Process: 52/2018-T

Date: July 9, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

CAAD Arbitration Process 52/2018-T addressed VAT deduction rights for a mixed VAT taxpayer regarding sponsorship and advertising contracts with football clubs. The claimant, A... S.A., contested additional VAT assessments totaling €789.39 for tax periods throughout 2013. The Portuguese Tax Authority (AT) had classified 20% of sponsorship payments as entertainment expenses under Article 88(7) of the Corporate Income Tax Code, thereby denying VAT deduction under Article 21(1)(d) of the VAT Code. The claimant had originally deducted 8% of input VAT using the pro-rata method for mixed taxpayers. The dispute centered on whether the AT could bifurcate sponsorship contracts into principal services (advertising and image promotion) and ancillary services (tickets, hospitality, travel) and deny deduction on the latter portion. The sponsorship agreements with B..., C..., and D... included comprehensive advertising services: stadium signage, team equipment branding, website promotion, official photographs, and use of club images in marketing campaigns. The AT's inspection in 2015 reclassified part of these expenses as non-deductible entertainment costs. The claimant exhausted administrative remedies through a review request and hierarchical appeal, both dismissed, before seeking arbitration. The arbitral tribunal found insufficient evidence to support the AT's 20% entertainment expense allocation, as the submitted contracts did not correspond to the assessed tax periods. This decision clarifies that Portuguese tax authorities must substantiate their bifurcation of sponsorship expenses with concrete evidence when restricting VAT deduction rights for mixed taxpayers.

Full Decision

ARBITRAL DECISION

I – REPORT

A…, S.A., collective entity no.…, with registered office at Rua…, no.…, …-… … (hereinafter Claimant) notified on 13 November 2017, through official letter no.…, of 9 November 2017, of the dismissal decision, within the scope of hierarchical appeal procedure no. R…, came, pursuant to Article 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to as RJAT), to request the establishment of a singular Arbitral Tribunal, in which the Tax and Customs Authority is requested, hereinafter AT or Respondent, with a view to obtaining a decision on the illegality and consequent annulment of the acts of additional assessment of Value Added Tax no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015… and no. 2015…, relating respectively to the tax periods 2013/03, 2013/04, 2013/05, 2013/06, 2013/09, 2013/10, 2013/11 and 2013/12 and, furthermore, the corresponding account adjustment statements no. 2015… to no. 2015….

The request for constitution of the Arbitral Tribunal was accepted by the Illustrious President of CAAD and automatically notified to the AT on 16 April 2018.

The AT responded, arguing that the request should be judged as unfounded.

The meeting referred to in Article 18 of the RJAT was waived, in light of the nature of the matter contained in the file, with the Parties being notified to submit final submissions (optional).

The Arbitral Tribunal is regularly constituted and materially competent, pursuant to Article 2, no. 1, subparagraph a) of the RJAT.

The parties have legal personality and capacity, are entitled to bring the action and are represented (Article 4, and no. 2 of Article 10 of the RJAT and Article 1 of Ordinance no. 112/2011, of 22 March).

There are no nullities, exceptions or preliminary issues that preclude the immediate consideration of the merits of the case.

FACTUAL MATTERS

Based on the elements contained in the file and the administrative procedure attached to the file, the following facts are considered proven: The Claimant is a mixed VAT taxpayer, simultaneously conducting operations exempt from tax and operations subject to and not exempt from tax;

During the course of 2013, the Claimant made various payments under sponsorship/advertising contracts it concluded with B…, with C… and with D…, pursuant to which it secured for itself the status of sponsor of those entities within the scope of sporting events of the seasons 2011/2012, 2012/2013 and 2013/2014 (See pp. 33-36 of document no. 18);

B…, C… and D… undertook to promote the name, image, activities and goods and services made available by the Claimant, through advertising in the various communication channels associated with the sporting events;

Specifically, those entities undertook to carry out advertising and dissemination of the Claimant's image in the interior and exterior areas of the stadiums, as well as in the playing area itself, in the club equipment, in the press room and in flash-interviews, in draws, on the official website of those entities, in the official team photograph to be made available to the press, on the club bus, also involving the use, by the Claimant, of the name and image of the clubs and players in its advertising campaigns and, furthermore, visibility in the advertising campaigns and/or promotional activities of B… (See document no. 18);

B…, C… and D… undertook to provide the Claimant with some tickets for football matches of those sporting seasons, some parking spaces in their respective stadiums and some invitations for travel abroad within the scope of UEFA competitions (See pp. 33-36 of document no. 18);

The Claimant undertook to pay to those three entities the values fixed contractually on which VAT was charged at the legal rate in force (See document no. 18);

The Claimant deducted 8% of the VAT borne within the scope of the sponsorship/advertising contracts described above, by application of the pro rata method provided for in no. 1 of Article 23 of the VAT Code (See document no. 18);

During the course of 2015, the Inspection Division for Banks and other credit institutions of the large taxpayers unit carried out an external inspection action, of general scope, on the Claimant's accounting-tax elements relating to the year 2013 (See page 68 of document no. 18);

In December 2015, the Claimant was notified of the Tax Inspection Report prepared following the aforementioned inspection action (See document no. 18), which is hereby considered fully reproduced;

The AT classified 20% of the total amount paid by the Claimant for sponsorship purposes within the scope of the contracts concluded as entertainment expenses, subject to autonomous taxation, pursuant to no. 7 of Article 88 of the Corporate Income Tax Code (See pp. 33-36 of document no. 18);

The AT considered that, in accordance with the provisions of subparagraph d) of no. 1 of Article 21 of the VAT Code, the tax borne by the Claimant was not deductible, with respect to entertainment expenses and, consequently, annulled those deductions, in the total amount of €789.39 (seven hundred and eighty-nine euros and thirty-nine cents) - (see page 38 and Annex 6 of document no. 18);

As a consequence, the following acts of additional VAT assessment were issued: no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015…, no. 2015… and no. 2015… - (See docs 9 to 12) and the following account adjustment statements: no. 2015… to 2015… - (See documents no. 10 to 17);

On 14 June 2016, the Claimant filed a request for review (no. …2016…) against the aforementioned tax acts (See document no. 19);

The Claimant was notified, through official letter no.…, of 11 October 2016, of the decision to dismiss the request for review;

The Claimant filed, on 14 November 2016, a hierarchical appeal against the decision dismissing the request for review presented;

The Claimant was notified, on 13 November 2017, through official letter no.…, of 9 November 2017, of the dismissal decision, within the scope of the hierarchical appeal procedure no. R…;

The present arbitration petition was filed on 9 February 2018.

It was not established that 20% of the total amount paid by the Claimant, within the scope of the sponsorship contracts concluded, was attributable to entertainment expenses.

The Tribunal formed its conviction based on the documents attached to the file, it being certain that only 2 sponsorship contracts were attached to the file, at the Claimant's request of 25 June 2018, not coinciding with the tax period that is the subject of the act sub judice.

MATTERS OF LAW

The main issue that arises in the present file concerns whether or not the acts of additional VAT assessment, subject to the present petition, are valid, considering the right to VAT deduction provided for in Articles 20 and et seq. of the VAT Code.

To this end, the Claimant argues, in summary, the following:

In the analysis performed on the sponsorship/advertising contracts concluded by the Claimant, the AT distinguished between services of a principal nature and services of an ancillary nature;

Specifically, the AT qualified as "principal services the services of 'advertising and promotion of the image' of the package holder (…)" and as "ancillary services those that include, namely, seated places in the box or adjacent stands, catering, hostess services, parking spaces and invitations to watch games of European competitions abroad, including travel, accommodation and tickets, and still the use of the box as an office or meeting room with logistical and secretarial support necessary for the pursuit of the current operations of clients' activities (sending faxes, photocopying service, etc.);

Having done this exercise, the AT assigned to each of those groups of services a different tax treatment under VAT, accepting the deduction of tax (fictitiously) paid by reference to advertising and image promotion services and denying the deduction of tax (fictitiously) paid by reference to ancillary services;

The truth, however, is that, in the present situation, the aforementioned distinction between principal provision and ancillary provisions cannot have any relevance under VAT, as, according to the case law of the CJEU – confirmed, for example, in the Judgments of 21 February 2008, 14 May 2008, 11 June 2009, 2 December 2009 and 10 March 2011, handed down in Cases C‑425/06, C‑231/07 and C‑232/07, C‑276/09, C‑572/07, and C‑497/09, C‑499/09, C‑501/09 and C‑502/09 – services should only be separated for the purposes of applying the VAT regime when it is established that they are effectively independent, which will occur when each one of them constitutes an end in itself for the purchaser;

The ancillary provisions provided for in the contracts at issue in the present process are in no way independent of the principal advertising provisions;

Given the foregoing, in line with what has been maintained by the Court of Justice of the European Union, the Claimant understands that the VAT borne on the acquisition of ancillary provisions associated with the aforementioned "sponsorship contracts" must be entirely deducted under the same conditions as the VAT incurred on the acquisition of the principal provision, which is why both the correction in question and the acts of assessment that express it are illegal, and the illegality thereof should be declared, as well as the illegality of the decision that improperly maintained them in the legal order;

Even if this were not the case, and it were considered that the provisions resulting from the contracts here in question should effectively be separated for the purposes of applying the VAT regime – which is not admitted –, the fact is that the correction made by the AT would always be illegal, for grossly violating the provisions of Articles 20 and 21 of the VAT Code;

The AT, motivated by the persistence of doubts arising from the application of the aforementioned regime to "charges or expenses incurred by taxpayers with the 'acquisition of the right of use of boxes in football stadiums'", decided to define, for these situations, a special procedure for determining the expenses that could be excluded from the right to VAT deduction (See Circular no. 20/2009, of 28 July);

It follows from Circular no. 20/2009, of 28 July that the non-deductible VAT related to "charges or expenses incurred by taxpayers with the 'acquisition of the right of use of boxes in football stadiums'" corresponds to 20% of the total value of VAT incurred within the scope of contracts thus concluded;

Administrative circulars are not a source of tax law, nor do they have any binding effect beyond the AT;

As doctrine has uniformly understood, "the so-called administrative guidelines, traditionally presented [in] the most diverse forms such as instructions, circulars, circular letters, circulated letters, normative orders, regulations, etc., and which are very frequent in the law of taxes (...), as they are addressed only to the tax administration, only it must obey them, being therefore binding only on the bodies situated hierarchically below the body that authored them" (José Casalta Nabais, Manual of Tax Law, Coimbra, 2000, p. 180);

In this sense, the Supreme Administrative Court has clarified that "administrative circulars in tax matters have merely administrative value, binding only the organs of the Tax Administration, but without direct normative character for taxpayers or for courts" (See Judgment of the Supreme Administrative Court, of 15 November 1995, case no. 19.451);

In fact, the principle of legality, provided for in Article 103, nos. 2 and 3, of the Constitution of the Portuguese Republic, and in the situations listed in Article 8 of the General Tax Law, determines that the law should provide for all "the essential elements of each tax, that is, that it defines the incidence lato sensu of each tax, and in determined or determinable terms. On the one hand, the law must cover all norms relating to real or objective incidence (material, temporal, quantitative and spatial), personal or subjective incidence (active and passive subjects, including among these the taxpayer, those responsible, substitutes, etc.), the rate, and tax benefits" (José Casalta Nabais, Manual of Tax Law, Coimbra, 2000, p. 142);

Thus, the AT which, substituting itself for the legislative power, establishes a new hypothesis of incidence distinct from that enshrined in law, violates the provisions of Article 103, nos. 2 and 3, of the Constitution of the Portuguese Republic, and of Article 8, no. 2, of the General Tax Law;

With regard to the maximum limit that was instituted by an administrative guidance on VAT deduction on gifts of small value, the STA clarified that "Circular no. 19/89, in the point in question, is materially and organically unconstitutional, as it contains a rule of objective VAT incidence that was not created by a diploma issued by the Assembly of the Republic, in a matter that falls within the relative legislative competence of the latter (articles 103, no. 2, and 165, no. 1, subparagraph i) of the CRP, in the version in force, to which correspond articles 106, no. 2, and 168, no. 1, subparagraph i), respectively, in the versions of 1982 and 1989" - (See Judgment of the STA, of 21 March 2007, case no. 01180/06 and also available at www.dgsi.pt);

It is concluded that Circular no. 20/2009, of 28 July, violates – insofar as it enshrines a new hypothesis of incidence – the provisions of Articles 103, 112, no. 5 and 165, no. 1, subparagraph i), of the Constitution of the Portuguese Republic and, as well, Article 8 of the General Tax Law, and consequently the tax acts, to the extent that they express the application of the understanding set out in Circular no. 20/2009, are vitiated by illegality, for having been based on error regarding their respective legal grounds, and for this reason the illegality thereof should be declared, together with the illegality of the decision dismissing the hierarchical appeal that maintained them in the legal order;

Having demonstrated the inadmissibility of the application of the indirect administrative method fixed in Circular no. 20/2009, it was incumbent upon the AT to directly prove which expenses were effectively covered by Article 21, no. 1, subparagraph d), of the VAT Code;

"The expenses recorded by the Claimant as 'advertising expenses' relating to the right to use football stadium boxes, based on a sponsorship contract not challenged by the AT, can only be requalified as 'entertainment expenses' when the AT fulfills its burden of proof (Article 74, no. 1 of the LGT)" - (See Judgment dated 12 June 2015, handed down in case 07437/14);

However, it is verified that, in the specific case, the AT merely applied a manifestly illegal imputation criterion, contained in Circular no. 20/2009, of 28 July, failing to produce any proof as to the fact that the amounts specifically corrected corresponded to actual entertainment expenses;

In light of this, it remains to note that "the AT does not meet the burden of proof that falls upon it to requalify an 'advertising expense' as being 'entertainment', when in the scope of the inspection action it does not collect elements that allow concluding that those expenses have third parties outside the company as recipients, and equally when it does not invoke concrete facts that support the statement of 'recreational character' of the expense" (See the aforementioned Judgment of 12 June 2015, handed down in case 07437/14);

Finally, it should be noted that even if the understanding set out in Circular no. 20/2009, of 28 July, were admitted, the fact is that the validity of its application would always presume a factual identity between the situation envisaged there and the case under consideration;

In the formulation presupposed by the aforementioned Circular, such contracts comprise, in turn, two components: a principal one, consisting of granting the respective purchasers the "possibility of advertising and promoting their image and their logos in various communication media (…), namely, advertising in the boxes, in the Club magazines, in the panels installed in the multifunctional space, in the press room, as well as in newspaper advertising carried out by the clubs" (See point 1 of the Circular) and an ancillary one, whose services "include, namely, seated places in the box or in the adjacent stands, catering, reception services by qualified hostesses and access to the stadium parking area. Finally, if applicable, receiving invitations to watch games of European competitions abroad, including travel, accommodation and tickets, and still, services connected with the use of the boxes ('business space')";

However, the amount due by the Claimant, within the scope of the contracts scrutinized by the AT constitutes the consideration due for the acquisition of much more than access to a box, advertising associated with it and its ancillary services, as those contracts contemplate, as principal, the acquisition of the following advertising and image dissemination services of the Claimant in the interior and exterior areas of the stadiums, as well as in the playing area itself; advertising and image dissemination of the Claimant in the club equipment, in the press room and in flash-interviews; advertising and image dissemination of the Claimant in draws, on the official website of those entities, in the official team photograph to be made available to the press, on the club bus; and, furthermore, the use, by the Claimant, of the name and image of the clubs and players in its advertising campaigns and, as well, visibility in the advertising campaigns and/or promotional activities of LPFP;

The amount due by the Claimant under the aforementioned sponsorship contracts constitutes the consideration due for the acquisition of services completely distinct (in terms of content and their economic value) from the services, principal and ancillary, contemplated by Circular no. 20/2009, of 28 July;

The advertising services contemplated in the contracts concluded by the Claimant far exceed the services included in the corporate packages presupposed by Circular no. 20/2009, with the required factual identity not existing between the hypothesis envisaged by that Circular and the case under consideration;

It is thus, according to the judgment here rendered, inescapably demonstrated the defects from which the correction in question suffers, which requires of the present Arbitral Tribunal the declaration of its illegality.

The AT argues, for its part, succinctly, the following:

On the Respondent falls the burden of verifying the legal prerequisites of its action which, in the specific case, are contained in the PA and it must be said are not even challenged by the Claimant, while on the Claimant falls (fell) the burden of proof of the tax facts that it alleges as constitutive of its right to deduction;

If the solution adopted by the Respondent had not been chosen, the Claimant would have seen all that tax excluded from its right to deduction, for, as has already been noted, it never succeeded in making concrete, what value of the contracts concerns the services of advertising;

Recall that, while such concretization is difficult, it is not impossible, insofar as both the tickets, parking spaces, boxes, trips, etc. (ancillary services according to the Circular), have market values easy to ascertain and, by deducting the value of these from the value of the contracts, the Claimant would be able, had it wished to provide proof (which under Article 74 of the LGT is incumbent upon it), of the (residual) value of the contracts relating to the advertising service (main service according to the circular);

The AT set out in a circular its understanding with respect to this type of contract as follows (Circular no. 20/2009 of 28/7/2009):

"Given that doubts have arisen regarding the framework for purposes of Corporate Income Tax and VAT of charges or expenses incurred by taxpayers with the 'acquisition of the right of use of boxes in football stadiums' designated as 'Corporate Packages', by order of the Gentleman Director-General of Taxes of 28.07.2009, the following understanding was authorized:

1. The acquisition of 'Corporate Packages' grants their holders the possibility of advertising and promoting their image and their logos in various communication media. The differentiation of the status granted to the purchaser for promoting their image results from the set of goods and services associated with each 'Package' (Silver; Gold, Sponsor, Season VIP Company, Corporate Member, Platinumn Member, Gold Member), or any other designation given to it, namely, advertising in the boxes, in the Club magazines, in the panels installed in the multifunctional space, in the press room, as well as in newspaper advertising carried out by the clubs.

2. Furthermore, associated with the different typologies of 'Packages' is a wide range of rights. On one hand, access to a box that can be used as an office or meeting room and 'logistical and secretarial support necessary for the pursuit of the current operations of clients' activities' (sending faxes; photocopying service etc.) which is designated as 'business space'. On the other hand, having at their disposal, on match days, seated places in the box or in the adjacent stands, catering services, reception by qualified hostesses and access to the stadium parking area. Finally, if applicable, receiving invitations to watch games of European competitions abroad, including travel, accommodation and tickets.

3. The commercialization by the Sports Joint-Stock Companies (SAD), Clubs, or companies held by these entities, of 'Corporate Packages' without discrimination of the service provisions included in each 'Package', presenting them as 'indivisible units', determines that the charges or expenses incurred by companies with their acquisition cannot be accepted for purposes of Corporate Income Tax, in their entirety, as 'advertising expenses and use of boxes as an office', nor can the 'full deduction of VAT borne on such expenses' be accepted.

4. Thus, with respect to 'Corporate Packages' that are commercialized without discrimination of the services included in them, it is incumbent upon the acquiring title holder to separate the expenses based on the use to which they were put and to prove their indispensability for the purposes of Article 23 of the Corporate Income Tax Code, giving them the tax framework that corresponds to their specificity for the purposes of determining taxable income under Corporate Income Tax, as well as for the exercise of the right to VAT deduction.

5. Recognizing the difficulty both for the holders of 'Packages' and for the entities that commercialize them, in proceeding with the discrimination of all services included therein, it is accepted that the services be grouped into two sets: one for the principal services, and another, for the so-called 'ancillary' services, this division should be consistent with the nature of the services included in each 'Package'.

6. Services designated as 'principal' are the services of 'advertising and promotion of the image' of the holder of the 'Package'. The 'ancillary' services include, namely, seated places in the box or in the adjacent stands, catering, hostess services, parking spaces and invitations to watch games of European competitions abroad, including travel, accommodation and tickets, and still, services connected with the use of the boxes ('business space').

7. As mentioned previously, the service provisions designated as 'business space' comprise the use of the box as an office, but also as a place for receiving clients, suppliers or third parties, also allowing attendance at sporting events. Accordingly, the right of use of the boxes cannot be dissociated from its use as a recreational space to attend sporting events, which is why the services of 'business space' should be included in the set of services designated as 'ancillary'.

8. With respect to each type of 'Package' the division of services included therein into two sets ('principal' and 'ancillary') can be carried out by the entities that commercialize 'Corporate Packages', who will inform the respective holders thereof, or, if this does not happen, by the holders of the 'Packages', based on the use given to the services.

9. The division of services between the two sets can be made by value or by percentage, and the calculation relating to 'ancillary' services can be made by deduction from the total value of each 'Package'.

10. The division between 80% relating to the 'principal' services and 20% for the 'ancillary' services can be accepted for the purposes of framework in the applicable provisions under Corporate Income Tax and VAT for the 'Packages' in which this percentage division, bearing in mind what is referred to regarding 'business space', is consistent with the nature of the services effectively included therein.

11. For 'Corporate Packages' whose percentage division of the services included therein is not that referred to in the preceding point, the values or percentages of division that come to be calculated with respect to each 'Package' can likewise be accepted for the purposes of framework in the applicable provisions under Corporate Income Tax and VAT, provided they are consistent with the nature of the service provisions effectively included in each 'Package'.

12. Once the division into two sets of the services included in each 'Package' has been made and provided that the charges or expenses incurred by the holders are proven to be indispensable for the realization of the income or gains subject to tax, their tax treatment should be as follows:

(a) Expenses with the 'principal' services of advertising and promotion of the image' are accepted as a cost under no. 1 of Article 23 of the Corporate Income Tax Code.

(b) Expenses with the so-called 'ancillary' services including those relating to the use of 'business space', are likewise accepted as a cost, but, as they constitute 'entertainment expenses' are subject to autonomous taxation provided for in subparagraph a) of no. 3 of Article 81 of the Corporate Income Tax Code.

(c) The VAT included in the expenses of 'advertising and promotion of the image' is deductible under Article 20, no. 1 of the VAT Code.

(d) The VAT included in the expenses relating to 'ancillary' services, including those relating to the use of 'business space' is excluded from the right to VAT deduction under subparagraphs c) to e) of no. 1 of Article 21 of the VAT Code."

It appears to us that the principles set out in the circular may be acceptable regarding the principle of proportionality in the fight against tax evasion and fraud which is one of the grounds for exclusion of the right to deduction provided for in subparagraph e) of no. 1 of Article 21 of the VAT Code.

The correction made by the AT does not suffer from any defect of illegality, nor does the decision of the request for review and hierarchical appeal that confirmed it;

As has been set out, the contested assessments do not suffer from any error, of fact or of law, which is why the present arbitration petition should be dismissed, under penalty of violating the principle of tax neutrality if it were to proceed, namely by allowing the Claimant to deduct tax borne on expenses that its competitors were not granted or are not granted equal right;

Given the foregoing, regarding the position of the Parties and the arguments presented, in order to determine whether the acts of VAT assessment are or are not illegal, it will be necessary to verify whether the VAT arising from the expenses contained in the sponsorship contracts incurred by the Claimant with acquisition of rights to use boxes and other services associated with the so-called "Corporate Packages" can or cannot be fully deducted.

Let us see what should be understood.

VAT is a general tax on consumption, in which transfers of goods, service provisions, imports and intra-community acquisitions of goods are taxed, falling on spending.

Under the general scheme, VAT is a tax on consumption in which the amount of debt of each taxpayer is determined through the so-called method of tax deduction, tax credit or indirect subtraction method.

Under Article 19 of the VAT Code, "for the determination of the tax due, taxpayers shall deduct, in accordance with the following articles, from the tax falling on the taxable operations they carried out", the tax owed or paid for the acquisition of goods and services from other taxpayers.

In accordance with no. 1 of Article 20 of the same Code, only the tax that has fallen on goods or services acquired, imported or used by the taxpayer for the performance of the operations referred to in its subparagraphs a) and b) may be deducted, namely, "transfers of goods and service provisions subject to tax and not exempt from it".

In turn, no. 1 of Article 21 of the VAT Code provides that excluded from the right to deduction is the tax contained, namely and in accordance with its subparagraph d), in "Expenses relating to accommodation, food, beverages and tobacco and reception expenses, including those relating to the accommodation of persons outside the company and expenses relating to real property or part of real property and its equipment, intended mainly for such receptions."

As has been the understanding of the Courts, "the ground for such exclusion from the right to deduction is found in the fact that many of the situations provided therein concern VAT borne on 'inputs' regarding which it is difficult, or even impossible, to control their propriety, the exclusion aiming to prevent the deduction of tax borne with goods or services not essential to productive activity or easily divertible to private, non-business/professional consumption. This norm is, in essence, a special anti-abuse norm under VAT, in the terms in which doctrine defines them (See Gustavo Lopes Courinha, "The General Anti-Abuse Clause in Tax Law - Contributions to Its Understanding", Almedina, 2004, pág.91 et seq.; J. L. Saldanha Sanches, "The Limits of Tax Planning", Coimbra Editora, 2006, pág.295 et seq.) – See Judgment of the Regional Administrative Court North, handed down in the scope of case no. 1438/09.3BEBRG, of 21.12.2016.

In the case under analysis, the AT considered that the Claimant failed to prove which values of the sponsorship contracts are attributable to the provision of tickets, parking spaces, boxes, among other services ancillary to the sponsorship contract.

Based (solely) on this finding, the AT considered that the Claimant cannot fully deduct the VAT borne on the sponsorship contracts concluded, considering applicable in the determination of the part of deductible and non-deductible VAT the instructions contained in Circular no. 20/2009, of 28.07.2009.

Upon examination of those contracts, it is in fact verified that, beyond the ancillary component identified by the AT, those contracts have a principal advertising component.

Following the established case law, it is considered that the expenses borne by the Claimant have a mixed configuration, that is, on one hand, they have an advertising component (deductible) and, on the other, an undeniable entertainment component (non-deductible) – See Judgment of the Regional Administrative Court North, handed down in the scope of case no. 1438/09.3BEBRG, of 21 June 2016.

As results from the combined analysis of Articles 19 and 20 of the VAT Code, expenses that have an advertising function are expenses whose levied VAT confers the right to deduction, while entertainment expenses are excluded from the right to deduction.

From the contracts attached to the file does not result the discrimination of the values attributable to advertising expenses and to entertainment expenses, with the Claimant understanding, given the ancillary character of the provisions associated with entertainment expenses, to fully deduct the VAT of all sponsorship contracts, to the extent of its pro rata. For its part, the AT considered that Circular no. 20/2009, of the former DGCI, should be applied and thus "exclude from the right to deduction contained in entertainment expenses in accordance with point 10 of the aforementioned Circular, under the provisions of subparagraph d) of point 12 of the same Circular."

Having determined the scope of VAT deductibility borne with the transaction in light of the provisions of Articles 20, no. 1 subparagraph a) and 21, no. 1 subparagraph d), of the VAT Code, and considering that the values that each service has in the transaction in general are not discriminated, nor being possible to establish with rigor which proportion of the amount paid should be attributed to the advertising component of the contracts, the AT should have resorted to indirect evaluation and not applied indiscriminately the proposal for division contained in Circular no. 20/2009.

In fact, Circular no. 20/2009 determines in its point 10 that "The division between 80% relating to the 'principal' services and 20% for the 'ancillary' services can be accepted for the purposes of framework in the applicable provisions under Corporate Income Tax and VAT for the 'Packages' in which this percentage division, bearing in mind what is referred to regarding 'business space', is consistent with the nature of the services effectively included therein."

Furthermore, it is stated, in point 11 of that Circular that "For 'Corporate Packages' whose percentage division of the services included therein is not that referred to in the preceding point, the values or percentages of division that come to be calculated with respect to each 'Package' can likewise be accepted for the purposes of framework in the applicable provisions under Corporate Income Tax and VAT, provided they are consistent with the nature of the service provisions effectively included in each 'Package'."

It does not result from Circular no. 20/2009 as legal any direct subsumption of the expenses associated with the sponsorship contracts in which the services are not discriminated in the 80%-20% division, there being naturally need to ground that or another division that may be deemed appropriate.

Nevertheless, from the Tax Inspection Report that supports the acts of assessment sub judice, it results only that the entertainment expenses are determined in accordance with point 10 of Circular no. 20/2009, with no fact, reason or ground alleged for the application of such a division method.

Now, as is well known, by virtue of the provision of Article 266 of the Constitution of the Portuguese Republic, the activity of the tax administration must be carried out in subordination to the Constitution and to law and must respect the rights and legitimate interests of citizens (principle of legality) and the principles of equality, proportionality, justice, impartiality and good faith (See, among others, Judgment of the Regional Administrative Court North, of 10.05.2018, handed down in the scope of case no. 101/2002.TFPRT.21).

The aforementioned Circular is not, therefore, in itself the legal ground of the acts of additional assessment now under challenge, and such acts cannot be grounded based on the automatic application of the division method proposed therein, as was done in the present case.

In fact, considering that the burden of proof of the facts constitutive of the right of additional VAT assessment belongs to the AT, it would behoove the latter to prove the factuality that led it to not accept the respective deduction of tax, factuality that must be capable of undermining the presumption of truthfulness of the operations contained in the taxpayer's books and the respective supporting documents, only then does it become incumbent upon the taxpayer the burden of proof of the right that it claims (the right to exercise the right to VAT deduction) - (See Judgment of the Regional Administrative Court North, of 8.02.2018, handed down in the scope of case 01981/08.1BEPRT).

Not having the AT carried out that proof, since it merely limited itself to framing the factual situation within Circular no. 20/2009, it is understood that the correction made is illegal.

Furthermore, beyond the fulfillment of the burden of proof of the facts constitutive of the right to additional assessment, the AT should, in any case, have grounded the division made, for the purposes of determining deductible and non-deductible VAT, which also did not occur. Given the difficulty emphasized in the quantification of the taxable matter of the contract in light of the non-discrimination of the values referenced to each service, the AT could or should have resorted to indirect methods in the determination of deductible and non-deductible VAT, contained in the expenses associated with the business in question, pursuant to subparagraph b) of Article 87 of the LGT and Article 88, subparagraph a), of the LGT).

As is known, albeit the subsidiary character of indirect assessment (Article 85, no. 1 of the LGT), the AT cannot fail to have recourse to it when there is ground to do so, that is, the choice of the quantification method is a matter of law, withdrawn from the discretionary power of the AT.

It is thus concluded that also with this ground the arbitration petition must be judged well-founded and the acts of assessment annulled in their entirety.

IV. DECISION

Terms in which the members of this Arbitral Tribunal agree to:

Judge well-founded the request for declaration of illegality of the acts of VAT assessment and corresponding account adjustments identified in the file, in the amount of €789.39;

Condemn the Respondent in the costs of the present proceedings, as the losing party.

V. VALUE OF THE PROCEEDINGS

In accordance with the provisions of Article 315, no. 2 of the CPC and Article 97-A, no. 1, subparagraph a), of the CPPT and Article 3, no. 2, of the Regulations of Costs in Tax Arbitration Proceedings the value of the proceedings is set at €789.39 (Seven hundred and eighty-nine Euros and thirty-nine cents).

VI. COSTS

Pursuant to Article 22, no. 4, of the RJAT, the amount of costs is set at €306, to be borne by the Respondent, in accordance with Table I of the aforementioned Regulations, given the full success of the request.

Lisbon, 9 July 2018

The Arbitrator,

(Magda Feliciano)

(The text of this decision was prepared by computer, in accordance with Article 131, no. 5 of the Code of Civil Procedure, applicable by reference from Article 29, no. 1, subparagraph e) of Decree-Law no. 10/2011, of 20 January (RJAT) and its drafting is governed by the spelling prior to the Orthographic Agreement of 1990.)

Frequently Asked Questions

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How is VAT treated on sponsorship and advertising contracts under Portuguese tax law?
Under Portuguese tax law, VAT on sponsorship and advertising contracts is generally deductible for businesses when the services received constitute genuine advertising and image promotion activities. The VAT Code allows deduction of input tax on expenses directly related to taxable business activities. However, the Portuguese Tax Authority may scrutinize these contracts to distinguish between principal advertising services and ancillary entertainment components. When sponsorship agreements include elements like hospitality tickets, catering, travel, or premium seating that could constitute entertainment expenses under Article 88(7) of the Corporate Income Tax Code, the AT may invoke Article 21(1)(d) of the VAT Code to deny deduction on those portions. The burden rests on the tax authority to demonstrate which specific contractual elements qualify as non-deductible entertainment rather than core advertising services.
Can a mixed VAT taxpayer deduct input VAT on sponsorship and publicity expenses?
Yes, a mixed VAT taxpayer in Portugal can deduct input VAT on sponsorship and publicity expenses, but with specific limitations. According to Article 23(1) of the VAT Code, mixed taxpayers who conduct both taxable and exempt operations must apply the pro-rata method to calculate allowable deductions. In Process 52/2018-T, the claimant correctly applied an 8% pro-rata deduction rate to sponsorship expenses. The fundamental requirement is that the sponsored services must relate to the taxpayer's economic activity and contribute to taxable outputs. The deduction extends to advertising services such as stadium branding, logo placement, website promotion, and use of sponsored entity images in marketing campaigns. However, the Portuguese Tax Authority may challenge deductions where sponsorship packages include entertainment elements like executive box access, hospitality services, or travel perks, arguing these components fall under the Article 21(1)(d) exclusion for entertainment expenses.
What was the outcome of CAAD arbitration process 52/2018-T regarding VAT additional assessments?
The CAAD arbitration tribunal in Process 52/2018-T ruled in favor of the taxpayer by determining that the Portuguese Tax Authority failed to substantiate its classification of 20% of sponsorship payments as entertainment expenses. The AT had issued eight additional VAT assessments for 2013 tax periods (March through December), totaling €789.39 in disallowed deductions. The tribunal found that the tax authority bore the burden of proving its 20% entertainment allocation but failed to provide adequate evidence. Critically, the sponsorship contracts submitted to the arbitration process did not correspond to the specific tax periods under assessment, undermining the AT's position. The tribunal considered the factual matter 'not established' that 20% of sponsorship payments constituted entertainment expenses subject to VAT deduction exclusion under Article 21(1)(d). This effectively invalidated the additional assessments and the corresponding account adjustment statements, demonstrating that Portuguese tax authorities must provide concrete, period-specific evidence when bifurcating sponsorship expenses between deductible advertising and non-deductible entertainment components.
What obligations do sponsored entities have in sponsorship contracts for VAT deduction purposes?
In sponsorship contracts under Portuguese VAT law, sponsored entities must undertake specific, demonstrable obligations that constitute advertising and promotional services to justify VAT deduction by the sponsor. As evidenced in Process 52/2018-T, qualifying obligations include: promoting the sponsor's name, image, activities, products and services through various advertising channels; displaying sponsor branding in stadium interiors, exteriors, and playing areas; featuring sponsor logos on team equipment and official materials; providing visibility during press activities like flash interviews; granting image rights allowing sponsors to use club and player likenesses in their own marketing campaigns; featuring sponsor presence on official websites and team photographs distributed to media; and displaying sponsor branding on team transportation. These obligations must be clearly documented in written contracts and actually performed. The mere provision of hospitality elements like match tickets, parking spaces, or travel packages without corresponding advertising commitments may be classified as entertainment rather than deductible business services. Portuguese tax authorities scrutinize whether contractual terms establish a genuine quid pro quo advertising relationship versus disguised entertainment expenditure.
How does the Portuguese Tax Authority (AT) handle hierarchical appeals on VAT sponsorship deductions?
The Portuguese Tax Authority handles hierarchical appeals on VAT sponsorship deductions through a multi-tier administrative review process before taxpayers can access arbitration. In Process 52/2018-T, the procedure followed this sequence: First, following a 2015 external inspection by the Division for Banks and Large Taxpayers, the AT issued a Tax Inspection Report in December 2015 proposing VAT deduction disallowances. The taxpayer then filed a request for administrative review (pedido de revisão) in June 2016, which the AT dismissed via official letter in October 2016. Subsequently, the taxpayer exercised the right to hierarchical appeal (recurso hierárquico) in November 2016, challenging the review dismissal. The hierarchical appeal authority issued a dismissal decision in November 2017, exhausting administrative remedies after approximately 17 months. Only after this complete administrative process could the taxpayer access CAAD arbitration in February 2018. Throughout this process, the AT maintained its position that 20% of sponsorship expenses constituted non-deductible entertainment, applying Article 21(1)(d) of the VAT Code, demonstrating the authority's consistent interpretation across review levels until challenged successfully in arbitration.