economy and prohibition of performance of useless acts apply.

Subsequently, written submissions were presented by the Claimant, followed by submissions from the Respondent.

In the submissions presented the parties limited themselves to reproducing the positions defended in their respective pleadings.

Given the position assumed by the parties, the main question to be decided in the present proceedings is to ascertain whether, in accordance with paragraph a), of n.º 1 of article 20.º of the VAT Code, the right to deduction of VAT paid upstream by a taxable person on the acquisition of two autonomous units that are allocated to tourist operation can be denied, in the part relating to the use for private purposes which is conferred on the goods for 90 days in each year.

II. CASE MANAGEMENT

The Arbitral Tribunal was regularly constituted.

The parties have legal standing and legal capacity, show themselves to be legitimate and are regularly represented, (cf. articles 4.º and 10.º, n.º 2 of the RJAT and article 1.º of Order n.º 112-A/2011 of 22 March).

The proceedings do not suffer from any nullities.

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

All things considered, it is necessary to render a decision.

III. REASONING

A. Factual Matter

1. Facts Accepted as Proved

The following facts are documentarily established and/or accepted by the parties in their respective pleadings:

1. The Claimant is a commercial company that exercises as its principal activity the purchase and sale of immovable property (CAE 13 201), and as its secondary activity the operation of tourist apartments without restaurant (CAE 55 123);

2. In terms of VAT, the Claimant is framed under the normal periodic regime of quarterly returns;

3. By public deed of purchase and sale executed on 4 July 2012, the Claimant acquired from company B... S.A., for the global price of € 305,120.00 plus VAT at the legal rate in force of 23%, the urban property registered in the matrix under article..., of the parish of..., the following units:

a) Autonomous unit designated by the letter "DK", in the amount of €164,900.00 plus VAT in the amount of 37,927.00;

b) Autonomous unit designated by the letter "GO", in the amount of €140,220.00, plus VAT in the amount of € 32,250.60;

1. In accordance with the terms set forth in the deed of purchase and sale of the autonomous units, the Claimant exercised the option to waive the VAT exemption, and VAT was assessed in the amount of € 70,177.60;

2. On the date of the public deed of purchase and sale, a contract for Assignment of Tourist Operation and Management of Immovable Property was concluded, "which states in its clause 3 that it shall commence on the date of execution and shall be valid until 31/12/2020, renewing automatically and for equal and successive periods of 10 years, unless denounced by the contracting parties" (cf. Tax Inspection Report from the Tax Office of …, attached with the Administrative Proceedings, hereinafter, A.P.);

3. In clause 12 of the same contract it is stipulated that the acquirers have the right to occupy the unit acquired for the period of 90 days in each year;

4. It results from publication in Diário da República, 2nd Series – N.º ... – … of April 2010, Dispatch n.º .../2010 with the following content: "By Dispatch of the State Secretary for Tourism of 26 February 2010, tourist utility was granted, on a preliminary basis, to C... with the projected category of four stars, to be installed in Monchique, of which company B... (… S.A.) is the representative;

5. Under Service Order n.º OI 2014..., of 28 March, the Tax Office of … conducted an inspection action that focused on the full deduction of VAT that the Claimant incurred due to the acquisition of units DK and GO;

6. It results from the Tax Inspection Report that "in the periodic VAT declaration relating to the third quarter of 2012 the taxpayer not only assessed the VAT amount referred to above, which was due by reason of the waiver of exemption, but also deducted it in full.

Considering that in accordance with article 20, n.º 1 paragraph a), of the VAT Code, only tax that has been incurred on goods acquired by the taxable person for the purpose of carrying out operations subject to tax can be deducted, and the unit acquired was not wholly for this purpose, since in the very act it was stipulated that the acquirers were granted the right to use it 90 days in each year, there shall be a corresponding adjustment of the right to deduction, in accordance with said article 20.º of the VAT Code, since only the tax corresponding to the period allocated to operation shall be subject to deduction. Thus, considering that the immovable property had to be entirely destined to the purposes of the activity for which the taxpayer is assessed, for a period of 20 years and that, from the outset, it was assigned in part, a different purpose, the following would apply:

a) The amount of VAT deducted, for the acquisition of the two units, in the 3rd quarter of 2012, was 70,177.60, an amount that corresponds to a deduction of € 3,508.88 (70,177.60/20) in each of the 20 years in which the allocation would have to be maintained in full.

b) In each of the 20 years, the deduction of 3/12 of the same € 3,508.88 cannot be accepted, in the amount of 877.22, corresponding to the period in which the property is enjoyed by the acquirer. In these terms there shall be a VAT regularization in the amount of (877.22x20)=17,544.40€, in the third quarter of 2012."

1. On 5 May 2014, through Office n.º..., issued by the Tax Office of …, the Claimant was notified to exercise the right to hearing of the draft report resulting from the inspection action;

2. On 26 August 2014 the Claimant exercised its right to hearing, which is hereby fully reproduced, where it alleges, among other aspects, the following:

"(...) the accommodation units are integrated in tourist operation when they are available to be rented day by day to tourists by the operating entity, and are not considered withdrawn from the operation by the fact that the owner has reserved the right to use them for a period not exceeding 90 days per year.

If the accommodation unit continues to be considered as integrated in tourist operation, it continues to have the purpose of providing a tourist accommodation service, even though the tourist-owner uses it 90 days per year."

1. On 25 October 2014, the Claimant was notified of the additional assessment prepared on the basis of the correction made by the Tax Inspection Services regarding the Value Added Tax, in the amount of 11,606.99, to proceed with the respective payment by 05 January 2015;

2. On 25 February 2015 the Claimant deduced a gracious appeal against the additional assessment mentioned above, which is hereby fully reproduced, in which it requested "annulment of the VAT assessment sub judice, with the legal consequences";

3. On 7 April 2015, the Claimant was notified by Office sent by the Tax Justice Division of the Tax Office of … to exercise the right to prior hearing and to receive knowledge of the draft decision and its reasoning concluding with the rejection of the gracious appeal presented;

4. On 29 April 2015 the Claimant was notified by Office sent by the Tax Justice Division of the Tax Office of … of the decision on the gracious appeal presented, which includes the rejection, regarding VAT, of the Claimant's request;

5. On 17 July 2015 the Claimant proceeded to pay the amount of VAT in question plus the respective interest, in the total amount of € 12,881.75;

6. On 24 July 2015, the Claimant deduced the request for constitution of the Arbitral Tribunal which gave rise to the present proceedings. (cf. electronic application to CAAD).

2. Facts Not Proved

There are no facts relevant to the decision of the case that have not been proved.

3. Motivation

The Tribunal's conviction in establishing the factual framework above was based on the Administrative Proceedings file and on the documents attached to the proceedings that instructed the procedural documents presented by the parties.

B. Matter of Law

1. Delimitation of the Question: Right to Deduction of VAT Incurred in the Acquisition of Accommodation Units Inserted in Tourist Enterprises Partially Intended for Private Use of Business Owners

The question to be decided is whether a company such as the Claimant that acquired accommodation units in a tourist enterprise, having for this purpose waived the VAT exemption, may deduct the entirety of the tax incurred upstream in the acquisition, when under the terms of the tourist operation assignment contract concluded with the enterprise, the right was reserved for it to use the accommodation units for its own benefit for a period not exceeding 90 days in each year.

According to the position assumed by the Tax Authority, when an activity is not covered by the rules of actual or personal incidence of the tax, such a situation makes impossible any right to deduction of VAT incurred upstream.

Now, finding that the service provisions carried out by the Claimant during 90 days per year are not taxed at the downstream level, that is, the Claimant does not assess tax for the performance of the service provisions that it itself acquires, then the right to deduction of VAT incurred upstream by the Claimant should be ascertained in proportion to the time in which the two units are allocated to the exercise of tourist activity, excluding the time of allocation to the private use of the business owners.

On the contrary, the Claimant considers that it is entitled to the full deduction of VAT incurred on the acquisition of the units by having exercised the waiver of the exemption of that tax in the acquisition of the same, in accordance with n.º 5 of article 12.º of the VAT Code. Additionally, it defends that since said autonomous units are accommodation units integrated in a tourist operation regime they continue to have the purpose of the provision of tourist accommodation services, even though the tourist-owner uses them 90 days per year, invoking in support of its thesis the provisions of article 45.º of Decree-Law n.º 167/97 of 4 July which established the previous version of the legal regime of tourist enterprises.

Considering the positions assumed by the parties, for the best analysis of the question that is the subject of the present proceedings, the rules governing this tax should be examined in accordance with European Union Law, considering its transposition at the national level and the administrative and judicial interpretation that has been carried out thereon, especially by the Court of Justice of the European Union (CJEU).

Given that it is intended to decide to what extent the Claimant may maintain the deduction of the entirety of the VAT previously incurred with the purchase of two autonomous units integrated in a tourist operation with reservation of the right of use to the owner for a period not exceeding 90 days per year, it is justified to make some preliminary considerations regarding the right to deduction, both as to its nature and as to its exercise, taking into account the type of use conferred by the Claimant on the immovable property in question.

2. On the Nature and Scope of the Right to Deduction

As a preliminary matter, it is important to begin by noting that VAT is a tax of Community origin, introduced into Portugal by Decree-Law nº 394-B/94, of 26.12, which transposed the Sixth VAT Directive (Council Directive 77/388/EEC, of 17 May 1977) as amended by Directive n.º 2006/112/EC, of 28 November (hereinafter VAT Directive). VAT is characterized as being an indirect tax, multiphase, which tends to affect every act of consumption.

The right to deduction is an essential element of the functioning of the tax, and must ensure neutrality, which constitutes the nuclear characteristic of the tax and places it on a level of advantage relative to other consumption taxes. Tax neutrality constitutes the equivalent, in VAT matters, of the principle of equal treatment[2].

The right to deduction is embodied as an essential element of the functioning of the tax, the "cornerstone of the value added tax system"[3], designated as the method of tax deduction, method of the tax credit, indirect subtractive method, or also the method of invoices, in accordance with which, and in compliance with the provisions of article 19.º of the VAT Code, through an arithmetic operation of subtraction, to the tax determined on sales and service provisions (outputs) and identifiable in the respective invoices, the tax incurred on purchases and other expenses (inputs) is deducted.

Therefore, the objective of neutrality set out in the First VAT Directive determines that, "In each transaction, VAT, calculated on the price of the goods or service at the rate applicable to the said goods or service, shall be due, with prior deduction of the amount of the tax that has directly affected the cost of the various elements making up the price", (see 2nd paragraph, of n.º 2, of article 1.º of the Directive).

The VAT Code determines, as a general rule, the deductibility of the tax due or paid by the taxable person on acquisitions of goods and services made from other taxable persons. The deduction regime thus established aims to relieve the businessman entirely of the burden of VAT due or paid in the context of all his economic activities. In this way, neutrality is ensured with respect to the tax burden of all economic activities, independently of their purpose or result, on the condition that these activities are themselves subject to VAT.[4]

The European VAT system does not establish any principle limitation as to the type of goods and services capable of generating the right to deduction. Situations of exclusion from the right to deduction are exceptional, referring to specific cases enumerated by the national legislator in exhaustive terms, in accordance with what is established in the VAT Directive, depending on the type of expenses in question, and must be applied with respect for the principles of proportionality and equality, and cannot empty the common VAT system of its content.[5] Thus, in accordance with article 176.º of the VAT Directive, excluded from the right to deduction are, as a principle, only goods or services that give rise to confusion between the personal sphere and the business sphere. As is emphasized in the Metropol Judgment, "The provisions that provide for derogations to the principle of the right to deduction of VAT, which guarantees the neutrality of this tax, are of restrictive interpretation." (see point 59).[6]

Note that the rules for the exercise of the right to deduction of the tax contemplate objective requirements related to the type of expenses, formal requirements relating to the formal density of the VAT supporting document, subjective requirements, relating to the taxable person, and temporal requirements, relating to the period in which it is possible to exercise the right to deduction of VAT, which must be verified simultaneously.

With special relevance to the case at hand, the VAT Directive conditions the exercise of the right to deduction to various substantive requirements, resulting from its article 168.º and the other provisions that make up Title X. From the subjective point of view, article 168.º, partly incorporated by article 20.º n.º 1 paragraph a) of the VAT Code, grants the deduction of VAT incurred by the taxable person in the Member State in which it is established, on the transfer of goods and provision of services, as well as assimilated operations, on intra-Community acquisitions of goods and on imports, however, it places as a basic premise of deduction that "goods and services are used for the purposes of its taxed operations (...)", (our emphasis), being this a fundamental requirement and a guarantor of the neutrality of the tax.

Note that the CJEU admits the deduction of VAT on expenses incurred with confirmed intention supported by objective elements to destine them to the development of an economic activity, notwithstanding the fact that the effective exercise of transfers of goods or provision of services that will constitute the object of the entity has not yet been effected, even if such does not effectively come to pass. The broad scope of the right to VAT deduction is confirmed by the jurisprudence established regarding the so-called preparatory activities, not requiring that the activity of the taxable person has already begun in order to be able to deduct the VAT incurred thereupon in the preparatory acts.[7]

Article 168.º of the VAT Directive also provides for the existence of a causal link between the goods or service acquired (input) and the taxed output, for the VAT to be susceptible to being deductible. Therefore, the VAT incurred upstream in a given operation is only deductible to the extent that it can be related downstream with an operation effectively taxed, and the relationship should be assessed case by case and depending on the inclusion and inclusion of the cost incurred in the price of the taxed operation.

In this context, the CJEU concluded that the upstream goods or services must have a direct and immediate relationship with one or more taxed operations downstream, and that the right to VAT deduction presupposes that the expenses in question must constitute an integral part of the constituent elements of the price of taxed operations.[8] In analyzing the scope of that expression "(…) direct and immediate relationship (…)", the Advocate General in the Midland Bank Case concluded that the use of the two adjectives "direct" and "immediate" cannot but mean a particularly close relationship between the taxable operations performed by a taxable person and the goods or services supplied by another taxable person.[9] However, the density of that relationship may be different depending on the quality of the taxable person and the nature of the operations performed, and these variables may also have repercussions on the burden of proof of the existence of the relationship, which falls on the operator interested in the deduction.

Thus, according to the jurisprudence of the CJEU, whenever a taxable person exercises economic activities intended to perform exclusively taxable operations, it is not necessary, in order to be able to deduct the tax in full, to establish, for each upstream operation, the existence of a direct and immediate relationship with the specific taxed operation.[10]

What the legislator only requires is that the goods and services be used or susceptible to being used "for the purposes of its own taxed operations" (our emphasis). There is no need for the existence of a relationship with a specific taxable operation, it being sufficient that there is a relationship with the activity of the company.

Now, the question of ascertaining whether or not there is a direct and immediate relationship assumes particular relevance when it is intended to apply the general principle of deduction of the entirety of VAT to situations in which the taxable person performs taxed and/or exempt operations or also non-taxed operations.

In the absence of an immediate and direct relationship between the goods or services and the taxed operation, the right to deduction is limited by the application of a pro rata or is refused when the downstream operation is an exempt operation.

Note that the questions that may be posed within the scope of the right to VAT deduction are not limited to the issue of allocation of inputs by the so-called mixed taxable persons. Indeed, alongside these, and with central relevance to the case at hand, is the question of private consumption, as identified in the Green Paper presented by the European Commission in 2010, "the neutrality of this tax implies that the VAT incurred on goods and services used in taxed economic activities should be entirely deductible. It may be difficult to achieve this objective and to ensure equal conditions of competition for EU companies whenever goods or services used for multiple purposes (taxed activities, exempt activities and non-professional purposes) and the destination of such goods and services changes during their economic life."[11] (our emphasis).

Finally, it is important to refer as a requirement for the exercise of the right to deduction the temporal requirement, in accordance with which "The right to deduction arises at the moment when the deductible tax becomes due", remaining, however, the cumulative requirement of possession of the invoice, or the receipt of payment of the VAT that forms part of the import declarations.

In turn, in accordance with the rules of n.º 1 of article 19.º of the VAT Code, it is stipulated that it confers the right to deduction, in particular, the tax due or paid by the taxable person on acquisitions of goods and services made from other taxable persons and the tax paid on the acquisition of the services referred to in paragraphs e), h), i), j) and l) of n.º 1 of article 2.º of the VAT Code.

In accordance with the provisions of paragraph a), of n.º 1 of article 20.º of the VAT Code, they confer, in particular, the right to deduction of VAT the transfers of goods and provision of services subject to tax and not exempt from it and the transfers of goods and provision of services that consist of operations performed abroad that would be taxable if performed in Portugal.

In summary, it results from the legal provisions cited above and from the jurisprudence issued by the CJEU, a requirement that the goods and services acquired by the taxable person be used in the performance of taxed operations.

3. On the Specific Case

In the case at hand, the Claimant acquired two autonomous units that form part of the company's assets, having for this purpose waived the VAT exemption in accordance with Decree-Law n.º 21/2007 of 29 January. Such units, or accommodation units, according to the Claimant's thesis are integrated in a tourist operation and continue to have "the purpose of the provision of a tourist accommodation service, even though the tourist-owner uses them 90 days per year". Such fact, according to the Claimant, would justify the legality of the full deduction of VAT incurred when purchasing the units, with waiver of exemption from that tax.

Now, with all due respect, the Claimant is not correct.

Let us then examine the provisions of the VAT Code and the extensive jurisprudence issued by the CJEU, accompanied, moreover, by the jurisprudence of the SAC and the Arbitral Tribunal, which seeks to achieve equal treatment and respect for the principle of tax neutrality, in the framework conferred regarding the mixed use of goods under VAT, that is, in situations of goods that were initially allocated to the enterprise and subsequently used, at least in part, for private purposes, even though the taxable person wholly deducted the VAT upon acquisition.

Now, in the case at hand, it was unequivocally proved that in the very act of the deed of purchase and sale of the immovable property, the purchaser, now Claimant, was granted the right to use the units already identified 90 days in each year, as also results from clause 12 of the Assignment of Tourist Operation and Management of Immovable Property. Consequently, it was the intention of the Claimant, from the moment of purchase of said autonomous units, to allocate them to the private use of the owner, for three months per year, with no doubt whatsoever, as the Claimant itself states, "that during this period of time the tourist is the owner".

On the other hand, it results from the evidence that despite the Claimant placing itself in the role of "tourist" 90 days per year, in the use of the accommodation units for private use, it did not act, in VAT terms, in the capacity of a true tourist, namely, by equating the use of the accommodation units, during said period, to a service provision made for valuable consideration and taxed in accordance with articles 4.º n.º 2 paragraph a) and 16.º n.º 2 paragraph c), both of the VAT Code. Paradoxically, although the Claimant claims that in this period in which the accommodation units are intended for private use of the owner they are not withdrawn from the market, on the other hand, it is not understood, if that were the case, why such use was not framed within the normal parameters of the market, and considered as a provision of a tourist accommodation service subject to VAT, in accordance with legal terms.

Now, article 4.º n.º 2, paragraph a) and article 16.º n.º 2 paragraph c), both of the VAT Code equate, by way of a legal fiction, the existence of a taxed service provision for VAT purposes, within the scope of the taxation of private consumption avoiding putting into question the neutrality that guides the application of the tax and the inequality of treatment that would be created between a taxable person who allocates a good of its enterprise to private use and the normal consumer who acquires a good of the same type.[12]

According to the settled jurisprudence of the CJEU, a taxable person has the possibility of choosing, for the purposes of the application of the Sixth Directive, whether or not to integrate into its enterprise the part of a good that is allocated to its private use.[13]

If the taxable person chooses to treat as enterprise goods the investment goods used at the same time for professional purposes and for private purposes, the VAT paid upstream on the acquisition of such goods is, in principle, wholly and immediately deductible.[14] And it is added that "a taxable person who opts to allocate the whole of a building to its enterprise and who subsequently uses part of that building for its private use or that of its personnel has, on the one hand, the right to deduct the VAT paid upstream on the whole of the expenses incurred in the construction of said building and, on the other, the corresponding obligation to pay the VAT on the amount of the expenses incurred with the execution of that private use."[15] In any case, the taxation of private consumption presupposes the prior allocation of the good to an economic activity and the subsequent exercise of the right to deduction.

The CJEU would recall, in this regard, that from article 168.º of the VAT Directive it results that the taxable person who, acting in that capacity at the moment it acquires a good, uses it for the purposes of its own taxed operations, becomes entitled to deduct the VAT incurred with that acquisition. Conversely, when a good is not used for the purposes of the taxable person's economic activity, as article 9.º defines them, but rather for private consumption of the taxable person, the right to deduction does not arise.[16] Thus, although the CJEU admits the possibility of acquiring an investment good intended simultaneously for private use and for professional use and the taxable person opts to allocate such good wholly to the enterprise and thus deducts all VAT that has been incurred thereon, nevertheless whenever that good is used for the private needs of the taxable person, such operation is equated to a service provision made for valuable consideration with the corresponding assessment of VAT downstream.

There is no doubt that the path chosen by the Claimant was different, opting to deduct wholly the VAT incurred on the acquisition of two autonomous units intended for mixed use - in part tourist operation (9 months per year) in part to the use of the enterprise's own owners (3 months per year) - notwithstanding the fact that in the exclusive use of that good allocated to the enterprise there was no assessment of any VAT on the value of the expenses incurred with said use.

If by hypothesis we accepted the position adopted by the Claimant, it would have clear economic advantages compared to the final consumer who acquires a good of the same type, and here is why: the final consumer bears the entire VAT that is passed on to him, whereas the Claimant, using its status as an enterprise, could exempt itself from the payment of VAT by way of the corresponding full deduction, even knowing beforehand that it would use the immovable property, in part, in a type of consumption susceptible to being inserted in a strictly private sphere.

Now, having reached this point, it will be important to follow closely the analysis of the Charles and Charles-Tigmens Case for the evident usefulness for the case in question.[17] As explained in its conclusions by Advocate General F.G. Jacobs, according to an established line of jurisprudence the taxable person has the possibility of choosing for the purposes of the application of the Sixth Directive whether or not to integrate into its enterprise the part of a good that is allocated to private use, deriving the necessary consequences from this regarding the exercise of the right to deduction.

Being so, a taxable person who acquires a good which it knows beforehand will be the subject of allocation for private purposes may choose between two options, although the respective conditions of application are different and these options are not simply interchangeable.

The first concerns the situation in which a taxable person uses for private purposes goods or services originally treated as intended for taxable business purposes in relation to which it deducted the VAT charged upstream. Under the equation to service provisions[18] the taxable person is, in practice, seen as acting in the dual capacity of businessman and private purchaser, so it must collect the VAT due downstream on that operation.

The second option is the recourse to the mechanism of proportional deduction of VAT as a function of actual professional use, proceeding in subsequent years with the necessary adjustments based on the change in the percentage of allocation of the good to professional or private use. The relevance of this second option is largely explored in the VNLTO case[19], in which the scope of the taxation of private consumption and the consequent legitimation of the deduction of VAT incurred upstream via the initial allocation of a good to a taxed activity is defined, in the particular case of VAT taxable persons who are legal persons.

In this proceeding, the CJEU articulates the concepts of "economic activity", "non-economic activity" and "purposes alien to the enterprise" and recalls that only in cases of acquisition of a good simultaneously allocated to the object of the VNLTO's activity and to the private purposes of one of its administrators, one of its employees, a third party or, in general, to purposes alien to the VNLTO's object would the jurisprudence established in the Charles-Tijmens case (2005) be admissible, which centered on a natural person with the quality of taxable person. On the other hand, recalling the Securenta case (2008) the CJEU defends that in the mixed use of a good or service in an economic activity and a non-economic activity, the deduction shall only be made proportionately, although it has referred the criteria and methods to be used to the free assessment of each Member State.[20]

On the interpretation to be given to the concept of "goods", the Advocate General Paolo Mengozzi argues that goods should be understood as investment goods, that is, goods whose consumption is staggered over time, therefore susceptible to durable use.

Thus, with the VNLTO Judgment it becomes clarified the question of the deduction regime of VAT incurred upstream by taxable persons who, even within the scope of the pursuit of their corporate or professional object, perform operations within the concept of economic activity and outside this concept, imposing in this case the partial deduction of the tax based on actual allocation and not allowing the full deduction of VAT. This judgment, in the context of prior jurisprudence[21], reiterates the principle that "when goods or services acquired by a taxable person are used for the purposes of exempt operations or are not covered by the scope of VAT, there can be no assessment of the tax downstream nor deduction thereof upstream".[22]

Furthermore, it should be noted that in order to overcome the frequent divergences between the positions assumed by the CJEU and the Tax Administrations relating to the specific case of the use of investment goods for both professional and non-professional purposes, and seeking to put an end to the various alternatives for framing the question, as explained above, Council Directive n.º 2009/162/EU, of 22 December was approved, amending various provisions of the VAT Directive, with effect from 2011, adding article 168.º-A, which n.º 1 states:

"Article 168.º-A

1. In the case of immovable property integrated in the assets of a taxable person's enterprise and used by it both for the activities of the enterprise and for its own use or that of its personnel or, in general, for purposes alien to the enterprise, the VAT incurred on the expenses relating to such immovable property is deductible in accordance with the principles established in articles 167.º, 168.º, 169.º and 173.º only in proportion to its use for the activities of the taxable person's enterprise.

In derogation from the provisions of article 26.º, changes in the proportion of use of an immovable property referred to in the first paragraph shall be taken into account in accordance with the principles provided in articles 184.º to 192.º as applied in the Member State concerned.

1. (...)"

In the wake of this evolution, the VAT Code added n.º 7 of article 19.º, limiting its application to immovable property, in accordance with which "The tax relating to immovable property allocated to the enterprise cannot be deducted, to the extent that such property is intended for private use of the owner of the enterprise, its personnel or in general for purposes alien to it".[23]

It should also be noted that this deduction is limited to the use of the actual allocation method, in accordance with the provisions of n.º 1 and 2 of article 23.º of the VAT Code.

Therefore, article 19.º n.º 7 of the VAT Code, applicable to the case at hand, prevents the full initial deduction ab initio of VAT, and subsequent taxation of private consumption in accordance with article 4.º n.º 1 of the VAT Code, a faculty previously granted by the VAT Directive. Note that such impossibility arises in situations where the mixed use of the immovable property (economic activity and purposes alien to the enterprise) occurs at the moment of initial allocation, when the deductible VAT becomes due, the taxable person being required to adopt a proportional deduction based on actual allocation, subject to possible subsequent regularizations in the event of a change in the initial conditions of allocation of the good.[24] Therefore, the full deduction of VAT incurred on the acquisition of the two units, in the amount of €70,177.60 would only be admissible in the case of full and permanent allocation to the purposes of the activity for which the Claimant is assessed, for a period of 20 years, in accordance with the provisions of n.º 7 of article 19.º of the VAT Code.

In these terms, the Claimant's allegation as to the application to the case at hand of the rules provided in article 45.º of Decree-Law n.º 167/97 of 4 July, combined with n.º 3 of article 30.º of Regulatory Decree n.º 36/97, of 25 September, which establishes the following, does not hold:

"Accommodation units shall not be considered withdrawn from tourist operation by reason of the fact that their respective owners have reserved the right to use them for their own benefit for a period not exceeding 90 days in each year, in accordance with the terms established in a contract concluded between them and the entity operating the hotel-apartment."

Such laws establish the essential regulatory framework for the installation and operation of tourist enterprises intended for tourist accommodation activity, and it is certain that what is discussed in the proceedings is a question of tax treatment, under VAT, of the right to deduction invoked by the Claimant. Now, given that VAT is a tax of Community origin, it is nowadays consensual not only the direct vertical effect recognized for Directives, but also the primacy of European law, making this legal system an integral part of the legal order of the Member States from the moment of entry into force, imposing itself, therefore, on its application to national courts.[25]

Furthermore, it should be noted that the objective of the VAT Directive is not to define the rules for installation, operation and exploitation of tourist accommodations, such determination falling to national law, which may in no case compromise the objectives of the Directive, in VAT matters, which aims to base the common VAT system on a uniform definition of taxed operations and the deduction regime, namely as regards the "regime that allows for the regularization of deductions applicable to investment goods throughout the useful life of the asset, depending on its actual use (...)".[26] Now, such a regime would be compromised if the rules applicable to the deduction of VAT on immovable property (investment) were subjected to the occurrence of regulatory conditions of an extra-tax nature that vary from one Member State to another.

Thus, we conclude to the legality of the additional VAT assessments relating to the third quarter of the year 2012 and respective compensatory interest made by the Tax Authority, to the effect that no right to deduction of tax incurred upstream can be recognized when it has been proved that the units acquired intended for accommodation are allocated 90 days per year to the private use of the taxable person, now Claimant, a fact that is enshrined in the very act of acquisition of said immovable property.

Finally, the Claimant objects to the violation of the principles of legality, good faith and protection of legitimate expectations, by considering that there was retroactive application of the law to a tax fact occurring under the old law.

Now, as appears from the foregoing, also in this regard, the Claimant is not correct. The tax fact that determined the assessment and payment of the tax refers to the date of 4 July 2012, during which time the law establishing the regime of VAT deduction applicable to the operation performed by the Claimant was in force. Note that the law applicable to the case, as the Claimant alleges, is not the Legal Regime of Tourist Enterprises, but the provisions of the VAT Code (article 19.º n.º 7) and the VAT Directive (article 168.º-A).

In this manner, when concluding the contract of assignment of tourist operation through which the right to use the autonomous units acquired, annually, for a period of 90 days, for its own purposes was reserved, the Claimant had conditions to consider the tax consequences of its conduct.

Moreover, the principle of good faith, enshrined in article 59º, n.º 2 of the General Tax Law, presupposes on the part of the Tax Authority a duty to act according to good faith, being constitutionally imposed on all Administration, in accordance with n.º 2 of article 266.º of the C.R.P. This principle has a content of an ethical character, imposing on those involved in the tax procedure that they act with reciprocal loyalty and sincerity in the course of the tax procedure, refraining from actions that may deceive the other participant, or concealing from them elements that may benefit their defense of their positions.

In harmony with the provision of article 59.º of the General Tax Law, article 48.º of the Code of Tax Procedure and Process establishes that the Tax Authority shall clarify taxpayers and other tax-bound parties about the need to submit declarations, appeals and petitions and the practice of any other acts necessary for the exercise of their rights, including the correction of manifest errors or omissions that are observed.

Now, the violation by the Tax Authority of the duties of cooperation and of acting according to the rules of good faith may constitute an autonomous defect of violation of law.

Indeed, the relevance of this principle does not end in acts performed in the exercise of discretionary powers, having come to be raised the possibility of its application in the case of acts performed in the exercise of mandatory powers.

As has been demonstrated in the proceedings, the Tax Authority acted with respect for the principle of legality, and applied the tax regime in force at the date of the practice of the relevant tax facts.

Note should also be made that the principle of protection of legitimate expectations aims to safeguard legal entities against unjustifiably unpredictable actions by those with whom they relate.[27]

According to the jurisprudence of the SAC, within the scope of administrative activity, the prerequisites of the protection of legitimate expectations are (a) conduct giving rise to trust, (b) the existence of a situation of trust, (c) the making of a trust-based investment, and (d) the frustration of trust by the party that generated it.[28]

Now, these circumstances did not occur in the present case. The Tax Authority did not violate the trust of the Claimant, limiting itself in its action to applying the law – VAT Code and VAT Directive – to the case at hand. The Claimant, in turn, would have the obligation to know the tax-legal regime applicable to its investments, on the date of the practice of the relevant tax facts.

There is therefore no situation of justified trust, deserving of the protection claimed by the Claimant, and thus the action of the Tax Authority does not merit any kind of censure, concluding by the legality of the additional VAT assessments relating to the third quarter of the year 2012 and respective compensatory interest made by the Tax Authority.

4. Decision

For these reasons, this Arbitral Tribunal decides as follows:

a) To adjudge the request for arbitral pronouncement wholly dismissed and, consequently, to uphold the tax act impugned;

b) To condemn the Claimant for the costs of the proceeding, in the amount of € 918.00.

The value of the proceeding is fixed at € 11,606.99 (eleven thousand six hundred and six euros and ninety-nine cents), in accordance with article 97.º-A, n.º 1, a), of the Code of Tax Procedure and Process, applicable by virtue of paragraphs a) and b) of n.º 1 of article 29.º of the RJAT and of n.º 2 of article 3.º of the Regulations on Costs in Tax Arbitration Proceedings.

5. Costs

The amount of the arbitration fee is fixed at € 918.00, in accordance with Table I of the Regulations on Costs in Tax Arbitration Proceedings, to be borne by the Claimant, since the request was wholly dismissed, in accordance with articles 12.º, n.º 2, and 22.º, n.º 4, both of the RJAT, and article 4.º, n.º 4, of said Regulations.

Notify accordingly.

Lisbon, 12 January 2016

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Regime of Tax Arbitration.

[2] Judgment S. Puffer, Proc. C-460/07 of 23 April 2009.

[3] Cf. Xavier de Basto, (Lisbon 1991) The Taxation of Consumption and its International Coordination, p. 41.

[4] There is abundant jurisprudence that the CJEU has developed in this regard, referring, merely by way of example, to the following decisions: Judgment Sosnoowska, Proc. C-25/07, of 10 July 2008, Judgment Bonik, C-285/11 of 6 December 2012, Judgment Petroma, C-271/12 of 8 May 2013.

[5] Clotilde Celorico Palma, (Coimbra 2006), Studies on Value Added Tax, p. 153.

[6] Judgment Metropol, Proc. C-409/99 of 8 January 2002.

[7] Judgment Rompelman, Recueil, Proc. C-268/83, of 14 February 1985; Judgment Lennartz, Proc. C-97/90, of 11 July 1991; Judgment Inzo, Proc. C-110/94, of 29 February 1996, Judgment Gabalfrisa, Attached Proc. C-110/98 to C-147/98, of 21 March 2000. More recently, see in particular, the Judgment Klub Ood, Proc. C-153/11, of 22 March 2011.

[8] Judgment BLP Group, Proc. C-4/94 of 6 April 1995.

[9] Judgment Midland, Proc. C-98/98 of 8 June 2000.

[10] Conclusions of Advocate General António Saggio presented on 30 September 1999 in the Midland Bank Case.

[11] Cf. European Commission, Green Paper on the Future of VAT. Towards a simpler, more robust and efficient VAT system, COM (2010) 695 final, Brussels, 1.12.2010.

[12] On the issue of taxation of private consumption as a way to ensure equal treatment between taxable persons and final consumers, see in particular Judgment Enkler, Proc. C-230/94 of 26 September 1996, Judgment De Jong, Proc. C-20/91 of 6 May 1992, Judgment Hotel Scandic, Proc. C-412/03, of 20 January 2005, among others.

[13] See in particular Judgment Armbrecht, Proc. C-291/92, of 4 October 1995, n.° 20 relating to the mixed use of an immovable property comprising a hotel, restaurant and part reserved for residence, and Judgment Seeling, Proc. C-269/00, of 16 March 2002.

[14] See Judgment Lennartz, Proc. C-97/90, of 11 July 1991 and Judgment Seeling, already referred to.

[15] Judgment Medicom, Proc. nos. C-210/11 and C-211/11, of 18 June 2013.

[16] Judgment Le Klub n.º 36, already referred to.

[17] Judgment of 14 July 2005, Proc. C-434/03.

[18] As per article 16.º of the VAT Directive.

[19] Judgment of 12 February 2009, Proc. C-515/07.

[20] Judgment of 13 March 2008, Proc. C-437/06, see specifically points 50 and 51.

[21] Judgment Wollny, Proc. C-72/05 of 14 September 2006, n.º 20.

[22] Cf. Judgment VNLTO, n.º 28.

[23] The legislative amendment was materialized by Decree-Law n.º 134/2010 of 27 December.

[24] Also in this sense see Rui Manuel Pereira da Costa Bastos, "Right to Deduction of VAT. The particular case of mixed-use inputs" in IDEFF Notebooks, n.º15, Almedina.

[25] Among others see Judgment Costa vs. Enel, Proc. n.º C-6/64 of 15 July 1964, Judgment Von Colson, Proc. n.º C-14/83 of 10 April 1984, Judgment Marlesing, Proc. n.º C-106/89 of 13 November 1990.

[26] Cf. 40th recital of the VAT Directive, Directive 2006/112/EC of the Council of 28 November 2006.

[27] In this sense, Marcelo Rebelo de Sousa and André Salgado de Matos, General Administrative Law, Volume I, 3rd edition, p. 221.

[28] See, in particular, Judgments of the SAC, Proc. n.º 0753/11, of 21 September 2011 and Proc. n.º 0589/11 of 7 June 2011.