Process: 51/2018-T

Date: October 19, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 51/2018-T) addresses whether commercial property leases that include movable assets qualify for VAT exemption under Article 9(29) of the Portuguese VAT Code. The taxpayer, A... S.A., challenged additional VAT assessments totaling €59,720.88 related to two lease agreements. The first lease (2010-2013) to B... Lda. included fiber optic cables, cameras, pallet racks, equipped offices, bathrooms and cabinets, with the landlord initially renouncing the VAT exemption. The second lease (2015) to G... Lda. included extensive movable assets left by the previous tenant, advertised as 'Completely equipped! Ready to work!' The Tax Authority argued these were 'bare walls' leases exempt from VAT under Article 9(29) CIVA, while the taxpayer contended they were mixed leases of immovable and movable property that should remain subject to VAT. The central legal issue concerns distinguishing between exempt property rentals and taxable mixed-use leases when significant movable corporate assets essential for business operations are included. The case examines when furniture, equipment and business fixtures transform a simple property lease into a composite supply requiring VAT treatment. This decision has significant implications for landlords of commercial properties who include movable assets, particularly regarding proper VAT treatment, exemption renunciation procedures, and the classification criteria CAAD applies to determine whether leases constitute exempt real estate transactions or taxable mixed supplies.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sofia Ricardo Borges and José Joaquim Monteiro Sampaio e Nora, designated by the Ethics Council of the Administrative Arbitration Center to form an Arbitral Tribunal, decide as follows:

I – REPORT

On 6 February 2018, A..., S.A., Tax Identification Number..., with registered office at..., postal box..., ...-..., submitted 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 Framework for 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 acts of additional VAT assessments No. 2017..., No. 2017... and 2017..., as well as the interest assessments No. 2017..., No. 2017... and No. 2017..., in the total amount of €59,720.88, and also of the decision to reject the administrative appeal that confirmed them.

To support its request, the Applicant alleges, in summary, the following:

  • the leases in question have a mixed nature composed of the lease of the property and a set of tangible movable assets essential to the exercise of the activity by the lessees;

  • the two leases under analysis could never be classified as a "bare walls" lease to which the exemption provided for in Article 9, paragraph 29) of the VAT Code applies.

On 7-02-2018, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Applicant did not proceed to appoint an arbitrator, therefore, pursuant to paragraph a) of Article 6, paragraph 2 and paragraph a) of Article 11, paragraph 1 of the RJAT, the President of the Ethics Council of CAAD designated the signatories as arbitrators of the collective arbitral tribunal, who communicated their acceptance of the appointment within the applicable period.

On 27-03-2018, the parties were notified of these designations and expressed no wish to challenge any of them.

In accordance with paragraph c) of Article 11, paragraph 1 of the RJAT, the collective Arbitral Tribunal was constituted on 16-04-2018.

On 22-05-2018, the Respondent, duly notified for this purpose, submitted its response defending itself solely by way of challenge.

On 16-07-2018, the meeting referred to in Article 18 of the RJAT was held, where witnesses presented by the Applicant were examined.

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

Pursuant to and for the purposes of Article 18/2 of the RJAT, it was indicated that the final decision would be notified 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, paragraph 1, subparagraph a), 5 and 6, paragraph 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 Regulatory Order No. 112-A/2011, of 22 March.

The proceedings are not subject to any nullity.

Thus, there is no obstacle to consideration of the case.

Having examined everything, it is necessary to issue

II. DECISION

A. MATERIAL FACTS

A.1. Facts Established as Proven

On 15-10-2010, the Applicant, by lease agreement, granted temporary use of the urban property located at..., ..., ..., ...-... Olhão, to the company B..., Lda.

The lease agreement was concluded for a period of five years, automatically renewable, with the monthly rent amounting to €13,500.00 (plus corresponding VAT).

Pursuant to Clause 7, paragraph 1 of the aforementioned contract "the lessee undertakes to maintain the leased premises, namely the walls, ceilings, floors, doors, locks, windows, plumbing, as well as all belongings and equipment in the state of conservation and cleanliness existing on the date of conclusion of the contract".

The belongings in question included fiber optic cables, cameras, pallets racks, equipped offices, equipped bathrooms and cabinets.

The Applicant renounced the VAT exemption with respect to this lease operation, pursuant to the provisions of Article 12, paragraph 4 of the VAT Code and Decree-Law No. 21/2007, of 29 January, and said renunciation took effect on 13-10-2010.

B..., Lda. decided to terminate the lease agreement before the 5-year period for which it had been concluded had elapsed, having paid the last rent in March 2013.

From the moment the Applicant was informed by B..., Lda. that it would terminate the lease agreement, it took steps to find a new lessee for that space.

The Applicant placed various advertisements in several industry publications, namely in C..., in D..., in E..., in Journal F..., among others, having paid all advertisements to the publishing entities.

The Applicant sent photographs of the property in question to real estate mediation agencies and potential interested parties.

B..., Lda. had acquired a set of goods that were placed in the property and which were left there after the cessation of the lease agreement, having prepared a list of equipment, dated 10-04-2013, which includes:

  • pallets 9 meters in height;
  • shelves 4 meters in height;
  • thermal accumulators for water heating;
  • technical area;
  • office furniture;
  • 2 kitchens;
  • complete bathroom equipment.

In the photographs sent to real estate mediation agencies and potential interested parties, there were the belongings and equipment that were part of the property, namely:

  • Storage and logistics shelves;
  • Desks;
  • Chairs;
  • Waste bins;
  • Computers;
  • Telephones;
  • Filing cabinets;
  • Sofas;
  • Various office materials;
  • Lockers.

In the advertisements the following mention was made: "Completely equipped! Ready to work!"

The Applicant had various interested parties in leasing and even purchasing the property in question.

On 20-04-2015, the Applicant granted temporary use of the aforementioned property to the company G..., Lda., covering only floor 0, however, since the remaining space of the property was not occupied, it was also used by the lessee.

The contract termed "Lease Agreement for Non-Residential Purposes" was concluded for a period of three years, automatically renewable, with the monthly rent value amounting to €2,000.00, with no mention of VAT made in the contract.

Clause 7, paragraph 1 of the contract states that "The Lessee undertakes to maintain the leased premises, namely the walls, ceilings, floors, doors, locks, windows, plumbing, as well as all belongings and equipment, in the state of conservation and cleanliness existing on the date of conclusion of this contract".

According to the contract, G... was authorized/obliged to use the property for the following purposes: ship design, construction and repair, construction of fiberglass objects and similar materials, purchase, sale collection and storage of vessels and navigation accessories.

With respect to this contract, the Applicant did not submit a request for renunciation of the exemption.

The Applicant assessed VAT on the rents invoiced to G....

In the period that elapsed between the cessation of the lease agreement concluded with B..., Lda. and the conclusion of the contract with G..., Lda., the property was used for the Applicant's activity and was only not leased due to the lack of interested parties.

In the lease to G..., Lda., the equipment and materials that were found in the leased property were the original ones, increased by the equipment left by the previous lessee (B..., Lda).

On 12 August 2016, in the periodic statement for the period 1606T, the Applicant submitted a refund request in the amount of €144,956.68.

The VAT deducted by the Applicant corresponds to VAT incurred on work carried out on the property, and not on its acquisition.

Following the aforementioned refund request, a tax inspection was determined by Decisions No. DI2016..., DI2016... and DI2016... and Service Orders No. OI2016..., OI2016... and OI2016..., of limited scope (VAT), and relating to the tax periods between 2014 and 2015 and the second quarter of 2016.

The formation of the refund amount requested occurred in the periods of 2008, 2009 and 2010, with the carryover repercussing in subsequent periods.

On 02-12-2016, the Applicant was notified of the Draft Inspection Report and given, if it so wished, a period of 15 days to exercise the right to a hearing.

The Applicant did not exercise the right to a hearing.

The duly authorized representative of the Applicant – H... – was notified on 05-01-2017 of the Final Tax Inspection Report.

The Tax Inspection Report contains the following:

The refund request was entirely rejected.

The Applicant was notified of the following assessments:

On 09-06-2017, the Applicant submitted an administrative appeal against the aforementioned assessments.

The Applicant was notified by letter No..., of 16-10-2017, of the draft decision rejecting the administrative appeal and, if it so wished, to exercise the right to a hearing.

The Applicant exercised its prior hearing right.

On 09-11-2017, the Applicant was notified of the decision rejecting the administrative appeal by letter No....

On 13 and 14 March 2017, the Applicant paid all additional assessments in the amount of €59,720.88.

On 06-02-2018 the Applicant submitted the Request that gave rise to this proceeding.

A.2. Facts Established as Not Proven

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

A.3. Reasoning for the Proven and Unproven Material Facts

With respect to the material facts, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it is incumbent upon it to select the facts that matter for the decision and to discriminate the proven from the unproven facts (see Article 123, paragraph 2 of the Code of Tax Procedure and Process and Article 607, paragraph 3 of the Code of Civil Procedure, applicable by virtue of Article 29, paragraph 1, subparagraphs a) and e), of the RJAT).

Thus, the facts relevant to the adjudication of the case are chosen and delimited according to their legal relevance, which is established with regard to the various plausible solutions to the legal question(s) (see former Article 511, paragraph 1 of the Code of Civil Procedure, corresponding to current Article 596, applicable by virtue of Article 29, paragraph 1, subparagraph e), of the RJAT).

Thus, taking into account the positions taken by the parties, in light of Article 110/7 of the Code of Tax Procedure and Process, the documentary and testimonial evidence, and the case files attached to the record, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Judgment of the Court of Administrative Appeals-South of 26-06-2014, issued in case 07148/13, "the evidential value of the tax inspection report (...) may have evidentiary force if the statements contained therein are not contested".

No weight was given as proven or unproven to allegations made by the parties and presented as facts, consisting of strictly conclusive assertions, incapable of proof, whose truthfulness must be assessed in relation to the specific material facts established above.

B. ON THE LAW

The Applicant begins by asserting a violation of law, due to error in the factual premises, in that the provisions of Article 9/29) of the VAT Code have been violated, which provides that:

"The following are exempt from tax:

  1. The lease of immovable property. This exemption does not cover:

a) The provision of accommodation services, carried out within the scope of hotel activity or other activities with similar functions, including camping grounds;

b) The lease of areas for the collection or collective parking of vehicles; c) The lease of machinery and other fixed installation equipment, as well as any other lease of immovable property resulting in the onerous transfer of the operation of a commercial or industrial establishment;

d) The lease of safes;

e) The lease of spaces for exhibitions or advertising;"

According to the Applicant, the contracts concluded between itself and B..., Lda., on the one hand, and G..., Lda., on the other, do not fall within the scope of mere property leases, but possess a mixed nature composed of the lease of a property and a set of tangible movable assets essential to the exercise of the activity by the lessees.

This argument is referred to by the Applicant with particular emphasis regarding the second of the contracts (G..., Lda.), since in the present proceedings the assessment in question concerns only VAT relating to periods occurring during the term of this contract. Indeed, the reference to the first does not fail to contain a contradiction in its terms, it should be noted, since within the scope of the first the Applicant requested renunciation of the exemption (exemption provided for in paragraph 29) of Article 9 of the VAT Code). In other words, the Applicant did not consider it then to be covered by the exclusion from the exemption provided for in subparagraph c) of the same 29).

The Applicant considers that the lease agreement concluded with G..., Lda. is subject to VAT not because a renunciation of the tax exemption has occurred, which would not be possible, but because, materially, there is a composite service provision, which translates into the provision of a furnished and adapted space for the exercise of an activity. Which would thus fall within the scope of the aforementioned subparagraph c) of paragraph 29 of Article 9 of the VAT Code.

On the matter in question, the Tax Authority has taken doctrinal positions on several occasions, in published binding information.

Thus, in the doctrinal note emerging from case No. 4369, sanctioned by decision of the Deputy General Director of VAT of 04-02-2013, it can be read:

"13. The Tax Authority has used a precise criterion that allows it to distinguish between situations of pure and simple property lease - mere lease - from other situations in which that lease, in the conditions in which it is used, provides the lessee with a certain added value.

  1. Thus, the lease of immovable property for residential purposes - commercial, industrial or agricultural - is only exempt from VAT when effected on a "bare walls" basis, in the case of urban properties or urban parts in mixed properties, or "land only" in the case of rural properties.

  2. The concept of "bare walls" is not limited to the fact that the lease is accompanied, or not, by equipment goods, furniture or utensils, being intrinsically related to the productive aptitude of the property, that is, the preparation for the exercise of a business activity."

Also in the doctrinal note emerging from case No. 1587, sanctioned by decision of the Deputy General Director of Taxes of 23-03-2013, cited by the Applicant, it can be read:

"The exemption in the lease of immovable property, as it is designed in paragraph 29 of Article 9 of the VAT Code, operates only in situations where there is mere provision of the property or part thereof by the lessor, conferring on the lessee the exclusive right to occupy it as if it belonged to him/her, for an agreed period of time and in consideration of an equally agreed remuneration. This notion, which can be considered modeled on or in line with the jurisprudence of the Court of Justice of the European Union, does not prevent the use of the concept of urban lease established in national legislation, which does not affect the jurisprudence of the Court of Justice of the European Union, or even the existence of a lease agreement, as an element to assess the conditions for exemption, namely, the residential lease agreement.

On the other hand, the very notion requires the establishment of a boundary between the mere provision of the property under the aforementioned conditions and any eventual provision of it accompanied by other elements, constitutive of the contract or contracted as a complement, under penalty of, under the pretext of creating favorable conditions for the realization of the business, distorting the characterization of the operation, assimilating to this leases of a commercial or industrial nature that do not fit within the objective of the exemption. Indeed, the matter gains special relevance when at issue is not the lease for residential purposes, but for industrial, commercial or service purposes.

The establishment of the criterion of bare walls (which encompasses in itself various notions, such as the absence of services associated with the provision of the property, with a view to a specific purpose, or the equipping thereof with furniture for a determined use) as a way of materializing that boundary is known to the applicants and was even mentioned in their arguments, without them taking care to demonstrate its inapplicability or non-conformity with European law."

More recently, in the doctrinal note emerging from case No. 1587, sanctioned by decision of the Director of VAT Services of 22-12-2017, cited by the Applicant, it was written:

"24. For its part, the internal legal order defines the concept of property lease, as provided for in Article 1022 of the Civil Code (CC), as amended by Law No. 6/2006, of 27 February, which approves the New Urban Lease Regime (NRAU): "A lease is a contract by which one party undertakes to provide to the other the temporary enjoyment of a thing, by way of remuneration."

  1. These characteristics, present in the immovable property lease contract, thus constitute its essential elements and, not only, must be present in a property lease operation but, furthermore, constitute its predominant characteristics. The lease of the property, in the sense of a passive placement of the property at the disposal, must be the preponderant provision of this economic operation.

  2. The Community Jurisprudence considers that any provision that goes beyond this scope should not benefit from the exemption. Under the terms of Article 135, No. 1, subparagraph l) and No. 2 of the VAT Directive, the following operations do not benefit from the exemption provided for in subparagraph l) of No. 1: "a) Accommodation operations, as defined in the legislation of the Member States, carried out within the hotel sector or sectors with similar functions, including the leases of holiday fields or camping grounds; b) The lease of areas intended for the parking of vehicles; c) The lease of equipment and machinery of fixed installation; d) The lease of safes".

  3. The exceptions to the exemption correspond to economic operations that encompass not only situations of property leases properly speaking, but also other types of characteristics deriving from other contracts and which, for that reason, lose the quality of mere placement at the disposal of locations or surfaces of properties in consideration of a remuneration linked to the passage of time.

  4. In these operations we are faced with contracts where the importance of other types of services is emphasized in relation to the simple lease of space, namely, premises or areas duly prepared and equipped to continue the exercise of commercial or industrial activities.

  5. Thus, all situations must be excluded from the exemption that, although sharing some elements present in a lease contract, are characterized essentially by integrating other service provisions connected to the enjoyment of the property and that imply active exploitation of immovable property, beyond its mere temporary enjoyment.

  6. The Tax and Customs Authority (AT) has used a precise criterion that allows it to distinguish between situations of mere leasing of property from other situations in which that lease, in the conditions in which it is conducted, provides the lessee with a certain added value.

  7. Thus, the lease of immovable property is only exempt from VAT when effected on a "bare walls" basis, in the case of urban properties or urban parts in mixed properties, or "land only" in the case of rural properties.

  8. However, the concept of "bare walls" is not subsumed only in the above, and must be interpreted in light of the idea of differentiation between the civil law concept of property lease (under Article 1022 of the CC), the contract by which one party undertakes to provide to the other the temporary enjoyment of a thing, by way of remuneration and the concept of temporary transfer of establishment or transfer of establishment or transfer of exploitation of establishment (under Article 1109 of the CC, as amended by Law No. 6/2006, of 27 February, NRAU), temporary and onerous transfer of enjoyment of the property or part thereof, together with the exploitation of a commercial or industrial establishment installed therein.

  9. It is thus verified that the concept of "bare walls" is not limited to the fact that the lease is accompanied or not by certain equipment goods, furniture or utensils. It is also intrinsically related to the productive aptitude of the property, that is, its preparation for the exercise of a business activity.

  10. This concept allows us, from the outset, to limit the exemption for the lease of immovable property to situations where the provision of enjoyment of the property is not accompanied by any equipment goods installed in the property or is accompanied by the provision of furniture and/or other utensils.

  11. Where it is a question of the lease of spaces duly prepared for the exercise of an activity, equipped with a minimum of conditions that go beyond the concept, necessarily restricted, of "bare walls", or if it is accompanied by other service provisions, the exemption no longer applies, and it becomes subject to value added tax.

  12. The Court of Justice of the European Union has held that the operation of leasing immovable property, in order to benefit from the exemption, must have the essential characteristics of leasing, which include the right to occupy a specific property as if it were one's own property and to exclude therefrom or admit others thereto, as well as the taking into account of the duration of that occupation in the agreement of the parties, in particular as a criterion for fixing the price; these characteristics must, furthermore, be predominant in the contract (...) this means excluding from the exemption contracts which, although they share some elements of the lease contract, are characterized essentially by a service provision connected to the enjoyment of the property, hence the need to distinguish whether the operation should be considered as occupation of an immovable property or as a service rendered, in relation to which the immovable property constitutes an incidental, though essential, condition.

  13. Some jurisprudence of the Court of Justice of the European Union defines the concept of property lease for purposes of VAT exemption as follows: economic operation in which the owner of a property transfers to the lessee (provision of services) - judgment of 9 October 2001, case C-409/98; the right to occupy the property and exclude other persons from it - judgment of 12 June 2003, case C-275/01; in return for payment of a rent (consideration) - judgment of 8 May 2003, case C-269/00; for an agreed term - judgment of 18 November 2004, case C-284/03.

  14. However, to determine the nature of a taxable operation, all the circumstances in which the operation in question is carried out must be taken into account to ascertain its characteristic elements.

  15. The Court of Justice of the European Union, in the aforementioned judgment of 09 October 2001, case C-409/98, regarding the scope of the exemption provided for in Article 13 B of the Sixth Directive (current Article 135 of the VAT Directive), also observes, "(...) The lease of immovable property within the meaning of Article 13o B, subparagraph b), of the Sixth Directive consists, in essence, in the fact that the owner of a property transfers to the lessee, in return for a rent and for an agreed term, the right to occupy his/her property and exclude other persons from it (...)". "It is, therefore, the owner who carries out the provision of services subject to tax and the lessee who pays, in return for it, a consideration (...)".

  16. In the same case, from the conclusions of the Advocate General: "Indeed, the opinion that the characteristics of the lease must be predominant in a given contract, in order for it to benefit from the corresponding exemption, seems to us very important for the purpose at hand. In fact, this means excluding from the exemption contracts which, although they share some elements of the lease contract, are characterized essentially by a service provision connected to the enjoyment of the property (...)".

  17. In the same document it is further stated "(...) to assess what are the predominant elements in a given contract, we cannot limit ourselves to an abstract or purely formal examination of it. It is necessary to identify the economic function of the contract, that is, the concrete function that it is objectively called upon to perform to satisfy the interests of the parties. In other words, it is necessary to identify what, in the legal tradition of the various European countries, is defined as the cause of the legal transaction, which is precisely understood as its economic function, intended to compose the interests at stake. In the case of the lease agreement, as stated, that function consists in the transfer, from one subject to another, for a given period of time, of the exclusive enjoyment of a property (...) Even if we admit that these are, in fact, distinct contracts, we would, however, also in this case, be in the presence of two legal transactions closely connected, since they are characterized by the same economic function. That is, once again, to establish whether the operation of which we speak can be considered exempt from VAT, it is necessary to take into account the function that it is called upon to perform as a whole".

  18. To know whether this definition fits a specific agreement, all the characteristic elements of the operation and the circumstances in which it is carried out must be taken into account, with its objective content being decisive, regardless of the qualification that the parties have given to it."

Already in the current year, in the doctrinal note emerging from case No. 12837, sanctioned by decision of the Director of VAT Services of 21-02-2018, it is stated that:

"17. In accordance with subparagraph a) of paragraph 1 of Article 1, combined with paragraph 1 of Article 4, both of the VAT Code, the lease of immovable property is considered a provision of services subject to VAT.

  1. However, Article 9, subparagraph 29) of the VAT Code establishes that the leases of immovable property are exempt from VAT. Not being, however, covered by this exemption the provision of accommodation services, carried out within the scope of hotel activity or other activities with similar functions, including camping grounds.

  2. This exemption results from the transposition into the national legal order of the provisions of subparagraph I) of No. 1 of Article 135 of Directive 2006/112/CE of the Council, of 28 November, relating to the common system of value added tax, which establishes that:

"1. The Member States exempt the following operations: (...)

l) The Lease of Immovable Property".

  1. In fact, the scope of the expression "lease of immovable property" contained in said legal provision was not defined in the Sixth Directive nor in Directive 2006/112/CE of the Council, of 28 November 2006.

  2. In the national legal order, the concept of property lease is contained in Article 1022 of the Civil Code. Under this rule, "(a) lease is a contract by which one party undertakes to provide to the other the temporary enjoyment of a thing, by way of remuneration."

  3. Considering this definition, it is concluded that the predominant characteristic in the lease of properties and the preponderant element of this economic operation is that of its passive placement at the disposal of the lessee by the receipt of a consideration.

  4. Community Jurisprudence considers that any and all provisions that go beyond this scope should not benefit from the exemption. Under the terms of Article 13 B, subparagraph b) of the Sixth Directive, which currently corresponds to Article 135, No. 1 subparagraph l) and No. 2 of Directive 2006/112/CE, the following operations do not benefit from the exemption provided for in subparagraph l) of No. 1:

a) Accommodation operations, as defined in the legislation of the Member States, carried out within the hotel sector or sectors with similar functions, including the leases of holiday fields or camping grounds;

b) The lease of areas intended for the parking of vehicles; c) The lease of equipment and fixed installation machinery; d) The lease of safes." 24. These exceptions to the exemption correspond to economic operations that encompass not only situations of property leases properly speaking, but also other types of characteristics deriving from other contracts and which, for that reason, lose the quality of mere placement at the disposal of locations or surfaces of properties in consideration of a remuneration linked to the passage of time.

  1. In these operations we are faced with contracts where the importance of other types of services is emphasized in relation to the simple lease of space, namely, premises or areas duly prepared and equipped to continue the exercise of a commercial and/or industrial activity.

  2. Thus, all situations must be excluded from the exemption that, despite sharing some of the preponderant elements of the lease contract, as defined throughout this information, are characterized essentially by integrating other service provisions connected to the enjoyment of the property and that imply active exploitation of immovable property, beyond the mere temporary enjoyment of the asset.

  3. The tax administration has used a precise criterion that allows it to distinguish between situations of pure and simple property lease - mere lease - from other situations in which that lease, in the conditions in which it is carried out, provides the lessee with a certain added value.

  4. Thus, the lease of immovable property for residential or non-residential purposes - commercial, industrial or agricultural - is only exempt from VAT when carried out without other additional services, in the case of urban properties or urban parts in mixed properties, or "land only" in the case of rural properties. In other words, the distinguishing criterion for considering a mere lease is the fact that it is accompanied or not by certain equipment goods, furniture/utensils or services. It is intrinsically related to the productive aptitude of the property, or rather, the preparation for the exercise of a business activity.

  5. The Court of Justice of the European Union (CJEU) understands, in summary, that the operation of leasing immovable property, in order to benefit from the exemption, must have the essential characteristics of leasing, which include the right to occupy a specific property as if it were one's own property and to exclude therefrom or admit others thereto, as well as the taking into account of the duration of that occupation in the agreement of the parties, in particular as a criterion for fixing the price; these characteristics must, furthermore, be predominant in the contract. This means excluding from the exemption contracts which, although they share some elements of the lease contract, are characterized essentially by a service provision connected to the enjoyment of the property, hence the need to distinguish whether the operation should be considered as occupation of an immovable property or as a service rendered, in relation to which the immovable property constitutes an incidental, though essential, condition.

  6. In several judgments, the CJEU defined the concept of property lease for purposes of VAT exemption as follows:

i) it is the economic operation in which the owner of a property transfers to the lessee (provision of services) - judgment C-409/98 of 9 October 2001;

ii) the right to occupy the property and exclude other persons from it - judgment C-275/01 of 12 June 2003;

iii) in return for payment of a rent (consideration) - judgment C-269/00 of 8 May 2003;

iv) for an agreed term - judgment C-284/03 of 18 November 2004.

  1. Accordingly, to determine the nature of a taxable operation, all the circumstances in which the operation in question is carried out must be taken into account to ascertain its characteristic elements and not solely to consider the name of the contract."

It being certain that, as the Respondent notes in its Response, "a binding information relates to a concrete factuality and only binds the Respondent in that same concrete case, and even so, the Respondent is not prevented from altering its understanding (...) Therefore, it is not the existence of binding information issued to a third party, which is not the Applicant, that determines the applicable law to the factuality at issue.", it is no less certain that binding information does not cease to be an institutionally expressed understanding by the Tax Authority, which is bound by principles of objectivity and equality to treat taxpayers in equal situations in the same way, in addition to having a reasoning that must be assessed and its possible inaccuracy demonstrated in cases where the Tax Authority itself intends to depart from the content of the doctrinal opinion published by it.

Also national jurisprudence has echoed an understanding identical to that conveyed above, and it can be read in the Judgment of the Court of Administrative Appeals-South of 07-05-2013, issued in case 06375/13, also cited by the Applicant, that "The exemption from payment of VAT relating to the lease of immovable property in the sense given to it by Article 1022 of the CC (...) in the case of urban properties, the exemption only applies if it is a bare walls lease, whether for residential, commercial, industrial or agricultural purposes, not encompassing situations in which, in addition to the placing at the disposal of the space, there are also integrated service provisions connected to the enjoyment of the property that imply active exploitation thereof".

Further clarified by that Venerable Court in the same decision that "the characteristics of the lease contract that constitute its essential elements – obligation assumed by one party to provide to the other the temporary enjoyment of a thing, by way of remuneration - must not only be present in the economic operation considered as an indivisible whole, but be the preponderant provision of that same operation".

Already in the Judgment of the same Court of 23-04-2015, issued in case 01324/06, it was clarified that "in cases of mixed lease contracts and other service provisions, only a part is subject to tax, with the rents being exempt, as the Tax Authority already understood following the jurisprudence of the CJEU – Judgment C-572/07, of 11-06-2009, RLRE Tellmer Property".

In this latter judgment of the CJEU, cited by the Court of Administrative Appeals-South, it had been written that:

"15 In this respect, it should be recalled, first of all, that, according to settled jurisprudence, the exemptions provided for in Article 13 of the Sixth Directive constitute autonomous concepts of Community law and must therefore be the subject of a Community definition (see judgment of 25 October 2007, CO.GE.P., C‑174/06, Coll., p. I‑9359, No. 26 and the jurisprudence cited therein).

16 The terms used to designate the exemptions referred to in Article 13 of the Sixth Directive are to be interpreted strictly, since those exemptions constitute derogations from the general principle that VAT is charged on all services provided for consideration by a taxable person (see, in particular, judgments of 18 January 2001, Stockholm Lindöpark, C‑150/99, Coll., p. I‑493, No. 25, and of 8 December 2005, Jyske Finans, C‑280/04, Coll., p. I‑10683, No. 21 and the jurisprudence cited therein).

17 Second, it follows from Article 2 of the Sixth Directive that each operation should normally be considered as distinct and independent (see judgment of 21 February 2008, Part Service, C‑425/06, Coll., p. I‑897, No. 50 and the jurisprudence cited therein).

18 On the other hand, in certain circumstances, several formally distinct operations, capable of being carried out separately and thus giving rise, in each case, to taxation or exemption, must be considered as a single operation when they are not independent. This is the case, for example, when it is found that one or more operations constitute a principal operation and that the other operation or operations constitute one or more ancillary operations that share the tax treatment of the principal operation. In particular, an operation must be considered ancillary in relation to a principal operation when it does not constitute an end in itself for the clientele, but a means of benefiting, in the best conditions, from the principal service of the service provider (judgment Part Service, already referred to, No. 51 and the jurisprudence cited therein).

19 Furthermore, it may also be considered that there is a single operation when two or several elements or acts supplied by the taxable person are so closely linked that they objectively form a single indivisible economic operation whose decomposition would be of an artificial nature (judgment Part Service, already referred to, No. 53).

20 Immediately, it should be recalled that the lease of immovable property, within the meaning of Article 13, point B, subparagraph b), of the Sixth Directive, consists, substantially, in the fact that a lessor confers on a lessee, for an agreed period and in return for remuneration, the right to occupy a property as if he/she were its owner, excluding any other person from the benefit of that right (see, in this sense, judgments of 4 October 2001, "Goed Wonen", C‑326/99, Coll., p. I‑6831, No. 55; of 9 October 2001, Mirror Group, C‑409/98, Coll., p. I‑7175, No. 31; of 8 May 2003, Seeling, C‑269/00, Coll., p. I‑4101, No. 49, and of 18 November 2004, Temco Europe, C‑284/03, Coll., p. I‑11237, No. 19).

21 Consequently, the provision of cleaning services for common parts of a property, although associated with the use of the leased property, does not necessarily integrate the concept of lease within the meaning of Article 13, point B, subparagraph b), of the Sixth Directive.

22 Furthermore, it is true that the service of cleaning the common parts of a property may be provided according to different modalities, that is, for example, by a third party who invoices the cost of that service directly to the lessees or by the lessor who uses, for that purpose, his/her own staff or resorts to a cleaning company.

23 It should be emphasized that, in the case at hand, RLRE Tellmer Property invoices the cleaning services to the lessees separately from the rent.

24 Thus, since the lease of apartments and the cleaning of the common parts of a property may, in circumstances such as those of the main proceedings, be dissociated from each other, it cannot be considered that that lease and the aforementioned cleaning constitute a single operation within the meaning of the jurisprudence of the Court of Justice."

The Supreme Administrative Court has also ruled on the matter, having stated, in its Judgment of 29-06-2011, issued in case 0497/11, that: "Possible service provisions, associated with the contracts in question, do not call into question the nature of lease inherent to those contracts, when they embody mere accessory clauses, not typified in the civil law discipline of leasing, which the parties decided to establish as a supplement to the legal transaction concluded, because they were suited to the contractual interests at stake, without economic relevance as operations carried out for consideration, for which the co-contractors would pay a certain consideration and which, by themselves, would be taxable.".

The doctrinal and jurisprudential corpus set out above makes it possible to define with certainty the decision-making criteria to follow.

Indeed, the exemption provided for in Article 9/29) of the VAT Code is an imposition of Community law, which must be implemented, with respect to the operations covered, of property leasing.

By these, must first be understood those corresponding to the lease of "bare walls" properties, there being no doubt whatsoever on this point.

This does not mean, and this does not result from any doctrinal or jurisprudential element collected, that every and any property lease that cannot be reduced to such a "bare walls" lease is automatically excluded from the scope of the exemption in question.

Indeed, as stated in the aforementioned Supreme Administrative Court Judgment: "A different understanding could defraud the interests protected by the exemption attributed thereto and would not be consistent with the fact that the same provision excepted, in its subparagraphs a) to e), the lease that brings coupled other service provisions that it considered, given the economic preponderance of those other services in relation to the lease, to be taxable.".

Indeed, such an understanding would collide head-on with Community law, insofar as it could lead to situations of exclusion from the exemption, proscribed by that law.

Following on from what was set out above, situations in which the provision of the property, in terms substantially corresponding to the figure of leasing, is accompanied by the provision of services and/or the supply of additional goods, should be analyzed in order to ascertain:

  • Whether the services and/or additional supplies are or are not severable; and

  • In case of a negative answer, where such severance is not possible, what is the economically preponderant element.

Only in the event that the services and/or supplies that go beyond mere "bare walls" lease constitute the economically preponderant element of the contract would it have to be concluded that there is an exclusion from the exemption provided for in Article 9/29) of the VAT Code, which is at issue.

Now, in the case at hand, as will be seen below, it will not be possible to reach such a conclusion, for the reasons to be set out below.

Thus, and first of all, upon examination of the contract concluded between the Applicant and G..., it is not discernible that it deviates from the typical character of the immovable property lease contract.

Indeed, in terms of the contractual wording, no reference is made to provisions of goods and/or supply of goods (or services) in addition to those that are the typical provisions in a property lease contract for non-residential purposes, so it must be considered that the provision of rent, contractually provided as being the responsibility of the lessee, is the corresponding value for the mere provision of the enjoyment of the location.

It is not overlooked that, as resulted from the evidence produced, and is reflected in the factual material, in the leased property several items of furniture and installations were provided, which will be, to a greater or lesser extent, used by the lessee.

However, and continuing with the Supreme Administrative Court Judgment issued in case 0497/11, any possible service provisions or supplies of goods that may exist, "do not have economic relevance as operations carried out for consideration, for which the co-contractors would pay a certain consideration and which, by themselves, would be taxable.".

Therefore, from the outset, the claim of the Applicant that the contract concluded by it with G... constitutes a taxable service provision (not covered, therefore, by the exemption of Article 9/29 because classifiable within the "exception" to the exemption contained in subparagraph c) of the same) will not be capable of acceptance, and that, consequently, there was an error of law in the application of Article 9/29) of the VAT Code, in the corrections contested.

However, and even if this were not the case, the fact is that it is not possible, in the situation sub judice, to assert that the possible service provisions and/or supplies of goods that the Applicant may make in the contractual relationship in question are not severable from the provision of the leased property, first and foremost because it does not even result that they are contractually linked, and then because, taking into account the activity of G... carried out in the property, nothing indicates that services or goods proper to or specifically intended for the exercise of such activity are at issue, which is not intended to mean, obviously, that they are useless or irrelevant to the enjoyment of the leased property, but merely that nothing indicates that they are essential elements to the activity concretely exercised there, whose absence would significantly impair that exercise, nor that their existence translates into a relevant economic gain for the lessee.

Finally, it would always have to be concluded, regardless of everything else, that such service provisions and/or supplies of goods would never present themselves as economically predominant in relation to the lease strictly speaking, not only because, as has been seen, the provision to G... is contractually reported, in an exclusive manner, to the provision of the leased property, but also because, moreover, nothing indicates that the economic value of the extravagant provisions assumes a substantial or relevant economic value, in view of the value of the provision of enjoyment of the leased property, and it cannot be overlooked that a significant part of the objects existing in the leased property and referred to by the Applicant were left by the previous lessee, which, in itself, already indicates that they do not incorporate a significant value.

Thus, and in light of all that has been set out, it must be concluded that there is, also with respect to the contract with G..., a contract for the lease of immovable property, pursuant to the terms and for the purposes of the applicable exemption provided for in Article 9/29) of the VAT Code, and that, consequently, the alleged error of law is not occurring and the arbitral request should therefore fail.

It should be noted, to conclude, that the considerations made by the Applicant regarding the first contract, and the interim between it and the second, were not considered relevant because the assessments at issue in the present proceedings relate, solely, to periods covered by the term of the second contract (1512T, 1603T and 1606T, the second contract being from April 2015 - 1506T).

With the main request failing, the ancillary request for compensatory interest formulated by the Applicant equally and necessarily fails.

C. DECISION

For the reasons set out above, this Arbitral Tribunal orders the dismissal of the arbitral request made and, consequently, absolves the Respondent of the request and orders the Applicant to pay the costs of the proceedings, set out below.

D. Value of the Proceedings

The value of the proceedings is fixed at €61,880.65, pursuant to Article 97-A, paragraph 1, subparagraph a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of Article 29, paragraph 1 of the RJAT and paragraph 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The arbitration fee is fixed at €2,448.00 pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Applicant, since the request was dismissed, pursuant to Articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and Article 4, paragraph 4, of the aforementioned Regulation.

Notify accordingly.

Lisbon, 19 October 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Sofia Ricardo Borges)

The Arbitrator Member

(José Joaquim Monteiro Sampaio e Nora)

Frequently Asked Questions

Automatically Created

Is a mixed lease of real estate and movable assets exempt from VAT under Article 9(29) of the Portuguese VAT Code?
Under Portuguese tax law, a mixed lease comprising both real estate and movable assets is generally not exempt from VAT under Article 9(29) of the CIVA. This provision exempts only 'bare walls' property rentals. When a lease includes significant movable assets essential for the lessee's business activity—such as shelving systems, office furniture, specialized equipment, or business fixtures—it constitutes a composite or mixed supply that falls outside the exemption scope. The CAAD examines whether the movable elements are merely incidental or represent a substantial component that transforms the transaction's economic character beyond a simple property rental.
How does CAAD distinguish between bare walls rental and mixed-use leasing for VAT purposes?
CAAD distinguishes between exempt bare walls rentals and taxable mixed-use leasing by analyzing the substantial nature and economic function of included assets. Key factors include: (1) whether movable assets are essential for the lessee's intended business activity; (2) the value and significance of equipment relative to the property itself; (3) contractual obligations regarding maintenance of 'belongings and equipment'; (4) marketing materials describing the property as 'completely equipped' or 'ready to work'; and (5) whether assets constitute mere property improvements or independent business equipment. The presence of specialized business fixtures like pallet racks, complete office setups, technical installations, and operational equipment typically indicates a mixed lease subject to VAT rather than an exempt property rental.
Can a landlord charge VAT on property leases that include essential movable corporate assets for business activity?
Yes, a landlord can and must charge VAT on property leases that include essential movable corporate assets for business activity. Such arrangements constitute mixed supplies that do not qualify for the VAT exemption under Article 9(29) CIVA, which applies only to bare property rentals. When the lease encompasses significant movable assets—office furniture, industrial equipment, shelving systems, computers, technical installations—the transaction's character changes from a simple property rental to a composite supply of accommodation and business equipment. Landlords must assess VAT on the entire rental amount unless they can demonstrate the movable elements are purely incidental. The renunciation of exemption procedure under Article 12(4) CIVA becomes relevant for determining proper VAT treatment and ensuring deduction rights for related input VAT on property improvements and equipment acquisitions.
What is the procedure for challenging additional VAT assessments through tax arbitration at CAAD in Portugal?
To challenge additional VAT assessments through CAAD tax arbitration in Portugal, taxpayers must: (1) submit a request for arbitral tribunal constitution within the statutory deadline pursuant to Articles 2 and 10 of RJAT (Decree-Law 10/2011); (2) specify the contested tax assessments and interest calculations with amounts; (3) present legal grounds supporting the illegality claim; (4) optionally appoint an arbitrator or allow the CAAD Ethics Council to designate the tribunal; (5) pay required procedural fees; (6) await the Tax Authority's response; (7) participate in hearings under Article 18 RJAT where witnesses may be examined; (8) submit written closing arguments; and (9) await the final decision within deadlines established in Article 21 RJAT. The process provides an alternative to judicial courts for resolving tax disputes, with binding arbitral decisions subject to limited appeal grounds.
What are the VAT implications of leasing furnished commercial properties under Portuguese tax law?
Leasing furnished commercial properties under Portuguese tax law has significant VAT implications. If the property includes substantial movable assets essential for business operations—furniture, equipment, technical installations—the lease typically cannot benefit from the VAT exemption in Article 9(29) CIVA, which covers only bare property rentals. Landlords must charge VAT on rents for furnished commercial spaces with significant equipment. However, landlords who lease bare properties may renounce the exemption under Article 12(4) CIVA and Decree-Law 21/2007, enabling VAT charges and input VAT deduction rights on property improvements. The classification depends on whether movable elements are incidental fixtures or substantial business assets. Properties marketed as 'completely equipped' or 'ready to work' with office furniture, shelving systems, computers, and specialized equipment typically constitute taxable mixed supplies. Proper classification affects VAT assessment, deduction entitlements, refund rights, and compliance obligations throughout the lease period.