Process: 477/2017-T

Date: May 14, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision addresses whether a Real Estate Investment Fund could validly waive VAT exemption when transferring land for construction, and whether related input VAT was fully deductible. The fund acquired land and partially completed construction works for a shopping center project, later transferring the development to another entity. The Tax Authority challenged the VAT treatment, issuing assessments totaling €1,204,150.68. The core dispute centered on whether the property qualified as 'land for construction' under Decreto-Lei 21/2007, allowing exemption waiver under only the objective conditions of Article 2(1) rather than the stricter requirements of Article 2(2). The fund argued it met all objective, subjective and formal requirements for waiving the VAT exemption, making input VAT fully deductible. Critical issues included: classification of the transferred asset as land for construction versus completed works; applicability of reverse charge mechanisms to construction expenses (87% of invoices); and the tax treatment of a contractual position assignment where the fund assumed supplier payment obligations. The case illustrates the complex interplay between VAT exemption waiver provisions, real estate transaction structuring, and input tax deductibility rights for investment funds in Portuguese tax law, particularly regarding partially completed construction projects and contractual assignments in distressed real estate situations.

Full Decision

ARBITRAL DECISION[1] (consult full version in PDF)

I – REPORT

On 22 August 2017, the Real Estate Asset Management Fund A..., NIPC ..., with headquarters at Av. ..., n.º..., ...-... Lisbon (hereinafter referred to as the Claimant), filed a request for the constitution of an arbitral tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the Value Added Tax assessment act No. ... of 2016, and corresponding liquidation statements and interest assessments, in the total amount of €1,204,150.68, according to the following table:

To substantiate its request, the Claimant alleges, in summary, that:

  • The real property transferred by the Claimant to O... constituted, for tax purposes, "land for construction";

  • To such land only the objective conditions provided in Article 2, no. 1 of Decree-Law 21/2007 of 29/01 apply, but no longer those of no. 2 of the same article;

  • In this manner, the objective, subjective and formal conditions for waiver of VAT exemption in the transfer of said land are met, and the VAT incurred on inputs shall be fully deductible;

  • The expenses listed in Annex C of the contractual position assignment agreement were used in the development of the undertaking sold to said O...;

  • The Tax Authority did not succeed in proving or casting doubt on the correspondence between said expenses and the values transferred as improvements in the deed of sale of the property, executed between B... and the Claimant;

  • The percentage of 87% of the invoices to which such expenses relate were subject to VAT reverse charge by the Claimant, in application of the reverse charge rule.

On 23-08-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not proceed to appoint an arbitrator, wherefore, pursuant to the provisions of Article 6, no. 2, letter a) and Article 11, no. 1, letter a) of the RJAT, the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable timeframe.

On 31-10-2017, the parties were notified of these designations, having manifested no intention to refuse any of them.

In accordance with the provision in Article 11, no. 1, letter c) of the RJAT, the collective Arbitral Tribunal was constituted on 21-11-2017.

On 10-01-2018, the Respondent, duly notified for this purpose, presented its response defending itself solely through contestation.

Pursuant to the provisions in Articles 16, letters c) and e), and 29, no. 2, both of the RJAT, the holding of the meeting referred to in Article 18 of the RJAT was dispensed with.

Having been granted a deadline for the presentation of written submissions, these were presented by the parties, commenting on the evidence produced and reiterating and developing their respective legal positions.

Notice was duly given that the final decision would be notified to the parties by the deadline fixed in Article 21/1 of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to Articles 2, no. 1, letter a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the RJAT and Article 1 of Ordinance No. 112-A/2011, of 22 March.

The proceedings are not affected by nullities.

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

All things considered, a decision must be rendered.

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proved

  • The Claimant is an Open Real Estate Investment Fund, constituted in accordance with legal requirements.

  • The administration, management and representation of the Claimant are, and were in 2016, the responsibility of C... – Real Estate Investment Fund Management Company, S.A.

  • The Claimant, until 9 October 2012, was covered under the exemption regime provided for in Article 9 of the VAT Code.

  • On that date, the Claimant submitted a declaration of changes, modifying its classification to the normal taxation regime, with monthly periodicity.

  • In that declaration, the Claimant indicated that it would simultaneously carry out VAT-taxable operations that grant and do not grant a right to deduction.

  • During the year 2016, the Claimant carried out the following operations:

    • Cession and operation of the Shopping Center ...;
    • Development of the project "... Shopping" and its transfer, including the land on which it was being constructed.

  • On 17 May 2013, the Claimant acquired from B..., S.A., the "urban property consisting of land for urban construction with an area of 33,897 square meters, located in ..., Rua ..., ..., parish of ..., municipality of ..." and "the improvements existing on said urban property consisting of construction work already initiated but not completed".

  • In the corresponding property register, the aforementioned property was registered as "land for construction".

  • The purchase price of the aforementioned acquisition was €22,400,000.00, comprising the following items:

    • €14,000,000: value of the land;
    • €8,400,000: value of improvements.

  • On the aforementioned property there was a financial lease agreement, executed between D... – Financial Credit Institution, S.A., subsequently incorporated into B..., and entity E... – Real Estate Investments and Projects, S.A., whereby the latter entity undertook to develop construction works for the ... Shopping on the property, to subsequently operate it economically.

  • The construction of the ... Shopping, subject of building permit No. .../2006, approved on 6 December 2006, began in 2011 and was scheduled for completion in 2013.

  • E... showed, from the year 2012 onwards, significant difficulties in fulfilling its obligations under the aforementioned financial lease agreement.

  • From 2012 onwards, various suppliers of E... saw their contracts breached due to non-payment.

  • According to real estate appraisal studies concluded in August 2012, the ... Shopping was under construction, with approximately 36.7% of the work completed.

  • Following negotiations aimed at revoking the financial lease agreement with E..., and with its suppliers, for the purpose of assigning the contractual position in contracts concerning the development of the ... Shopping, as well as corresponding approval by CMVM, the Claimant proceeded with the aforementioned acquisition on 7.

  • On 17 May 2013, the financial lease agreement referred to in 10 was resolved with immediate effect.

  • On the same date, a contractual position assignment agreement was executed with E... in order for the Claimant to assume E...'s position in the various contracts in force for the development of the ... Shopping.

  • The Claimant also assumed E...'s position in the contracts executed with the group of retailers identified in Annex B of the contractual position assignment agreement.

  • Within the framework of the same transaction, the Claimant, as Second Party, assumed the obligation to "proceed with payment of all amounts owed to suppliers and service providers as of the present date in accordance with the contracts and as per the list attached as Annex C".

  • The same contract further provides that "For this purpose, suppliers shall issue the corresponding invoices to the Second Party, which must pay them in full within a maximum period of 30 (thirty) days from the present date".

  • The amounts included in Annex C of the aforementioned contractual position assignment agreement related to supplies of goods and services provided between April 2012 and July 2013.

  • The real estate studies for ... Shopping, dated 1 August 2012, and prepared by companies F... – Engineering Projects and Consulting, Ltd. and G..., Ltd., were commissioned by the Claimant at an earlier date.

  • For development of the ... Shopping project, between April 2012 and May 2013, goods and services were acquired for civil construction, project management and real estate consulting, in the total amount of €5,101,846.13, from the following suppliers:

    • H... – Individual Real Estate Consulting, Ltd.;
    • I... – Individual Company, Ltd.;
    • J..., S.A;
    • K...;
    • L..., Law Partnership, RL;
    • M..., Ltd.;
    • N... – Real Estate Brokerage Company, Ltd.

  • The VAT incurred on the aforementioned acquisitions amounted to €954,000.90.

  • The VAT associated with invoices issued by J..., S.A., in the amount of €797,901.98, was subject to reverse charge by the Claimant, in application of the reverse charge rule relating to acquisition of civil construction services.

  • The VAT associated with invoices issued by K..., in the amount of €32,200.00, was subject to reverse charge by the Claimant, in application of the reverse charge rule relating to acquisition of services from non-established subjects.

  • On 25 February 2016, a certificate of waiver of VAT exemption in the operation of sale of the land for construction of the ... Shopping to entity O... – Individual Real Estate Investments, Ltd. was issued by the Lisbon-... Tax Service.

  • On 3 March 2016, the Claimant sold to said O... "the urban property, land for construction, with an area of thirty-three thousand eight hundred and seventy-nine square meters, with the improvements existing thereon and consisting of construction work initiated but not completed, located in Herdade ..., Rua..., ..., parish of..., municipality of...", having assessed VAT on said transaction.

  • The Claimant, in the declaration for the corresponding period, proceeded with the deduction of VAT that it understood to be incurred in the development and construction of the property sold to O..., having inserted in field 20 of that declaration the amount of tax of €860,505.58 and in field 24, the amount of tax of €374,104.13, in a total tax to deduct of €1,195,823.70.

  • In the periodic declaration of September 2016, the Claimant requested reimbursement of the amount of €999,766.31, and the Tax Authority, following such declaration, initiated an external tax inspection procedure.

  • Subsequently, the Tax Authority issued a draft Tax Inspection Report, regarding which the Claimant exercised its right to a hearing.

  • The Tax Authority did not accept the Claimant's arguments and issued the final Report, maintaining the proposed corrections, which states, among other things, the following:

[content of report as in original]

Further contained in said Report:

[content as in original]

In May 2017, the Tax Authority notified the Claimant of the Tax Inspection Report (TIR), which substantiated the assessments that are the subject of the present arbitral action.

A.2. Facts Established as Not Proved

With relevance to the decision, there are no facts that should be considered as not proved.

A.3. Reasoning of the Proved and Not Proved Factual Matters

Regarding factual matters, the Tribunal does not need to pronounce on everything that was alleged by the parties, its duty being instead to select the facts relevant to the decision and distinguish between proved and not proved matters (see Article 123, no. 2, of the CPPT and Article 607, no. 3 of the CPC, applicable pursuant to Article 29, no. 1, letters a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in light of the various plausible solutions to the question(s) of law (see former Article 511, no. 1, of the CPC, corresponding to current Article 596, applicable pursuant to Article 29, no. 1, letter e), of the RJAT).

Accordingly, taking into consideration the positions assumed by the parties, in light of Article 110/7 of the CPPT, the documentary evidence and the proceedings joined to the file, it was considered that the facts listed above were proved, with relevance to the decision, taking into account that, as stated in the Judgment of the TCA-South of 26-06-2014, rendered in case 07148/13[2], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not disputed".

The allegations made by the parties, and presented as facts, consisting of strictly conclusive statements, insusceptible to proof, and whose veracity must be ascertained in relation to the concrete factual matters consolidated above, were neither established as proved nor as not proved.

B. ON THE LAW

As clearly follows from the Tax Inspection Report, the corrections made, against which the Claimant objects, are based on the understandings that:

  • the transaction regarding the property relating to the ... Shopping undertaking does not meet the requirements of Article 2, no. 2 of Decree-Law 21/2007 of 29/01; and

  • the invoices referred to in Annex C of the contractual position assignment agreement between the Claimant and E..., relate to operations that occurred between April 2012 and May 2013, at a date prior, therefore, to the execution of the public deed of acquisition of the property in question, as well as of that contractual position assignment agreement.

Let us examine each of them.

Article 2/2 of Decree-Law 21/2007 of 29/01, in the applicable version, provides that:

"2 - Provided the conditions in the preceding number are met, waiver is only permitted when the immovable property is in one of the following circumstances:

a) It is a question of the first transfer or lease of the property occurring after construction, where VAT supported therein has been deducted or it is still possible to deduct it, in whole or in part;

b) It is a question of the first transfer or lease of the property after it has been subject to major works of transformation or renovation, resulting in an alteration exceeding 30% of the tax property value for the purposes of the municipal property tax, where it is still possible to deduct, in whole or in part, the VAT supported in such works;

c) In the transfer or lease of the property subsequent to an operation carried out with waiver of exemption, where the regularization period provided for in no. 2 of Article 24 of the VAT Code is still running with respect to the tax supported in construction or acquisition expenses for the property."

The transcribed norm embodies, together with no. 1 of the same article, the so-called objective requirements of the Regime of waiver of VAT exemption in operations relating to immovable property, requirements to which are added the also-called subjective and formal requirements, requirements that were not questioned by the Tax Authority in the corrections it made, now challenged.

Thus, at the outset, the allegation of the Respondent in its response shall not be admissible, according to which "if the Claimant's claim is that the tribunal confirm its right to waive the exemption, it is incumbent upon it, pursuant to the provision of Article 74 of the LGT, to prove that it meets the necessary conditions therefor, including the subjective ones, that is, in this case, that it was a taxpayer that carried out exclusively operations conferring the right to deduction (...), or that not being so had at that date (of the waiver), a right to deduction equal to or exceeding 80%".

Indeed, apart from being based on an incorrect premise – that the Claimant's claim is that the tribunal confirm its right to waive the exemption, when, as could not but be the case in tax arbitration proceedings, the claim of the latter is the annulment of the tax acts that constitute the subject of such proceedings – the eventual acceptance of said allegation of the Respondent would translate into the maintenance of the correction made by the Tax Authority, now contested, on other grounds of fact and law, which, according to consistent jurisprudence of the STA[3], will be inadmissible.

Having established this, it is therefore necessary to ascertain whether, as the Tax Authority understood, the requirements of said no. 2 of Article 2 of Decree-Law 21/2007 of 29/01 are not met in the case.

As the Claimant states, and the Tax Authority does not contest, either in the inspection proceedings or in the arbitral proceedings, that norm of no. 2 of Article 2 in question shall not be applicable with respect to land for construction.

This conclusion is imperative, as the Claimant demonstrates, inasmuch as all the letters of such no. 2 presuppose the existence of construction.

Thus, letter a) of that no. expressly refers to "the first transfer or lease of the property occurring after construction".

Whereas letter b) subsequently refers to operations after "major works of transformation or renovation, resulting in an alteration exceeding 30% of the tax property value for the purposes of the municipal property tax".

Now, with respect to the fixing of the tax property value of land for construction, Article 45 of the CIMI applicable provides that:

"1 - The tax property value of land for construction is the sum of the value of the building site area to be constructed, which is the area situated within the building perimeter measured by its external part, added to the value of the terrain adjacent to the site.

2 - The value of the site area varies between 15% and 45% of the value of authorized or planned buildings.

3 - In fixing the percentage of the value of the site land, the characteristics referred to in no. 3 of Article 42 are taken into consideration.

4 - The value of the area adjacent to construction is calculated pursuant to no. 4 of Article 40."

Now, no. 3 of Article 42 of the CIMI, to which no. 3 of said Article 45 refers, provides that:

"3 - In fixing the location coefficient, the following characteristics are taken into consideration, in particular:

a) Accessibility, meaning the quality and variety of road, rail, fluvial and maritime routes;

b) Proximity to social facilities, namely schools, public services and commerce;

c) Public transport services;

d) Location in areas of high real estate market value."

Finally, no. 4 of Article 40 of the CIMI, to which no. 4 of the same Article 45 refers, states that:

"The terrain free of the building or the fraction or its share results from the difference between the total area of terrain and the site area of the building or buildings and includes gardens, parks, sports fields, swimming pools, courtyards and other grounds, applying thereto, up to the limit of twice the site area (Ac), the coefficient of 0.025 and in the area exceeding the limit of twice the site area (Ad) that of 0.005."

As can be seen from the CIMI regime transcribed, the tax property value of land for construction is incapable of being altered by "major works of transformation" (it being that, by nature, renovation works can only have buildings as their object).

Indeed, the legal criteria for fixing the TPV of land for construction do not take into account the intrinsic characteristics of the land itself, but rather relate to the characteristics of the authorized or planned construction and the surrounding characteristics of the land in question.

Now, neither the authorized or planned construction nor the surroundings of land for construction are susceptible to increase in value as a function of works performed on the land itself for construction.

Hence, by absolute impossibility, it must be concluded that letter b) of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01 will also be inapplicable to land for construction.

Finally, letter c) refers to operations subsequent "to an operation carried out with waiver of exemption". Now, waiver of exemption necessarily presupposes the verification of one of the conditions to which the preceding letters (a) and (b) refer.

Insofar as, as has been seen, it will not be possible to apply letters a) and b) of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01 to land for construction, necessarily letter c) shall not be applicable either, since it presupposes the prior carrying out of an exempt operation, which could only occur on the basis of the preceding letters, which is impossible.

Having reached this point, one of two conclusions must be imposed, namely:

  • Either one concludes that it is not possible to waive VAT exemption in operations relating to land for construction, since, with respect to these, it is impossible to meet the conditions enshrined in the letters of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01;

  • Or one concludes that that of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01 is not applicable to land for construction, permitting waiver of VAT exemption, provided the remaining requirements demanded by Decree-Law 21/2007 of 29/01 are met.

Now, taking into account that it is Decree-Law 21/2007 of 29/01 itself that, in its Article 2, no. 1, letter a), expressly refers to the admissibility of waiver of VAT exemption with respect to land for construction, it must be concluded, in order to ensure the normative coherence of the said statute, to the second of the above-formulated hypotheses, that is, to the inapplicability of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01 to land for construction, permitting waiver of VAT exemption, provided the remaining requirements demanded by Decree-Law 21/2007 of 29/01 are met.

Having established this, it must be ascertained whether, as the Claimant claims, an operation relating to land for construction is at issue, as presumed by the Regime of waiver of VAT exemption in operations relating to immovable property, or whether, as the Respondent maintains, this is not the case.

Respect being shown for other understandings, it is considered that the concept of "land for construction" used in said Regime should be identified with the corresponding concept defined in the CIMI, lest, among other things, incongruencies be created, such as those pervading the TIR, of which note will be taken hereafter.

Indeed, having the legislator of the Regime of waiver of VAT exemption in operations relating to immovable property itself opted to connect such regime, for certain purposes, to the CIMI regime, namely by giving relevance, for purposes of the Regime in question, to the tax property value, it must, in order to ensure the normative coherence of that same Regime, maintain such correspondence.

Furthermore, the Regime of waiver of VAT exemption in operations relating to immovable property does not distinguish the use of incompatible, distinct, or even mixed concepts, from those used in the CIMI.

In this context, not to opt for the correspondence between the concept of "land for construction" used in the Regime now in question, and the CIMI, would result in situations, such as those in the present case, in which a land for construction, so qualified and evaluated for CIMI purposes, sees its TPV substantially reduced, notwithstanding the carrying out of construction works of considerable value, due to the fact that, precisely, the CIMI does not take into account, in fixing the corresponding TPV, such constructions, until the property is qualified as a residential, commercial, industrial urban property or for services.

It is also noted, finally, on this point, that there is no discernment, nor is it suggested by the Tax Authority, of any type of normative disruption by the understanding exposed, nor that another solution corresponds to the necessary protection of any relevant legal values that, in the matter, must be safeguarded.

Thus, and notwithstanding the fact that the Respondent affirms that "in VAT there is a prevalence of material reality over formal reality", the fact is that, on the one hand, it does not specify in what the effective materiality of the situation justifies treatment distinct from that resulting from the letter of the law interpreted above, and, on the other, such materiality, confessedly, consists in a "partially constructed property" being at issue, a category not autonomized in the Regime of waiver of VAT exemption in operations relating to immovable property, and which, in light of the CIMI, is not incapable of being qualified as "land for construction", it not advancing or suggesting by the Respondent which treatment should be given to such reality within the possible categories framing the Regime in question, nor what normative criteria should be followed to determine such treatment, namely, and for example, from what level (gross?, percentage?) of construction would a "land for construction" cease to be qualifiable as such, within the framework of the Regime in question.

Finally, and moving now to point out the incongruencies previously alluded to, the position assumed by the Tax Authority in the inspection proceedings, and sustained in the arbitral proceedings, leads to the paradox, expressed in the TIR, of not considering the property in question as "land for construction", because it has already been subject to partial construction, but refusing to apply letter a) of no. 2 of Article 2 of Decree-Law 21/2007 of 29/01, because the property is still "under construction"...

Thus, and in light of all the foregoing, it is concluded that, in the case, an operation relating to "land for construction" is at issue, for purposes of the Regime of waiver of VAT exemption in operations relating to immovable property, and that such operations are not subject to the objective requirements embodied in no. 2 of Article 2 of that Regime, wherefore the first of the grounds of the tax acts now contested by the Claimant shall be deemed illegal.

With respect to the total of €954,000.90, covered by the correction made on the basis of the ground previously analyzed, the Tax Authority further considered that the invoices referred to in Annex C of the contractual position assignment agreement between the Claimant and E..., relate to operations that occurred between April 2012 and May 2013, at a date prior, therefore, to the execution of the public deed of acquisition of the property in question in the present proceedings, as well as of that contractual position assignment agreement.

Given this circumstance, the Tax Authority understood that there are no supplies of goods and services actually provided to the Claimant, and that, on the other hand, such goods and services are comprised in the improvements to the property acquired by the Claimant from B..., being, therefore, included in the value of €8,400,000.00 paid for those.

It was further added, in the TIR that "this issuance and/or remission of invoices by suppliers and service providers violates the basic rules of invoice issuance, namely with respect to issuance deadlines, identification of the recipient or purchaser and the date on which the goods were placed at the disposal of the purchaser or the services were rendered".

It is thus established that the grounds of the corrections made in question now being analyzed are based, essentially, on two orders of reason, namely:

  • The circumstance that the supplies of goods and services provided occurred in a period prior to the acquisition of the property by the Claimant; and

  • The circumstance that the same are comprised in the improvements to the property acquired by the Claimant for the value of €8,400,000.00.

With all respect due to other understandings, it is considered that none of the circumstances referred to is apt to sustain the legal consequences drawn by the Tax Authority.

Thus, and with respect to the first of the circumstances pointed out, the Tax Authority disregarded that, as results from the facts proved and was already demonstrated in the inspection proceedings, the payment by the Claimant of the invoices in question occurred as a result of a contractual position assignment agreement, whereby the latter assumed E...'s position in the contracts underlying the supplies of goods and services, it being noted that, at no time, the Tax Authority questioned or called into question, in any manner whatsoever, either the normality, necessity or effectiveness of the said contractual position assignment, or the actual supply of goods and services underlying the invoices in question, as well as the respective payment.

Now, within the framework of such contractual position assignment, the Claimant was, unquestionably, obliged to make the payments in question (it being stressed that there is not a mere assumption of debt, but a contractual position assignment, which implies, precisely, that the assignee assumes the legal position of the assignor in the contracts where the assignment of the position of the latter took place), and in an equally evident manner, the suppliers of goods and services were obliged to issue an invoice, pursuant to Article 29/1/b) of the VAT Code, to receive the respective payment.

Now, such invoice, as it could not but be, must be issued in the name of the assignee of the contractual position, and not of the assignor. Given such issuance, the respective issuers should proceed with the necessary corrections with respect to the invoicing of the same goods or services, that they may have issued in favor of the assignor, which did not pay them, it being certain that any incorrection that occurs in such procedure shall be reflected in the legal and tax spheres of the suppliers and the assignor, and never in that of the assignee.

Furthermore, it lacks any sense the consequence of the understanding followed by the Tax Authority, which is that, where there is a contractual position assignment, the payments made by the assignee of debts prior to the assignment shall be invoiced to the assignor ... which did not pay them ...

And it should not be said, as occurs in the TIR, that the rules of invoice issuance are violated, namely with respect to issuance deadlines, identification of the recipient or purchaser and the date on which the goods were placed at the disposal of the purchaser or the services were rendered.

Indeed, it is clear that invoices to be issued to the assignee should have all legally required elements, correctly included, and as purchaser should appear that person (the assignee), since by way of the contractual position assignment, assumed such position, within the framework of the contractual relationships subject to assignment.

On the other hand, and with respect to the remaining mandatory mentions indicated (issuance deadlines, identification of the recipient or purchaser and date on which the goods were placed at the disposal of the purchaser or the services were rendered), the TIR is absolutely silent on the matter, not indicating either the mentions that appear in the invoices in question, or those that should appear, nor what consequences flow therefrom, it being that incorrections in the said data do not imply, from an abstract and necessary point of view, the exclusion of the right to deduction now in question.

From the only factual ground invoked in the TIR and duly proven – the circumstance that the goods and services were supplied at a date prior to the acquisition of the property by the Claimant – one cannot, without more, as occurred, draw the conclusion that the invoicing issued is incorrect.

The conclusion that the value of the expenses paid by the Claimant, now in question, would be included in the improvements to the property acquired by the Claimant for the value of €8,400,000.00 likewise lacks sufficient factual support.

Indeed, what is ascertained is that within the framework of complex contractual relationships, involving B... and E..., the Claimant acquired from the former the land intended for the construction of the ... Shopping and the works executed up to that point, and, in order to take for itself the rights over the property that in the prior contractual relationship existing between B... and E... assisted the latter, negotiated with the same the termination of such contractual relationship, and in the framework of the agreement reached, assumed E...'s contractual position in the contracts relating to the development of the ongoing ... Shopping project.

Now, from these circumstances, it does not result, beyond any reasonable doubt, that the price attributed to improvements in the contract of sale executed by the Claimant with B... includes the goods and services to which Annex C of the contractual position assignment agreement executed, also by the Claimant with E..., relates.

In light of the data ascertained, this may be the case, or it may not be, it being that the most probable, in the case, will be not to be, already because to B... the Claimant acquired the property burdened with that Bank's contract with E..., wherefore, in light of a judgment of normality, the value of the property sold by B... will have been discounted from such burden, which the Claimant removed, moreover, with the cost of the contractual position assignment.

Furthermore, the Respondent in its Response seems not to properly frame the factuality in question, affirming that "From that moment on (of the acquisition), the Claimant assumed E...'s contractual position in the development of the ... Shopping project". Such assertion requires correction, already insofar as it is not from (necessarily by force of) the acquisition of the property that the Claimant assumed E...'s contractual position, but rather, by force of the contractual position assignment agreement executed with the latter. On the other hand, the contractual position that the Claimant assumed was not the one that E... had in the development of the ... Shopping, since such position had B... as its counterparty, while it was the property owner, and was extinguished with the revocation of the financial lease agreement executed between that bank and E..., but the contractual position of the latter with respect to its suppliers, which was a condition, moreover, of the revocation of said lease agreement.

It will not thus be, contrary to that stated by the Respondent, "completely inappropriate the assumption of such responsibility towards E...", since such assumption was a condition of the extinction of E...'s position in the financial lease agreement executed with it by B..., the position of which, by way of the acquisition of the property, would pass to the Claimant.

The statement, formulated in the Response of the Respondent, is likewise not correct, according to which "the supplies covered by such invoices are indeed inputs of an operation, but of the operation of purchase and sale of the land and construction existing thereon, between E... and the Claimant, and not between the latter and the successive purchaser", since the purchase and sale of the land did not have E... as a party, and the Claimant acquired nothing from it, having, as already referred, merely negotiated with the same the extinction of the financial lease agreement between the latter and B..., which had the property acquired by the Claimant as its object, and in which, were it not for the negotiated extinction, the Claimant would succeed the Bank.

Thus, and by all the foregoing, it is judged that the factual ground ascertained and valued in the TIR, on which the corrections now in question are based, is insufficient to sustain the conclusion that we are faced with a duplication of burdens.

Thus, in light of the pointed out errors of fact and law underlying the corrections on which the assessments that are the subject of the present arbitral action are based, the same must be annulled with the arbitral request fully succeeding.

With respect to the request for Preliminary Ruling to the CJEU, formulated by the Claimant, on a subsidiary basis, having examined the matters at hand and taking into consideration the conclusions obtained, this Arbitral Tribunal understands it unnecessary to promote the same, as it has at its disposal all the elements necessary to render the present decision.

Consequently, the request for Preliminary Ruling presented by the Respondent is rejected.

As to the request for indemnification interest formulated by the Claimant, Article 43, no. 1, of the LGT establishes that indemnification interest is due when it is determined that there was an error attributable to the services from which results payment of the tax debt in an amount exceeding that legally due.

In the case, the errors that affect the assessments annulled are attributable to the Tax Authority and Customs, which carried out the assessment act on its own initiative, without the necessary factual and legal support.

The Claimant has, therefore, the right to be reimbursed the amount it paid (pursuant to Articles 100 of the LGT and 24, no. 1, of the RJAT) by force of the annulled acts, and further to be indemnified for the undue payment by means of payment of indemnification interest, by the Respondent, from the date of payment of the amount, until reimbursement, at the legal default rate, pursuant to Articles 43, nos. 1 and 4, and 35, no. 10, of the LGT, Article 559 of the Civil Code and Ordinance No. 291/2003, of 8 April.

C. DECISION

For the reasons stated, it is decided in this Arbitral Tribunal to deem the arbitral request formulated fully successful and, accordingly:

  1. To annul the Value Added Tax assessment act No. ... of 2016, and corresponding liquidation statements and interest assessments, in the total amount of €1,204,150.68, according to the following table:

[table as in original]

  1. To condemn the Respondent to the payment of indemnification interest, in accordance with the terms indicated above;

  2. To condemn the Respondent in the costs of the proceedings, in the amount of €16,524.00.

D. Value of the Proceedings

The value of the proceedings is fixed at €1,204,150.68, pursuant to Article 97-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by force of letters a) and b) of no. 1 of Article 29 of the RJAT and no. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The amount of the arbitration fee is fixed at €16,524.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Tax Authority, since the request was completely successful, pursuant to Articles 12, no. 2, and 22, no. 4, both of the RJAT, and Article 4, no. 4, of the cited Regulation.

Let notice be given.

Lisbon, 14 May 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Sílvia Oliveira)

The Arbitrator Member

(Clotilde Celorico Palma)

[1] The drafting of the present decision is governed by the spelling prior to the Orthographic Agreement of 1990, except for transcriptions made.

[2] Available at www.dgsi.pt, as is the remaining jurisprudence cited without mention of source.

[3] See, in this sense, the Judgment of the STA of 23-09-2015, rendered in case 0134/11, where it can be read that "It is exclusively in light of the reasoning expressed by the Tax Authority at the time of the practice of the additional VAT assessment that the legality of such tax act must be assessed."

Frequently Asked Questions

Automatically Created

Can a real estate investment fund waive the VAT exemption when selling land for construction in Portugal?
Yes, a real estate investment fund can waive the VAT exemption when selling land for construction in Portugal, provided it meets the conditions established in Decreto-Lei 21/2007. The fund must satisfy objective conditions under Article 2(1) for land classified as 'terreno para construção', as well as subjective and formal requirements. In this case, the fund had opted into the normal VAT regime (monthly periodicity) and properly notified the tax authorities, establishing the formal basis for the waiver.
What are the objective conditions under Article 2(1) of Decreto-Lei 21/2007 for waiving VAT exemption on land for construction?
The objective conditions under Article 2(1) of Decreto-Lei 21/2007 for waiving VAT exemption on land for construction are less stringent than those in Article 2(2). When property qualifies as 'land for construction' (terreno para construção) rather than completed buildings, only the basic objective requirements apply. The distinction is critical because it determines whether the stricter conditions of paragraph 2 must be met. In this decision, the tribunal examined whether partially completed construction works (36.7% complete) still qualified as land for construction, which would allow exemption waiver under the more favorable Article 2(1) regime.
Does the reverse charge mechanism apply to construction expenses incurred by a real estate fund for VAT purposes?
Yes, the reverse charge mechanism applies to construction expenses incurred by a real estate fund for VAT purposes in Portugal. In this case, 87% of the invoices related to construction expenses were subject to VAT reverse charge by the fund, meaning the fund was responsible for self-assessing and accounting for the VAT rather than the supplier charging it. This mechanism is particularly relevant for construction services and affects how input VAT deduction rights are calculated. The proper application of reverse charge rules was central to determining the fund's VAT liability and deduction entitlements.
Is VAT on input costs fully deductible when a real estate fund validly waives the VAT exemption on a property transfer?
Yes, when a real estate fund validly waives the VAT exemption on a property transfer, VAT on input costs becomes fully deductible, provided the expenses relate to the taxable transaction. The fund argued that expenses listed in the contractual position assignment agreement were used in developing the undertaking sold, establishing the direct link required for deductibility. The Tax Authority failed to prove or cast doubt on the correspondence between these expenses and the improvements transferred. Full deductibility depends on meeting all conditions for valid exemption waiver and demonstrating that input costs were incurred for taxable output supplies.
How does the assignment of a contractual position (cessão de posição contratual) affect VAT treatment in Portuguese real estate transactions?
The assignment of a contractual position (cessão de posição contratual) significantly affects VAT treatment in Portuguese real estate transactions by potentially transferring both assets and liabilities with VAT implications. In this case, the fund assumed the seller's position in construction contracts and retailer agreements, including obligations to pay suppliers for past services (April 2012-July 2013). Suppliers then issued invoices directly to the fund within 30 days. This structure raised questions about: (1) whether the fund could deduct VAT on services rendered before it became the contracting party, (2) the characterization of payments as acquisition of improvements versus assumption of debt, and (3) the proper VAT treatment of the overall transaction as land transfer with improvements rather than a completed construction sale.