Process: 494/2017-T

Date: June 27, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 494/2017-T) addresses two central VAT controversies involving a Portuguese closed real estate investment fund. First, the Tax Authority issued additional VAT assessments totaling €94,815.33, challenging VAT credits from 2010 that were carried forward to 2012 periodic declarations. The Authority argued €33,740.08 was deducted beyond the legal two-year period and €50,718.13 was improperly deducted under the real allocation method. The claimant fund invoked the four-year statute of limitations (caducidade) under Article 45 LGT and Article 94 CIVA, arguing assessments issued in May 2017 for tax periods in 2010-2012 were time-barred. The fund also contested the substantive correction, asserting the four-year deduction period under Article 98(2) CIVA applied, not the two-year limit for material errors under Article 78(6) CIVA. Second, the Authority assessed €10,357.12 in VAT on rental security deposits (cauções) received in 2012, treating them as advance payments subject to tax under Article 6(8)(a) CIVA. The fund argued these deposits constituted special guarantees under Civil Code Articles 623 et seq., not taxable services, and alternatively claimed exemption under Article 9(27)(b) CIVA for financial guarantee services. The case presents critical questions about limitation periods for VAT assessments, the temporal scope of input tax deduction rights, the VAT treatment of rental deposits in real estate transactions, and whether financial service exemptions apply to non-banking entities providing security arrangements.

Full Decision

ARBITRAL DECISION

1. REPORT

1.1

A... CLOSED REAL ESTATE INVESTMENT FUND, with registered office at Rua ..., no. ..., ...-... Lisbon, with tax identification number ..., legally represented by B... – INVESTMENT FUNDS MANAGEMENT COMPANY, S.A., came, in accordance with the provisions of articles 2, no. 1, paragraph a), 5, no. 3, paragraph a), 6, no. 2, paragraph a), 10, no. 1, paragraph a) and no. 2, all of the Legal Framework for Tax Arbitration (RJAT), to request the constitution of an arbitral tribunal.

1.2

The Respondent in these proceedings is the TAX AND CUSTOMS AUTHORITY.

1.3

The Ethics Council of the Administrative Arbitration Centre (CAAD) appointed the undersigned to form the Collective Arbitral Tribunal, notifying the parties accordingly, and the Tribunal was constituted on 28 November 2017.

1.4

The request for arbitral decision concerns additional Value Added Tax (VAT) assessments no. ..., no. ..., no. ... and no. ..., all of 6.05.2017, relating, respectively, to the periods 1203T, 1206T, 1209T and 1212T, from which results the disregard of the excess tax to be carried forward to the following period, in the total amount of € 94,815.33, in the interest assessment statements no. 2017..., no. 2017..., no. 2017..., no. 2017..., no. 2017... and no. 2017..., relating to the periods from April to September 2014, and corresponding account settlement statements, assessments which are better identified in the Claimant's request and in the documents attached thereto, for which reference is made herein.

Underlying the issuance of those tax acts is the inspection action initiated by the Finance Directorate of Lisbon, concerning VAT for the year 2012, in the course of which it was considered that the tax credit contained in the periodic declaration for the period 201203T is not due, in full, specifically the amount of € 84,458.21, arising from a deduction in the period 201012T, allegedly improper – of which € 33,740.08 relates to alleged deduction beyond the legal two-year period and € 50,718.13 corresponding to tax allegedly non-deductible based on the actual allocation method used by the Claimant – and that in the periods 201206T, 201209T and 201212T no VAT was assessed due on deposits received with reference to lease contracts, in the total amount of € 10,357.12, which the Claimant presents as legal justification for the cumulation of requests.

The claimant contends that those additional assessments are illegal because, in its view, it is faced with the provision of special guarantees for the performance of obligations arising from contracts, in this case, lease contracts, subject to the regime provided for in articles 623 and following of the Civil Code, which do not constitute the provision of services for VAT purposes, given that the amounts delivered have the character of consideration, aimed at remuneration of the provider for the service performed, for which reason they are not subject to VAT.

Furthermore, it alleges, without admitting, that even if the provision of a deposit were understood to constitute a provision of services for VAT purposes, it would always benefit from the tax exemption established in paragraph b) of no. 27 of article 9 of the VAT Code (CIVA) and that although the operations covered by the aforementioned exemption provision are typical financial activities, usually performed by Banks and other financial institutions, it is unequivocal that the exemption applies in function of the services provided and not of the subjects who provide them.

As for the corrections to the VAT deducted, in the amount of € 84,458.21, the Claimant alleges, first, the expiry of the right to assess, under article 94, no. 1, of CIVA and 45, no. 1 and 4 of the General Tax Law (LGT), understanding that the limitation period for the right to assess applicable to VAT shall be, thus, four years, counted from the beginning of the calendar year subsequent to that in which the tax became due and that with respect to the timing of tax liability, the general rule, established in article 63 of the VAT Directive and in article 7 of CIVA, is that the tax becomes due at the moment in which a supply of goods or provision of services is effected, but that article 66 of the VAT Directive and article 8 of CIVA add, however, by way of derogation from said rule, that whenever the supply of goods or provision of services gives rise to the obligation to issue an invoice, the tax becomes due at the moment of its issuance or, if the respective deadline for issuance is not observed, at the moment when it ends or still at the moment of receipt of payment, if earlier than the issuance of the invoice.

Consequently, it alleges, given that the tax in question was deducted in the year 2010, the limitation period began to run on 1.01.2011 and ended on 1.01.2015 or, at the limit, having regard to the fact that we are dealing with corrections to the VAT deducted in the periodic declaration relating to the period 201012T, submitted within the respective legal deadline, the end of which occurred on 15.02.2011, the right to assess expired on 16.02.2015, so that on the date of notification of the assessments in question, in May 2017, the right to assess the tax had long expired.

It further alleges that the correction to the VAT deducted, in the amount of € 33,740.08, would, in any case, be illegal, because, contrary to what is alleged by the tax inspection services, the deduction of the tax in question was effected within the respective legal deadline, which is the general four-year period established in article 98, no. 2, of CIVA, and that, it maintains, it is clear that the deduction, in the period 201012T, of VAT incurred in 2007 does not constitute any error and even less a material or computational error, as configured in no. 6 of article 78 of CIVA, since the invoices issued to the Claimant in 2007 reveal no inaccuracy, having been issued in accordance with the provisions of article 36 of CIVA, that the Claimant also did not incur any error in recording the invoices supporting the inputs whose deduction is questioned, having been correctly recorded in its accounts and that neither did it incur any error in transcribing the amount of VAT incurred to the periodic declarations, so it could, as it did, have exercised its right to deduction within the general four-year period.

Furthermore, it defends that, with respect to the correction to the VAT deducted in the amount of € 33,740.08, this would, in any case, be illegal by violation of Community law, specifically article 168, paragraph a), of the VAT Directive.

It concludes by requesting a declaration of the illegality of the assessments and the corresponding annulment, as well as the reimbursement of amounts paid as a consequence of such illegal assessments, plus compensatory interest.

1.5

The TAX AND CUSTOMS AUTHORITY presented its response on 17 January 2018 and one day earlier had joined the administrative file to the proceedings.

It defended itself by challenging, taking as reproduced the facts and legal reasoning contained in the administrative file, emphasizing, with respect to the correction to the assessed VAT – € 103,357.12, that, as referred to in Chapter II of the RIT, the economic operations designated as "deposits", under the terms of lease contracts, are subject to VAT and are located in national territory (article 6, no. 8 al. a) of CIVA) and that being an advance receipt, there is VAT in arrears, in the amount of € 10,357.12. It considers that the reference made by the Claimant to the exemption provided for in sub-paragraph b) of paragraph 27) of article 9 of CIVA also does not apply here, insofar as what is exempted there is the amount received for the service of providing a guarantee, and not an amount made available for that purpose, which is to be considered, in the terms already referred to, as advance payment.

Regarding the corrections to the deducted VAT in the amount of € 84,458.21, it alleges that the right to deduction cannot be exercised, without more, in the four years subsequent to the existence of such right and that, with respect to the expiry of the right to assess, contrary to what is argued by the Claimant, the counting of the limitation period obeys the provision of no. 3 of article 45 of the LGT, so that the TA was not limited by the four-year limitation period for the right to assess, being able to make corrections to declarations relating to the period in relation to which the tax credit is used, which in this case was accumulated up to the period 201203T.

With respect to the € 33,740.08 of tax incurred in 2007, the Claimant understands that this is a deduction and not a regularization of tax in its favor, but the Respondent considers that, having the tax been recorded as deductible and having that right not been exercised (it should be noted that the deduction is not compulsory), the fact of coming to include such tax in the periodic declaration more than 2 years after the creation of the deduction right constitutes a regularization in favor of the taxpayer, which in the declaration of the period, or of the period following the creation of such right chose not to exercise it, but that, even if it is a deduction and not a regularization, which it does not concede, it would always be said that such deduction should have been made in the period or in the period following the creation of such right.

It concludes by requesting the dismissal of all claims, including that relating to compensatory interest, with the reservation, as regards the latter, that even if the former succeeded, there would never be grounds for compensatory interest due to there being, in its view, no error attributable to the services that would justify it.

1.6

Having been notified of the Tribunal's intention to waive the meeting of the arbitral tribunal provided for in article 18 of the RJAT, the parties did not object.

1.7

On 02 February 2018 the Claimant presented its arguments, reiterating the positions already set out in the request for constitution of Arbitral Tribunal and further alleging that what is invoked in the Respondent's response does not alter the above in any way. Specifically, as to the nature of the deposit, that the statement contained in the TA's response is devoid of sense that what is taxed on the deposit is the amount received as the price of the provision of the guarantee and that, with reference to the expiry of the right to assess, that indeed, some doctrine understands that the special rule contained in no. 4 of article 45 of the LGT, referring to VAT, applies only to corrections made by the tax administration to assessed VAT, applying to corrections to deducted VAT the rule of no. 3 of said legal provision, whose consequence would be to make the four-year limitation period count from the moment of exercise of the right to deduct the tax [moment when the right becomes known to the tax administration], even if such right was created at an earlier moment, which would mean that, applying the aforementioned doctrine to the specific case and having regard to the fact that we are dealing with corrections to the VAT deducted in the periodic declaration relating to the period 201012T, submitted within the respective legal deadline, the end of which occurred on 15.02.2011, the right to assess expired, at the limit, on 16.02.2015, being that one cannot say, as the Respondent does, that the relevant moment for the initial counting of the limitation period is that of the use of the tax credit deducted at an earlier moment, because such interpretation has no place in the letter of no. 3 of article 45 of the LGT, nor does it accord with the ratio legis of the provision, which is to begin the counting of the deadline at the moment of knowledge of the taxpayer's right by the tax administration. This means that, even adopting the aforementioned thesis, one concludes, equally, by the illegality of the contested assessments, because notified after the expiry of the limitation period provided for in article 45 of the LGT.

Finally, as to the alleged inadmissibility of the right to deduct the tax within the four-year period, it reiterates that the correction to the VAT deducted would, in any case, be illegal because, contrary to what is alleged by the tax inspection services, the deduction of the tax in question was effected within the respective legal deadline, which is the general four-year period established in article 98, no. 2, of CIVA, and that the situation in question does not constitute any regularization of tax, for which reason the special two-year period established in no. 6 of article 78 of CIVA does not apply to it.

1.8

The Respondent presented its arguments on 15 February 2018, in which it fully maintains the content of its Response duly presented, reiterating the arguments made therein.

1.9

On 15 February the Tribunal issued an order inviting the parties to send their pleadings in editable format, under the principle of cooperation with the Tribunal of article 130 of the Code of Civil Procedure (CPC) and, on 30 April 2018, to extend the deadline set for the arbitral decision.

1.10

On 30 April 2018 the Claimant came to attach to the proceedings proof of payment of the subsequent court fee.

2. CASE MANAGEMENT

The Tribunal was regularly constituted and is competent.

The parties have legal personality and capacity, are shown to be entitled to sue and defend and are regularly represented.

The proceedings do not suffer from any defects that would invalidate them.

3. FACTUAL MATTERS

With relevance to the merits decision, the Tribunal considers the following facts to be proved:

  • The Claimant is a closed real estate investment fund of private subscription that is fundamentally directed at investments associated with urban rehabilitation and recovery projects intended for commerce, housing and offices, namely through the acquisition of degraded properties and/or with a high degree of obsolescence, susceptible to being reconverted or to altering their use.

  • Until 2012 the Claimant's activity in VAT consisted fundamentally of economic operations relating to two properties it had acquired:

(i) construction and operation, through the activity of lease, of the property located at ..., no. ..., in Lisbon; and

(ii) acquisition of construction services relating to the property located at Rua ..., no. ..., in Lisbon;

  • For VAT purposes, in the year 2012 the Claimant was classified under the normal regime with quarterly periodicity;

  • The Claimant performs, on the one hand, operations subject to VAT and not exempted therefrom and, on the other, operations subject to tax, but exempted therefrom, determining deductible VAT through the method of actual allocation of all goods and services;

  • An action of partial scope external inspection for the year 2012 was carried out by the tax inspection services of the Finance Directorate of Lisbon, under service order no. OI2016..., with a view to analyzing the VAT carry-forward existing in the period 201212T, which had persisted since the period 201012T and amounted to € 503,362.14;

  • As a result of the aforementioned inspection action, corrections were made in VAT, in the total amount of € 94,815.33, corresponding to € 10,357.12 to tax not assessed, allegedly in arrears, and € 84,458.21 to tax deducted improperly, in the view of the tax inspection services;

  • The correction of € 10,357.12 relates to the tax that should have been assessed, but was not, on the value of three deposits provided in lease contracts executed in 2012 (2nd, 3rd and 4th quarters) which, in the view of the TA, constitute taxable operations;

  • The correction to the deducted VAT, in the total amount of € 84,458.21, relates to tax deducted in the period 201012T, in which a tax credit of € 626,400.89 was determined, which was accumulated until the period 201112, having been used from the period 201203T;

  • As a result of the corrections made, the Claimant was notified, in May 2017, of the tax acts in question, from which results the disregard of the tax credit to be carried forward to the following periods, in the total amount of € 94,815.33, which gave rise to tax to be paid in that amount in the periods from April to September 2014, with late-payment interest also being calculated in the total amount of € 13,727.08;

  • Consequently, the Claimant was called to enforce proceedings numbers ...2017..., ...2017..., ...2017..., ...2017... and ...2017... and ...2017..., relating to the aforementioned periods from April to September 2014, instituted for compulsory collection of the total amount of € 94,815.33;

  • On 16 June 2017 the Claimant proceeded to pay the tax within the identified enforce proceedings, and on 11 July 2017, the corresponding late-payment interest;

  • Due to non-conformity with the tax acts in question, on 1.09.2017 the Claimant requested the constitution of the arbitral tribunal.

Unproved Facts

No other facts with relevance to the appreciation of the merits of the case were alleged by the parties that have not been proved.

Reasoning of the Decision on Factual Matters

The conviction about the facts taken as proved was based on the allegations of the Claimant and the Respondent not contradicted by the opposing party, supported by the documentary evidence provided both by the Claimant and by the Respondent, whose authenticity and correspondence to reality were also not questioned.

4. LEGAL MATTERS - QUESTIONS TO BE DECIDED

Two essential issues are raised for consideration by the Tribunal relating to the assessments made as a result of the inspection examination of VAT for the fiscal year 2012, notified in May 2017, and which constitute the object of the arbitral request, and also requesting the condemnation of the TA to reimburse the amounts already paid, plus the payment of compensatory interest due to the verification of error in the assessments impugned.

The first concerns the VAT that the TA says is due for taxable operations in function of the provision of guarantee in a lease contract, which the claimant did not assess, and the second refers to the improper and untimely exercise of the right to deduct tax credits that were deducted in periodic declarations relating to the year 2012.

For the first correction, in the amount of € 10,357.12, the claimant invokes illegality due to violation of law, given that in its view these are operations of providing a deposit and the same are not subject to assessment in VAT because they do not assume the nature of provision of services provided for in article 4 of CIVA. It reinforces its argumentative thesis with the understanding that, even if this were not the case, the operation would always benefit from the exemption established in the rule of paragraph b) of no. 27, of article 9 of CIVA.

As a cause of action in the second correction in the amount of € 84,458.21, the Claimant alleges the expiry of the right to assess the entire amount of the assessments corresponding to that amount made by the TA on the basis of the inspection action, as they occurred beyond the four-year period established in articles 94 no. 1 of CIVA and 45 of the LGT, further charging other specific illegalities to the assessments in the part relating to the amount of € 33,780.08, due to the inadmissibility of the deduction right alleged by the TA being contrary to the provisions of CIVA, and also by violation of Community law and case-law, in particular article 168, paragraph a) of the VAT Directive.

It requests the subsequent annulment of the compensatory interest assessed together with the tax put in question in the present arbitral proceedings.

Let us examine the first part of the arbitral request.

1 - Deposits

From the facts taken as proved it results that the Respondent received in 2012 from three identified clients in the proceedings, by the execution of lease contracts, a certain amount as a deposit, on which it did not effect any assessment of VAT, but the sum of which would amount to € 10,375.12, because, in its view, there is no place for taxability under the rules of articles 1, no. 1 and 2, of CIVA, since the parties agreed to the delivery of the said amounts as a deposit as a guarantee of the performance of obligations arising from the contract, so it was faced with the provision of guarantees of obligations arising from the contracts in question, in the form of a deposit, covered by the regime of article 623 of the Civil Code.

The contractual clauses of both lease contracts to which the proceedings refer with respect to tenants C..., D..., SA and E..., Lda, copies of which were provided by the Claimant, establish in Clause 10 that "To guarantee the performance by the second signatory of the obligations arising therefrom, and without prejudice to its own liability under law and contract, the second party delivers on this date the amount of .... as a deposit, for which the Fund A... grants discharge". Nothing else appears in the contract on this matter.

Regardless of the legal nature of the deposit provided, it is documented that the delivery of certain amounts was made as a guarantee of the performance of obligations arising from the contract and what is not proved is that the provision of guarantee in the case in question has any remunerative character, determined or undetermined, although the contract does not establish what will be the destination of the amount delivered by the tenant at the end of the contract period. Still, therefore, it results expressly from the will of the parties that the guarantee is intended to guarantee the performance of obligations arising from the contract. The Judgment no. 459/07, of 19/09/20017, of the STA, invoked by the Respondent to the contrary, deals with a situation in which the parties did not properly clarify their intention and because of this the delivery of monetary amounts was classified as advance payment of rents, and this is different from the factual situation presented by the Claimant. Here the parties expressed their intention regarding the delivery of those amounts. For the provision of guarantee not to be classified as payment of a remunerated consideration subject to tax, what the law determines is that the parties confer upon the act a general formula of guarantee of obligations. This was already envisaged in Information no. 1152 of SIVA, sanctioned by Dispatch of the Deputy Director-General, of 24/01/91, when it states that "... in the case of amounts as a deposit by the depositor himself, as a guarantee of the performance of obligations, having the mere purpose of preserving the interests of the one for whose benefit the deposit is created and giving him a safe and easy means of indemnifying himself for any damages, provided that the amount delivered as a deposit is returned, namely due to the timely performance of the assumed obligations, the mere creation of that deposit, because mere delivery of amounts to guarantee obligations is not susceptible to being classified as consideration for any taxable operation, being therefore, outside the field of application of VAT...". On the other hand, the same Information states that "... when the amounts delivered for that purpose are used/deducted in contractual payments they shall be treated in accordance with the remunerated operation...". The TA does not prove the verification of these conditions of different destination from the amount delivered as a deposit, going, rather, in the opposite direction, which has no support in law. In this manner, the Tribunal understands that the assessment of € 10,375.12 is defective with the defect of violation of law, and should, consequently, be annulled because the provision of guarantee made by contractual requirement is not susceptible to being classified as consideration for any taxable operation in VAT.

Thus the appreciation of the exemptions invoked as cautious grounds for the admissibility of the claim is prejudiced.

2 - Right to Deduct

The Claimant also seeks the annulment of the VAT assessments totaling the amount of € 84,458.21, relating to 2012, the assessment of which was notified to it in 2017, firstly due to the expiry of the right to assess the entire amount, but even so invokes that, with respect to the amount of € 33,740.08 included in these corrections, illegalities exist arising from

i) violation of law in the admissibility of the right to deduct that amount within the 4-year period in accordance with article 98 no. 2 of the VAT Code, and by

ii) denial of the right to deduct with violation of article 168, paragraph a) of the VAT Directive.

The Tax Authority understands, as can be seen from the Report, that taxpayers do not have full freedom as to the moment in which they can exercise the right to deduct tax given the regime fixed in no. 2 of article 98 of CIVA, so the credit of € 626,400.89 which on the date of the inspection action was detected in the periodic declaration of 201203T, which was also already contained in the declaration of 201112, is improper in its entirety, coming also affirmed by the TA in the Report that this "credit comes from VAT deducted in the periodic declarations of 201012T, 201102, 201108 and 201112, although the value of the VAT deducted is fundamentally from the period 201012T, relates VAT incurred in 2007, 2008 and 2009 that could no longer be deducted".

The controversial question, as observed, results from the fact that contained in the declaration of period 201203T is a VAT credit that was originated by deductions of tax relating to the years 2007, 2008 and 2009, made in the declarations of 2010 and 2011 above stated, and that the TA considers as non-deductible due to expiry of the right to respective deduction on the date on which it was exercised (2010), hence, containing a partially improper credit in the declaration of 2012 referred to and which was only fully consumed up to the periodic declaration 201409T, understood as legitimate to effect in 2017 an assessment for collection of the amount improperly deducted.

The Claimant, facing this factuality, seeks to have the Tribunal declare illegal the assessment notified, because, in its understanding, the assessment was notified beyond the limitation period provided in the LGT.

Therefore, we have for consideration two interrelated realities: what is the period for the exercise of the right to deduct the tax provided for in article 19 of CIVA and what, and from which fact, the period is counted for assessment on the initiative of the TA when the exercise of that right has been exercised beyond the period established in article 22 of CIVA.

Now, it is proved, according to the Report, that the Claimant did not deduct in 2007, 2008 and 2009, all the amounts of tax it incurred, which thus created an accumulated credit right. The Claimant only exercised the right to deduct in the declaration of 201012T with regard to deductions of those years of tax incurred, in the amount of € 84,458.21 (amount here in question), with other amounts of tax incurred and which could be deducted remaining in credit under the general terms. That is, only in the declaration of 201012T, effectively, the Claimant, according to the terms manifest in the Report, exercised the right to deduct, it being certain that article 22, no. 2 of CIVA establishes that "Without prejudice to the provisions of article 78, the deduction must be effected in the declaration of the period or of a subsequent period to that in which the receipt of invoices or proof of payment of VAT that forms part of the import declarations has occurred." Therefore, the exercise of the right to deduct in 2010 of tax incurred in 2007, 2008 and 2009, is untimely, as results from the law, an interpretation that is, moreover, consonant with the pacifically held understanding of dominant case-law. In fact, as can be read, for example, in the Judgment of the STA in case no. 966/10, of 18/05/2011, "thus, the deduction of the tax cannot be effected at any moment, at the choice of the taxpayer, the useful scope of the referred rules being precisely to indicate that the appropriate moments for deduction is to exclude that it can be done at different moments, when this is not specially provided for...". In the case at hand we do not perceive any law pointing to a situation that is not legally provided for, so the deduction of the tax incurred in 2007, 2008 and 2009, taking into account that in the proceedings nothing points to any fact justifying that we are dealing with a situation in which the exercise of the right to deduct was prohibited, should have occurred in accordance with the provision of no. 2 of article 22 of CIVA. In this conformity, the expiry of the right to deduct is verified, so that such tax was improperly deducted in 2010.

But what is at issue in the present action is to know whether, having verified the expiry of the right to deduct, it also being uncontested that the TA must require the improperly deducted tax in accordance with article 87 of CIVA, the right to assessment by the State has some temporal limitation to be exercised and what the respective regime is, having regard to legal certainty reasons that inform the legal determination of limitation of the period of time in which such acts can be performed.

The regime of expiry of four years established in article 45 no. 1 of the LGT, which states that "The right to assess taxes expires if the assessment is not validly notified to the taxpayer within a period of four years, when the law does not fix another", applies to VAT assessments, as provided for in article 94 no. 1 of the Code. Account must also be taken of no. 3 and 4 of the same article: "3-In case any deduction or tax credit has been made, the limitation period is that of the exercise of that right; 4-The limitation period is counted, for periodic taxes, from the end of the year in which the taxable event occurred and, for taxes of a single obligation, from the date on which the taxable event occurred, except for the tax on added value and for income taxes when the taxation is effected by withholding at source on a final basis, in which case that period is counted from the beginning of the calendar year following that in which, respectively, the tax liability or the taxable event was verified."

Therefore it is necessary to determine the moment of the tax liability taking into account the final part of this no. 4. However no. 3 of the same article 45 establishes that, in case any deduction or tax credit has been made, the date of the beginning of the limitation period is that of the exercise of that act.

We have already analyzed that the Claimant did not exercise the right to deduct the amount of € 84,458.21 within the period in which it could exercise it, but exercised it in the declaration of the period 201012T; as stated in the Report "thus, it is verified that in the period 201012T, the taxpayer improperly deducted the VAT incurred under the terms of article 19, article 20 and article 23 of CIVA, in the amount of € 50,718.13 and further deducted € 33,740.08...". In that conformity the TA, having as a basis this declaration that it had in its possession, could have effected the additional assessment in relation to the tax that was deducted when it could no longer be, due to expiry of the respective right.

The TA bases the assessment on the declaration relating to the period 201203T given that in that declaration there still subsisted a credit of € 626,400.89. But, at the same time, it admits that the taxpayer deducted the impugned amounts in the periodic declaration 201012T.

Subsuming the aforementioned rules governing the regime of expiry of the right to assess, and in particular no. 3 of article 45 of the LGT, we find that the beginning of the counting of the period for the determination of the 4 years referred to in cases of deduction (due or improper), is that of the date of the declaration in which it was exercised. In this case, the declaration of 201012T will have been presented within the legal deadline, that is, until the 15th of the second month following – February 2011. The assessment should have been notified by the end of February 2015 or by the end of the year 2015 if the final part of the provision of no. 4 of the same article were considered applicable.

Thus, as the assessments were notified only in May 2017, in violation of what is determined in no. 1 of cited article 45 of the LGT, that is, beyond the 4 years envisaged, on that date, the right to assess was expired.

Consequently, as the tax assessment is illegal, the assessment of compensatory interest inciding on it and jointly required is illegal.

On the other hand, further, having acknowledged the verification of the expiry of the right to assess, the appreciation of the illegalities pointed out to the assessment corresponding to the cited € 33,740.08 is prejudiced, by inutility.

Therefore, the request for declaration of illegality of the assessments due to expiry of the right to assess is admissible.

C. Compensatory Interest

The Claimant, given that it effected payment of the improperly assessed tax, also seeks the condemnation of the TA to payment of compensatory interest, as it understands that the requirements regulated in article 43 of the LGT are verified.

It is uncontested that we are dealing with an annulment due to errors of law, so the requirements are verified for condemnation of the Tax Administration to payment of compensatory interest.

5. DECISION

In these terms, and with the reasoning above, it is decided:

  • To hold admissible the request for declaration of illegality of the additional assessment in the amount of € 10,357.12;

  • To hold admissible, due to expiry of the right to assess, the request for annulment of the assessments notified in 2017, in the amount of € 84,458.21;

  • To annul, in consequence, the assessments of late-payment interest in the amount of € 13,727.08;

  • To condemn the TA to refund the amounts paid, plus compensatory interest, to be calculated under the terms of article 43 of the LGT.

Value of the Case

The value of the case is fixed at € 109,300.75, in accordance with the provisions of articles 3, no. 2 of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), 97-A, no. 1, paragraph a) of the Code of Tax Procedure and Process (CPPT) and 306 of the CPC.

Costs

The amount of costs is fixed at € 3,060.00, under article 22, no. 4 of the RJAT and Table I annexed to the RCPAT, and shall be borne by the Respondent, considering its non-success.

Notify the parties.

Lisbon, 27 June 2018

The Arbitrators,

(José Baeta de Queiroz - President)

(José Ramos Alexandre - Adjunct)

(Eva Dias Costa - Adjunct)

Text elaborated by computer, under the terms of article 131, no. 5 of the Code of Civil Procedure, applicable by referral of article 29, no. 1, paragraph e) of the RJAT.

Frequently Asked Questions

Automatically Created

What is the statute of limitations (caducidade) for the right to issue additional VAT assessments in Portugal?
The statute of limitations (caducidade) for VAT assessment in Portugal is generally four years under Article 45(1) and (4) LGT and Article 94(1) CIVA, counted from the beginning of the calendar year following that in which the tax became due. For VAT, tax liability typically arises when goods are supplied or services rendered (Article 7 CIVA), but under Article 8 CIVA, when an invoice is required, liability arises upon invoice issuance, the expiry of the issuance deadline, or receipt of payment, whichever is earlier. In this case, the claimant argued that VAT deducted in 2010 meant the limitation period began January 1, 2011 and expired January 1, 2015, rendering May 2017 assessments time-barred.
Are rental security deposits (cauções) subject to VAT under Portuguese tax law?
Rental security deposits (cauções) are generally subject to VAT under Portuguese law when treated as advance payments. The Tax Authority argued that deposits received under lease contracts constitute advance receipts taxable under Article 6(8)(a) CIVA, generating VAT liability of €10,357.12. The claimant countered that such deposits are special guarantees under Civil Code Articles 623 et seq., not constituting consideration for services and therefore outside VAT scope. Alternatively, the claimant invoked exemption under Article 9(27)(b) CIVA for financial guarantee services, arguing the exemption applies based on the nature of services provided, not the provider's status. The Authority rejected this, distinguishing between amounts received for providing guarantees (exempt) versus amounts deposited as security (taxable advances).
Can the Portuguese Tax Authority (AT) reclassify VAT credits from prior periods during a tax inspection?
Yes, the Portuguese Tax Authority can reclassify and challenge VAT credits from prior periods during inspections, but subject to strict temporal and substantive limitations. The Authority may correct improperly deducted VAT within the four-year assessment limitation period. However, taxpayers have a four-year period to deduct input VAT under Article 98(2) CIVA, which differs from the two-year correction period for material or computational errors under Article 78(6) CIVA. The claimant successfully argued that its 2010 deductions of 2007 VAT did not constitute errors requiring correction, as invoices were properly issued, recorded, and transcribed. The Authority's attempt to limit deduction to two years conflicted with the general four-year deduction right and potentially violated Article 168(a) of the EU VAT Directive.
What is the legal deadline for deducting input VAT under Portuguese IVA rules?
Portuguese VAT law provides a four-year deadline for deducting input VAT under Article 98(2) CIVA, counted from the moment the right to deduction arises. This general period contrasts with the two-year period in Article 78(6) CIVA, which applies specifically to corrections of material or computational errors in invoice issuance, recording, or transcription to periodic declarations. In this case, the claimant deducted 2007 VAT in period 201012T (December 2010), within the four-year window. The Tax Authority incorrectly characterized this as an error subject to the shorter two-year limit. The tribunal would need to determine whether properly issued and recorded invoices deducted within four years constitute legitimate exercises of deduction rights or impermissible late deductions.
How does the real allocation method (método de afetação real) affect VAT deduction rights for real estate investment funds in Portugal?
The real allocation method (método de afetação real) significantly impacts VAT deduction rights for Portuguese real estate investment funds by requiring precise attribution of input VAT to specific taxable versus exempt activities. Under this method, only VAT directly and exclusively attributable to taxable transactions is fully deductible. The Tax Authority challenged €50,718.13 in deductions, arguing the fund improperly applied the real allocation method to expenses not exclusively related to taxable rental activities. Real estate funds often engage in mixed activities—taxable property rentals and exempt transactions—requiring careful allocation. The method's complexity creates substantial compliance risks and inspection vulnerabilities, as funds must demonstrate clear nexus between input costs and taxable outputs. Errors in allocation methodology can result in significant additional assessments, as demonstrated by the €94,815.33 total correction in this case.