VAT Reduced Rate on Dental Implants Sold Separately – CAAD Ruling 530/2014-T

ARBITRAL DECISION

Tax Arbitration Proceeding

Case No. 530/2014 – T

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Deontological Council of the Center for Administrative Arbitration ("CAAD") to form the Sole Arbitral Tribunal, constituted on 26 September 2014, decides as follows:

I. REPORT

The company A…, LDA, legal entity no. …, with registered office at …, hereinafter "Claimant", and B… with tax identification number …, with domicile at …, hereinafter "Claimant with Pass-on Right" hereby, pursuant to the provisions of article 2, no. 1, paragraph a), article 10 and following of Decree-Law no. 10/2011, of 20 January, hereinafter referred to as "RJAT"[1], request the constitution of an Arbitral Tribunal to rule on the illegality and consequent annulment of VAT assessments, in the total amount of € 2,277.16 relating to the year 2012 and first quarter of 2013.

To support their request, the Claimant and the Claimant with Pass-on Right consider, in summary, that the individual and non-joint transfer of implants and abutments falls within the concept of "device" or "prosthetic material" contained in item 2.6 of List I of the VAT Code, and should consequently be taxed at the reduced rate of 6%. Thus, they state that there is no legal basis for the understanding advocated by the Tax Administration, according to which the reduced rate would apply only to "single implant units".

They further state that abutments and implants are used exclusively in the context of implantology, being intended solely for replacing, in whole or in part, the patient's tooth. Therefore, the Claimant and the Claimant with Pass-on Right consider that it would be contrary to the purpose of the rule and to the principle of the reasonable legislator an interpretation requiring the presence of "a single implant unit", as it would lead to the practical and absurd consequence of – for technical reasons – completely excluding any dental implant from the objective scope of the reduced VAT rate of 6%.

On 28 July 2014, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Respondent in accordance with legal provisions.

The Claimant did not proceed to appoint an Arbitrator.

Thus, pursuant to the provisions of no. 1 of article 6 and paragraph b) of no. 1 of article 11 of the RJAT, by decision of the Honorable President of the Deontological Council, duly communicated to the parties within the legally prescribed periods, Dr. Filipa Barros was appointed as arbitrator of the Sole Arbitral Tribunal, who communicated to the Deontological Council and to the Center for Administrative Arbitration the acceptance of the appointment within the period stipulated in article 4 of the Code of Ethics of the Center for Administrative Arbitration.

In accordance with the provisions of paragraph c), of no. 1, of article 11 of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Sole Arbitral Tribunal was constituted on 26 September 2014, followed by the relevant legal procedures.

The Respondent, duly notified for this purpose, filed its response in which it defends the inadmissibility of the request for arbitral ruling.

To this end, it invokes repeated and consistent administrative understanding, between the VAT Services Department and the General Directorate of Customs, since the beginning of the VAT Code's validity, according to which, "although it is difficult to distinguish between components and complete prostheses (implants), it appears that when transacted complete (...) in order to constitute a single implant unit proper + connecting pieces + tooth constituting a unit of sale per classifiable in item 2.5 of List I attached to the VAT Code, are subject to VAT at the reduced rate. The transfers of various individual components, parts and pieces are subject to VAT at the normal rate."

Thus, the Respondent makes a distinction between the material concept of implant and that of prosthesis, the former, the implant, being merely a piece, part or accessory, used in the elaboration and fixing of the prosthesis, while the prosthesis proper configures an artificial piece capable of replacing autonomously and in a single moment, an organ of the human body or part thereof, deserving, unlike the implant, classification in item 2.6 of List I attached to the VAT Code.

It further argues that the interpretation of item 2.6 of the VAT Code cannot ignore the EU legal framework, being for this purpose fundamental to consider the Combined Nomenclature as it proceeds to identify goods subject to import and export, to the determination of tariff classification and, consequently, to the respective tax treatment, which should be in consonance with the classification criterion used by the customs authorities.

On 19 December 2014, the first meeting of the arbitral tribunal was held, in accordance with the objectives provided for in article 18 of the RJAT.

In the exercise of the right to a hearing, the Tribunal decided to admit the production of expert evidence requested by the Claimant, and notified the Order of Physicians and Dentists for the appointment of an expert specialist in implantology.

On 12 March 2015, and after hearing the parties regarding the object of the expert examination, the Expert was notified to answer the questions defined by the Arbitral Tribunal.

On 30 March 2015, the Expert appointed by the Order of Physicians and Dentists submitted his report answering the questions formulated.

Written submissions were presented by the Claimants, followed by submissions by the Respondent.

In the submissions presented, the parties reiterated the positions defended in their respective pleadings.

In light of the submissions produced by the parties, the main question to be decided in the present case is to determine whether the transfer of abutments and implants, which constitute prosthetic material, habitually sold separately, may be taxed at the reduced rate of 6% because it falls within the scope of the provisions of item 2.6 of List I attached to the VAT Code, or conversely, whether it should instead be taxed at the normal rate of 23% applicable to the generality of transfers of goods, as they consist of pieces, parts and accessories of prostheses, incapable of fulfilling, considered individually, the function of replacing a part of the body or its function, as provided in the said item.

II. CASE MANAGEMENT

The Arbitral Tribunal was duly constituted.

The parties have legal personality and capacity, are legitimate and duly represented, (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

III. REASONING

1. Facts Established as Proved

The facts were established as proved based on the documents attached in the context of the administrative proceeding, the documents attached with the request for arbitral ruling, the response presented by the Tax and Customs Authority and, finally, the expert report in the indicated points.

1. The Claimant has as its main activity the import and wholesale distribution of medical devices used in the context of the implantology sector, being classified for purposes of economic activity under CAE 46460 – Wholesale Trade of Pharmaceutical Products;

2. For VAT purposes, the Claimant is a VAT taxable person, in accordance with paragraph a), of no. 1 of article 2 of the VAT Code, classified in the quarterly regime since 01-09-2001;

3. The medical devices marketed by the Claimant are of various kinds, having in common the fact that they are used in the treatment of anomalies and deficiencies of teeth, mouth, jaws and related structures;

4. In the course of its activity, the Claimant imports implants and abutments that it subsequently sells to dentists or dental prosthesis technicians;

5. The Claimant with Pass-on Right derives income from category B – professional income – for personal income tax purposes, exercising the professional activity of dentist;

6. For VAT purposes, the Claimant with Pass-on Right is classified in the VAT exemption regime, pursuant to article 9 of the VAT Code;

7. In the periods of 2012 and first quarter of 2013, the Claimant assessed VAT at the rate of 23%, duly reported in the respective periodic declarations, relating to the sales of implant abutments made to the Claimant with Pass-on Right, evidenced by the following invoices:

1. The materials transacted constitute implants and abutments on which the Claimant applied VAT at the rate of 23%, in compliance with the guidance issued by the Tax and Customs Authority through the Doctrine Sheet relating to process T -120 2005093 of 11 May 2007;

2. The function of an oral rehabilitation of an implant is to replace a single tooth. The osseointegrated implant can be rehabilitated with a crown (fixed prosthodontics on implant). If two or more implants are placed, their function may be to rehabilitate an edentulous space of two teeth to a complete arch, in a fixed or removable manner, cf. Expert Report;

3. The parties involved in a surgical procedure of oral rehabilitation are: pre-surgical clinical and radiographic planning; local anesthesia; incision for exposure of the bone cortex that will serve as the entry point for the surgical preparation of the implant bed, with a sequence of specific bone drills, according to the manufacturer's instructions; placement of the implant and the screw or healing abutment; suturing; Depending on the cases, the implant may remain submerged or transmucosal, cf. Expert Report;

4. The implant is a structure generally threaded similarly to the root of a single-rooted tooth, whose surface is prepared for osseointegration. It has a neck (region closest to the bone surface) where structures such as impression or healing abutments, or prosthetic components are attached, cf. Expert Report;

5. The implant replaces the function of the tooth root;

6. The prosthetic parts of a dental implant give the implant masticatory and functional aptitude, being indispensable for an implant to be rehabilitable. They serve for the attachment (screwing or cementing) of single crowns, bridges, complete dentures or attachments for anchoring a removable prosthesis, cf. Expert Report;

7. The abutment consists of a cylindrical structure inserted in the implant;

8. On the abutment a crown is introduced whose function is to restore, as much as possible, the original form of a tooth making it functional;

9. The dental implant is a structure composed of three elements: implant, abutment and crown intended to replace as a whole the tooth organ;

10. Implants and abutments are produced in series whereas the crown – elaborated by dental prosthesis technicians – needs to be adjusted to the characteristics of the patient's dentition, being specifically produced for each clinical case, cf. Expert Report;

11. The surgical procedure should be executed in phases that integrate the placement of the crown on the implant performed within 72 hours after surgery (aesthetic or immediate loading, generally performed with provisional acrylic crowns), or within a period of no less than ten weeks, to ensure that there is osseointegration of the implant before it is subjected to masticatory forces, cf. Expert Report;

12. The oral rehabilitation process through implant is divided into two phases: the placement of the dental implant in an initial phase, and placement of the abutment and crown in a later phase;

13. A prosthesis is any component that is not part of natural dentition and which aims to restore the masticatory function, replacing lost teeth, cf. Expert Report;

14. A prosthetic piece may be a crown, an abutment or another component necessary for the manufacture of a prosthesis. A prosthesis must have in itself all the constituent parts that allow it to exercise its function, cf. Expert Report;

15. The prosthetic components can only be used together with the respective implant, cf. Expert Report;

16. The implant may also serve for orthodontic traction, cf. Expert Report;

17. The benefits achieved with oral rehabilitation are those of conferring and optimizing the masticatory function of a patient partially or completely edentulous. Improvements in quality of life relate to the ability to chew, improving chewing, aesthetics and self-confidence. Prior to the emergence of dental implants it was only possible to rehabilitate edentulous spaces in a fixed manner, by executing bridges on teeth, which involved an invasive procedure of at least two teeth. With dental implants it is possible to rehabilitate small and large edentulous areas without compromising adjacent teeth and in a fixed manner, thus avoiding removable prostheses, whose retention, in cases of large bone absorption, often becomes a problem as well as being able to cause diminishment of taste. In cases of total edentulism, where complete prostheses present major retention problems, implants provided an answer for which there was no solution with conventional treatments, significantly increasing the patients' quality of life, cf. Expert Report;

18. On 27 March 2014, the Claimant and the Claimant with Pass-on Right submitted a Gracious Complaint to the Finance Directorate of Lisbon seeking the correction of their VAT self-assessments relating to the fiscal year 2012 and first quarter of 2013, relating to the sales of implant abutments that the Claimant made to the Claimant with Pass-on Right, with VAT having been assessed in excess in the amount of € 2,277.16, resulting from the application of the general VAT rate to the dental material in question (abutments and implants) instead of the application of the reduced rate of 6%;

19. By official letter no. … of 09 June 2014, the Claimant and the Claimant with Pass-on Right were notified to exercise the Right to Prior Hearing regarding the proposal to reject their request, cf. Administrative Proceeding;

20. The Respondent's position is based on the Doctrine Sheet of 11 May 2007, issued by the Tax and Customs Authority and reiterated in Information no. 2883, of 20 December 2012;

21. On 18 June 2014, the Claimant and Claimant with Pass-on Right were notified of the decision to definitively reject the Gracious Complaint presented against the acts of VAT self-assessment relating to the fiscal year 2012 and first quarter of 2013, cf. Administrative Proceeding;

22. On 25 July 2014, the Claimant filed the request for constitution of the Arbitral Tribunal that gave rise to the present proceeding. (cf. electronic application to CAAD).

1. Facts Not Established as Proved

No facts with relevance to the assessment of the matter were found that were not proven.

1. Motivation

The Tribunal's conviction in establishing the factual framework above was based on the Administrative Proceeding file, the documents that instructed the parties' pleadings and the expert report prepared by the Honorable Dr. C…, appointed by the Order of Physicians and Dentists, as a specialist in the matter of dental implants.

1. Questions of Law

The question to be decided is whether the individual transfer of the various components of dental implants – implant, abutment and crown – may be taxed at the reduced VAT rate of 6%, because it falls within the scope of the provisions of item 2.6 of List I attached to the VAT Code.

The Tax and Customs Authority (TA) has been arguing that the transfer of abutments, implants and their connecting pieces should be taxed at the normal VAT rate of 23%, applicable to the generality of transfers of goods, as they consist of parts and accessories of prostheses, incapable of fulfilling, considered individually, the function of replacing a part of the body or its function.

This position is supported by the Doctrine Sheet of 11 May 2007, reiterated in Information no. 2883, of 20 December 2012.

The Respondent's thesis is based on a Dispatch of the Subdirector-General of VAT, dated 1987-08-04, sanctioning the understanding that "artificial teeth (with or without pivot) are included in item 2.5 (current item 2.6) of List I, attached to the VAT Code, as they are considered prosthetic material and by the fact that they possess characteristics very specific to them that make them inapplicable in other functions other than exclusively those of replacing part of an organ."

There is also Information no. 1717, of September 1996, provided to a medical equipment company, in the face of a catalog of products identical to those marketed by the Claimant (such as implant material, material for the application thereof, namely cylinders, screws, abutments, crowns, bridges, among others) in which it was determined that "in the assembly of the components listed in the said catalog, various combinations of the said material can be obtained depending on each case and according to what the patient needs, which makes it difficult to differentiate what are components and what are already complete implants, having been the guidance of this Service that only complete apparatus can benefit from the reduced rate of 5% in their transfers".

Accordingly, according to administrative doctrine, the literal element of item 2.6 of List I attached to the VAT Code only covers the transfer of the article which, in itself, configures a complete artificial piece, apt to replace the organ or part of the human body, excluding from its scope of application implants constituted by various pieces, as these do not configure a "complete apparatus" or "finished product". Indeed, the importance of the Combined Nomenclature is invoked for this purpose, which proceeds to the delimitation of each of these categories, deserving the dental implant, also in this light, a differentiated classification, denominated as "article that serves as support to an artificial tooth".

Let us consider the question taking into account the facts established as proved and the law considered pertinent.

Let us begin by considering the provisions of item 2.6 of List I, attached to the VAT Code, relating to goods and services subject to the reduced rate of 6%, as follows:

"Orthopedic appliances, medical-surgical braces and medicinal stockings, wheelchairs and similar vehicles, driven manually or by motor, for disabled persons, appliances, devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or for the treatment of fractures and lenses for the correction of sight, as well as orthopedic footwear, provided that prescribed by medical prescription, in accordance with terms regulated by the Government."

The question that arises reduces itself to the application, in the case at hand, of the normative legal provisions that establish the rules to be observed in the interpretation of law, that is, of article 9 of the Civil Code, which, under the heading "Interpretation of Law", reads as follows:

"1. Interpretation should not be limited to the letter of the law, but should reconstruct from the texts the legislative intent, having particularly in account the unity of the legal system, the circumstances in which the law was elaborated and the specific conditions of the time in which it is applied.

1. However, the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed, cannot be considered by the interpreter.

2. In fixing the sense and scope of the law, the interpreter shall presume that the legislator sanctioned the most correct solutions and knew how to express its intent in appropriate terms."

In turn, in the annotation to this article, Pires de Lima and Antunes Varela wrote the following: "Instead of imposing a method or consecrating a doctrinal current in matters of interpretation of laws, the Code limits itself to consecrating the principles that can be considered as a definite acquisition in the matter, combating the excesses to which objective and subjective authors have often gone.

Thus, it moves away from the exaggeration of objectivists who do not even consider the historical circumstances in which the norm was born, insofar as no. 1 of article 9 commands the reconstruction of legislative intent and attention to the circumstances in which the law was elaborated. As it also condemns the excess of subjectivists who completely refrain from the letter of the law, to attend only to the will of the legislator, when no. 2 rejects the possibility of any legislative intent being valid as the decisive sense of the law, if in the text thereof no minimum of verbal correspondence is found.

And while commanding attention to the (historical) circumstances in which the law was elaborated, the provision does not fail to expressly consider relevant the specific conditions of the time in which the norm is applied (noting markedly actualist).

The fact that the article affirms that the reconstruction of legislative intent should be done from the texts does not mean, in no way, that the interpreter cannot or should not avail themselves of other elements for this purpose, namely the spirit of the law (mens legis)"[2].

Considering the various interpretative elements cited, it is important to note that VAT is a tax of EU origin, introduced in Portugal by Decree-Law no. 394-B/94, of 26.12, which came to transpose the 6th VAT Directive (Directive 77/388/EEC of the Council, of 17.05.1977) as amended by Directive no. 2006/112/EC, of 28 November, hereinafter VAT Directive.

Let us see, therefore, whether through the analysis of the relevant norms contained in the Community Directive arguments can be extracted in favor of the thesis defended by the Respondent.

Pursuant to the provisions of article 98 of the VAT Directive, Member States may apply one or two reduced rates to the deliveries of goods and provision of services of the categories contained in Annex III of the VAT Directive, (previously Annex H of the Sixth Directive) which contemplates, for the purposes of the case at hand, the following realities:

Point 4: "medical equipment, auxiliary material and other appliances normally used to alleviate or treat deficiencies, for the exclusive personal use of disabled persons, including their repair, as well as car seats for children";

Point 17: "Medical and dental treatments as well as thermal cures, provided that these services are not exempt by virtue of the provisions of paragraphs b) to e) of no. 1 of article 132";

Now, the Directive is a community act which, in terms of article 288 of the Treaty on European Union, binds the Member State recipient "as to the result to be achieved, leaving however to the national authorities the competence as to the form and means."

Thus, if on one hand Portuguese VAT obeys the principles established in the Directive, this, unlike the Regulation which has direct and immediate effect independent of the respective transposition, does not apply directly to taxable persons, who should only obey the rules of domestic law that operate the transposition of the Directive.

Furthermore, from the text of the Directive, no interpretative element emerges that induces in the direction of promoting a distinction of rates between "single implant units" and "implants composed of several pieces". Moreover, the goods and services referred to above listed by the VAT Directive as capable of benefiting from the reduced rate assume general interest and fulfill the objective of preventing certain medical equipment and services from becoming inaccessible due to the increased cost resulting from the subjection to VAT at the general rate.

Therefore, also in light of the objectives pursued by the community legislator, there is no reason to consider that the concept of "...appliances, devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body..." used in item 2.6 of List I attached to the VAT Code has a sense that only authorizes the benefit of the reduced rate to prostheses consisting of "Single Implant Unit".

In any case, it would be up to Portuguese law to determine the scope of the reduced rate, and to introduce, if it so wished, such distinctions, which it clearly did not do (see in this sense point 3 et seq. of the opinion attached to the file issued by José Guilherme Xavier de Basto).

Continuing the analysis from the point of view of community law, article 98, no. 3 of the Directive provides that "when applying the reduced rates provided for in no. 1 to categories relating to goods, Member States may use the Combined Nomenclature to precisely delimit each category".

Now, in the first place, the community Directive confers on Member States the faculty or option of using the Combined Nomenclature to delimit the various categories of goods that make up their lists of goods and services to which reduced rates apply. This is therefore a faculty and not an obligation, which the Portuguese legislator did not use in the VAT Code, with only one exception to be noted, contained in paragraph i) of no. 1 of article 14 of the same Code.

It is therefore irrelevant, for VAT purposes, the classification that prosthetic articles have in the Combined Nomenclature, as it clearly emerges that the Portuguese legislator did not resort to that nomenclature to define the goods contained in List I attached to the VAT Code, and for this reason either, the arguments invoked by the Respondent are not valid to refuse the application of the reduced VAT rate to the transfer of dental implants composed of several pieces.

The Respondent also recalls the positions assumed by the CJEU regarding the exceptional nature of the cases in which the application of reduced rates is permitted, since the general principle consists in the application of the normal VAT rate. On the other hand, it states that the principle of fiscal neutrality opposes a differentiation in the taxation of goods or services of identical nature, being verified when the tax does not influence the consumer's choice, and being debatable the commercial comparison that can be made between the good "removable prosthesis" and "fixed prosthesis" plus the respective fixing pieces.

Now, on this aspect, it is important to consider the Jurisprudence of the CJEU.

In the wake of this jurisprudence, the introduction and maintenance of reduced VAT rates is only admissible if it does not violate fiscal neutrality[3]. The CJEU holds that Member States, when making use of the possibility conferred on them by article 98 of Directive 2006/112 to apply a reduced VAT rate, must respect the criteria developed by the jurisprudence to determine whether an operation containing various elements should be considered a single provision, subject to a single tax treatment, or two or several distinct provisions, which may be treated differently[4].

To this end, it is recognized that it is impossible to give an exhaustive answer to the problem, and all the circumstances in which the operation in question develops should be taken into account and criteria should be observed, such as the expectation of the average consumer, with the objective of protecting the functionality of the VAT system in the face of the diversity of commercial transactions[5].

Furthermore, the principle of fiscal neutrality imports the consideration of two other principles: that of VAT uniformity and the elimination of competition distortions. Thus, similar operations, which are therefore in competition with each other, should not be treated differently from a VAT perspective, under penalty of introducing arbitrary discriminations and ad hoc applications of the Tax.

Therefore, in delimiting the goods and services that may benefit from reduced rates, objective criteria should be found, and it is incumbent upon Member States in the exercise of the margin of appreciation allowed them by Directive 2006/112 regarding the application of the reduced VAT rate, to observe general and objective criteria, such as those formulated in the Jurisprudence of the CJEU[6].

Now, in the case at hand, the Respondent seeks to distinguish for purposes of applying the reduced rate between implants composed of separate pieces and complete implants, assuming as a presupposition that the components of a composite implant have no the purpose that the law intended to privilege. However, to admit such argumentation would, in truth, introduce within the VAT system an arbitrary discrimination between two possible modalities of dental rehabilitation through implants.

Indeed, it should be noted that none of the arguments invoked by the Respondent will be valid, since such interpretation does not have a minimum of verbal correspondence with the letter of the Law.

As results from the evidence, the function of oral rehabilitation of an implant is to replace a tooth.

This goal must respect a complex process of a surgical nature.

According to the Expert Report, the surgical process presents several phases, which necessarily culminate in the aforesaid replacement of one or more teeth of the patient. Thus, the implant is introduced in parts in the patient's mouth "pre-surgical clinical and radiographic planning; local anesthesia; incision for exposure of the bone cortex that will serve as the entry point for the surgical preparation of the implant bed, with a sequence of specific bone drills, according to the manufacturer's instructions; placement of the implant and the screw or healing abutment; suturing; Depending on the cases, the implant may remain submerged or transmucosal".

Additionally, from the evidence it results that "the implant replaces the function of the tooth root" and that "the prosthetic parts of a dental implant give the implant masticatory and functional aptitude, being indispensable for an implant to be rehabilitable. They serve for the attachment (screwing or cementing) of single crowns, bridges, complete dentures or attachments for anchoring a removable prosthesis" according to the Expert Report.

In turn, the expert report clarifies that the abutment consists of the cylindrical structure that fits in the implant, and that on the abutment a crown is introduced whose function is to restore, as much as possible, the original form of a tooth making it functional.

It was thus demonstrated that a fixed prosthesis, introduced through an implant, is composed of three pieces – implant, abutment and crown – inseparable from each other and whose purpose consists solely in the replacement of an organ of the human body: the tooth.

Therefore, the concept of "single implant unit" used by the Respondent to sustain the application of the normal VAT rate to the components of the dental prosthesis has no correspondence either with the practice of implantology current in dental medicine, nor with the legislative text itself, even if imperfectly expressed, as was demonstrated.

Moreover, from an interpretative point of view, item 2.6 of List I attached to the VAT Code speaks only of "(...) devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body (...)", and by advocating an understanding that finds no minimum support in the letter of the law, the Respondent proceeds to a restrictive interpretation of that norm, in violation of good principles of legal hermeneutics that recommend declarative interpretation, taking into account the characteristics of VAT and the interpretation that the CJEU has been making, as was decided recently in a Judgment of the Supreme Administrative Court[7].

With respect to the concept of "single implant unit", the evidence made it clear that this is something that simply does not exist in the matter of oral rehabilitation through implants, so that by seeking to assign the benefit of the reduced rate only to implants consisting of single pieces, one would deny any possibility of applying the reduced rate to composite implants. The Expert Report was peremptory on this point, noting for example, that "implants and abutments are produced in series whereas the crown – elaborated by dental prosthesis technicians – needs to be adjusted to the characteristics of the patient's dentition, being specifically produced for each clinical case", adding convincingly that the implant, abutment and crown are applied to the patient in phases which "integrate the placement of the crown on the implant performed within 72 hours after surgery (aesthetic or immediate loading, generally performed with provisional acrylic crowns), or within a period of no less than ten weeks, to ensure that there is osseointegration of the implant before it is subjected to masticatory forces."

Now, the understanding advocated by the Respondent would create rules for VAT taxation differentiated between two types of prosthesis, which although they have processes of manufacture and surgical implantation different from each other, fulfill the same objectives, in light of the applicable legal provisions, that is, in both cases the intention is to replace a tooth and to improve the health and quality of life of the patient.

Furthermore, a selective interpretation, which limits the possibility of applying the reduced VAT rate only to classical prostheses, would be contrary to the general principles of the VAT Directive, violating in particular the principle of fiscal neutrality and uniform taxation, which opposes merchandise or provision of services being similar, which are in competition with each other, being treated differently from the point of view of this tax.

In this sense, it is also important to consider the jurisprudence of the CAAD[8] on this same matter. As was decided in a recent Judgment "not existing such "complete implant goods", in the sense that the TA intends to convey, the understanding of the Tax Administration ends up denying the benefit of the reduced rate to this type of prostheses, thus putting in question, without rational motive worthy of consideration, the ratio legis that presided over the acceptance of this item in the terms in which it is drafted – the protection of public health. Indeed, if such understanding were to prevail, an arbitrary discriminatory treatment would be introduced between the different dental prostheses. On the one hand, prostheses composed of a single piece would benefit from the reduced rate of 6%, on the other hand, prostheses "composed" would be taxed at the normal rate". It is further added that "if the understanding conveyed by the TA in the concrete case were to prevail, we would have a difference in treatment for identical realities resulting not from the VAT Directive but rather from a deficient application thereof by the Tax Administration".

Finally, it is also important to note that all the components that form the composite implant – implant, abutment and crown – cannot be used separately, being specially designed and prepared for the execution of a piece designated as an implant.

And being so, in accordance with a principle of substance over form, which should prevail in tax matters, the simple fact that such pieces are marketed individually and subject to separate invoicing cannot condition the classification and qualification of the transaction for VAT purposes. See also in this sense the arbitral proceeding no. 171/2013 -T in which it was considered irrelevant for purposes of applying the reduced rate, the separate invoicing of accessories and parts of wheelchairs and mobility scooters for the exclusive use of motor disabled persons, since such accessories only made sense if used together with the wheelchair completing it and ensuring the fulfillment of its functions.

Therefore, the reality that is in question in the present case subsumes itself in the legal provision of item 2.6 of List I attached to the VAT Code, consisting of "(...) appliances, devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body".

Thus, in accordance with the facts established as proved, the interpretation of the fiscal norms convoked for this purpose, the characteristics of VAT and the interpretation conveyed both by the jurisprudence of the Supreme Administrative Court and by the jurisprudence of the CJEU, it was concluded that in the present case the reduced VAT rate provided for in item 2.6 of List I attached to the VAT Code should be applied to the transfer of abutments and implants, upholding the claim of the Claimant and the Claimant with Pass-on Right.

1. Indemnificatory Interest

The Claimants further petitioned for the condemnation of the Respondent to indemnificatory interest, accrued and accruing until the date of reimbursement of the amounts of tax unduly assessed, considering that, in the case at hand, there occurred an assessment of VAT in excess of that legally due as a result of error attributable to the services.

Pursuant to article 43 of the General Tax Law and article 61 of the Code of Tax Procedure and Administrative Procedure "Indemnificatory interest is due when it is determined, in gracious complaint or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount higher than legally due".

Error attributable to the administration is understood as the error that is not attributable to the taxpayer and is based on erroneous presuppositions of fact and law that are not the responsibility of the taxpayer. Thus, "the right to indemnificatory interest covers only one of the causes of responsibility of the tax Administration, acting as such: that originated by the payment of undue taxes, that is attributable to it (...) the right to indemnificatory interest in favor of the taxpayer stems, as a general rule, from a duty of indemnification of the tax Administration resulting from the forced unproductivity of the amounts disbursed by the taxpayer."(cf. António Lima Guerreiro, Annotated General Tax Law, Rei dos Livros Publisher, p. 204 and 205).

Now, attending to the aforesaid, one cannot fail to consider that there has been error attributable to the services, in that the self-assessments of VAT in question were a consequence of the erroneous interpretation that the Respondent made regarding the provisions of item 2.6 of List I attached to the VAT Code.

It is thus concluded that the claim of the Claimants to be compensated through the payment of indemnificatory interest counted from the date of payment of the annulled tax assessments to the date of issuance of the credit note, is well-founded, in terms of article 61, nos. 2 to 5, of the Code of Tax Procedure and Administrative Procedure.

1. Expert's Remuneration

For purposes of the expert's remuneration, the criteria provided for in nos. 3 and 4 of Article 17 of the Regulation on Procedural Costs are adopted, and thus, attending to the complexity of the matters contained in the expert report prepared and to market practices, the respective remuneration is fixed at 8 Units of Account, to be paid by the Respondent.

1. DECISION

In accordance with the foregoing, this Arbitral Tribunal decides as follows:

a) To uphold the request for arbitral ruling;

b) To annul the decision rejecting the Gracious Complaint presented by the Claimants;

c) To correct the VAT self-assessments corresponding to the invoices identified in point 7 of the factual matter established, in a total of VAT assessed in excess of € 2,277.16;

d) As a consequence, the amounts of VAT assessed and paid shall be reimbursed, increased by indemnificatory interest calculated in accordance with the law, and in accordance with the present arbitral decision;

e) Finally, the Respondent is condemned to pay the remuneration of the expert appointed in the case, in the total amount of 8 Units of Account and to the payment of the arbitration fee (see articles 12, no. 2 and 22, no. 4, of the RJAT), fixing this at the amount of € 612.00 in accordance with Table I attached to the Regulation on Costs in Tax Arbitration Proceedings.

Value of the case: in accordance with the provisions of article 306, no. 2, of the Code of Civil Procedure and article 97-A, no. 1, paragraph a), of the Code of Tax Procedure and Administrative Procedure and article 3, nos. 1 and 2, of the Regulation on Costs in Tax Arbitration Proceedings, the case is valued at € 2,277.16 (two thousand two hundred and seventy-seven euros and sixteen cents).

Notify.

Lisbon, 21 May 2015

The Arbitrator

(Filipa Barros)

[1] Acronym for Legal Framework of Tax Arbitration.

[2] See, in Annotated Civil Code, vol. I, 3rd edition, Coimbra Publisher, pages 57-58

[3] Judgment of 3 April 2008, Case Torgau‑Westelbien, Proc. C-442/05.

[4] Judgment of 25 February 1999, Case CPP, Proc. C-349/96.

[5] Judgment of 21 February 2008, Case Part Service, C‑425/06.

[6] Judgment of 8 May 2003, Case Commission/France, C‑384/01.

[7] Judgment of the SAC of 15 April 2015, Proceeding 01563/14.

[8] See on the same question Judgment of the CAAD of 24 November 2014, Proceeding no. 429/2014-T.