VAT on Local Accommodation Property Exploitation – CAAD Arbitral Decision 548/2015-T

ARBITRAL DECISION

The Arbitrators Counsellor Jorge Lopes de Sousa (appointed by the other Arbitrators), Professor Doctor Clotilde Celorico Palma and Doctor Emanuel Augusto Vidal Lima, appointed respectively by the Applicant and the Respondent, to form the Arbitral Tribunal, constituted on 19-11-2015, agree as follows:

1. Report

A..., S.A." (hereinafter referred to as "Applicant" or "A"), with registered office at Avenida..., No...., ...-... Lisbon, holder of VAT ID No...., came, under Article 2, No. 1, paragraph a), and Article 10, Nos. 1 and 2, both of Decree-Law No. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters or "RJAT") and Articles 1 and 2 of Order No. 112-A/2011, of 22 March, to request the constitution of a Collective Arbitral Tribunal with a view to declaring the illegality of the additional VAT assessment act No. 2014 ... of Value Added Tax ("VAT") and interest issued by the Tax and Customs Authority ("AT"), with reference to the period of November 2013.

The Respondent is the TAX AND CUSTOMS AUTHORITY (AT).

The Applicant appointed as Arbitrator Professor Doctor Clotilde Celorico Palma, in accordance with the provisions of Article 6, No. 2, paragraph b) of the RJAT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 07-09-2015.

Pursuant to the provisions of paragraph b) of No. 2 of Article 6 and No. 3 of the RJAT, and within the period provided for in No. 1 of Article 13 of the RJAT, the head of the Tax Administration service appointed Doctor Emanuel Augusto Vidal Lima as Arbitrator.

The Arbitrators appointed by the Parties agreed to appoint Counsellor Jorge Lopes de Sousa as presiding arbitrator, who accepted the appointment.

Pursuant to and for the purposes of the provisions of No. 7 of Article 11 of the RJAT, the President of CAAD informed the Parties of this appointment on 23-10-2015.

Thus, in accordance with the provisions of No. 7 of Article 11 of the RJAT, after the period provided for in No. 1 of Article 13 of the RJAT had elapsed without the Parties having anything to say, the Collective Arbitral Tribunal was constituted on 09-11-2015.

The Tax and Customs Authority submitted a Response, in which it raised the exception of lack of jurisdiction of the Arbitral Tribunal to assess the legality of acts denying VAT refund requests and argued for the inadmissibility of the request and to recognize the Applicant's claimed right to waive VAT exemption.

The Applicant clarified that the request it formulated is for the annulment of the VAT assessment No. 2014..., of 2 August 2014, in the amount of € 4,465.83, and not the act denying the refund request.

By order of 29-12-2015, the meeting provided for in Article 18 of the RJAT was dispensed with and it was decided that the proceedings would continue with successive written submissions.

The Applicant stated that it did not intend to present submissions.

The Tax and Customs Authority, in summary, reiterated its position on the lack of jurisdiction of the Arbitral Tribunal to assess the act denying the VAT refund request and argued that the assessment act in question is independent of the refund request and that there cannot be a judgment ordering reimbursement following the possible annulment of that act.

The arbitral tribunal was regularly constituted and is competent.

The parties have judicial personality and capacity and are entitled (Articles 4 and 10, No. 2, of the same statute and Article 1 of Order No. 112-A/2011, of 22 March) and are properly represented.

The proceedings do not suffer from any nullities.

2. Exceptions Raised by the Tax and Customs Authority

2.1. Issue of Assessment of the Legality of the Act Denying a VAT Refund Request

The Tax and Customs Authority raised the issue of the lack of jurisdiction of the Arbitral Tribunal to assess the legality of the act denying the VAT refund request, to which the Applicant refers in the request for arbitral pronouncement.

In light of the clarification provided by the Applicant regarding the request, which only concerns the assessment of the legality of the VAT assessment, the assessment of the issue of the jurisdiction of the arbitral tribunals functioning at CAAD to assess VAT refund requests becomes unnecessary, as pointless, since there is no such request that is the subject matter of the proceedings.

2.2. Issue of Lack of Material Jurisdiction

The Tax and Customs Authority understands, in summary, that:

– "in any situation, whether because the operations in question are subject and not exempt (as the Applicant argues), or because VAT was improperly mentioned in the invoices documenting the operations (as the Tax Inspection concluded), the delivery to the State of the tax in question in the assessment is mandatory";

– "therefore, only as a matter of professional duty, and without conceding, could it be considered that the assessment now being challenged is based on the Applicant's classification under the waiver of exemption regime".

– "if it comes to be understood in this way, in line with what was stated above regarding the material jurisdiction of this request for arbitral pronouncement, as restrictively defined in the RJAT and in the Binding Order, excluded from the scope of its jurisdiction is the assessment of a preliminary question to the one that would then be discussed in these proceedings: the recognition of the Applicant's right to benefit from the waiver of exemption regime".

The jurisdiction of the arbitral tribunals functioning at CAAD is defined, in the first place, by Article 2, No. 1, of the RJAT, which establishes the following:

1 - The jurisdiction of the arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of acts of assessment of taxes, self-assessment, withholding at source and payment on account;

b) The declaration of illegality of acts establishing the taxable amount when not giving rise to the assessment of any tax, of acts determining the taxable material and of acts establishing patrimonial values;

In the second place, the jurisdiction of the arbitral tribunals functioning at CAAD is limited by the commitment of the Tax and Customs Authority which, pursuant to Article 4, No. 1, of the RJAT, was defined by Order No. 112-A/2011, of 12 March, which establishes the following, insofar as relevant here:

The services and bodies referred to in the preceding article commit themselves to the jurisdiction of the arbitral tribunals functioning at CAAD which have as their object the assessment of claims relating to taxes whose administration is entrusted to them referred to in No. 1 of Article 2 of Decree-Law No. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to administrative procedures in accordance with Articles 131 to 133 of the Code of Tax Procedure and Process;

b) Claims relating to acts determining the taxable material and acts determining the taxable amount, both by indirect methods, including the decision of the revision procedure;

c) Claims relating to customs duties on imports and other indirect taxes on goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff quotas, or whose resolution depends on laboratory analysis or proceedings to be carried out by another Member State in the context of administrative cooperation on customs matters.

Order No. 112-A/2011, regarding the acts classifiable as indicated in Article 2, only excluded from the scope of the commitment of the Tax Administration, in non-customs matters, claims relating to acts of self-assessment, withholding at source and payment on account that have not been preceded by recourse to administrative procedures and claims relating to acts determining the taxable material and acts determining the taxable amount, both by indirect methods, including the decision of the revision procedure.

It is manifest that we are not faced with any of the situations in which Order No. 112-A/2011 removes the jurisdiction of the arbitral tribunals functioning at CAAD, so jurisdiction must be assessed solely on the basis of the RJAT.

As can be seen from Article 2 of the RJAT, the jurisdiction of the arbitral tribunals functioning at CAAD was defined by the RJAT only taking into account the type of acts that are the subject of claims by taxpayers and not according to the type of questions that need to be assessed to decide whether the acts are legal or illegal.

There is, in particular, no prohibition on assessing matters relating to the verification of the prerequisites for the right to waive VAT exemption or any other questions of legality relating to acts of the types referred to in Article 2 of the RJAT. A tax assessment that departs from disregarding an exemption or a waiver of exemption does not cease to be a tax assessment act. And the claim for assessment of the legality or illegality of such disregard underlying an assessment act is not, therefore, anything other than the assessment of a claim relating to the declaration of illegality of assessment acts, in which that disregard is embodied.

Thus, in arbitral proceedings, similarly to what occurs in judicial review proceedings, any illegality can, as a general rule, be attributed to assessment acts, as follows from Article 99 of the CPPT, subsidiarily applicable.

This will only not be the case where the law provides for autonomous impugnability of administrative acts that are prerequisites of assessment acts, and it is only to that extent that assessment of the legality of assessment acts in all respects is excluded. But, for such autonomous impugnability to exist, there must be some administrative act in tax matters, as impugnability refers to acts and not to legal positions assumed explicitly or implicitly as prerequisites of assessment acts, but not embodied in autonomous tax acts.

For there to be limitation on the impugnability of the challenged assessment act, there would have to be previously carried out some administrative act that was a prerequisite of this assessment act, which did not occur in the case at hand.

Therefore, as the assessment act is harmful to the interests of the Applicant and as it is the only act carried out by the tax administration specifically concerning the obligation to pay the assessed amount, its contentious impugnability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in Articles 20, No. 1, and 268, No. 4, of the CRP.

On the other hand, when there is no autonomously impugnable act preceding an assessment act concerning its prerequisites, any illegality previously committed may "be invoked in the challenge to the final decision" (final part of Article 54 of the CPPT), so that all questions relating to the legality of assessment acts can be assessed in the tax courts in judicial review proceedings, as follows from paragraph a) of No. 1 of Article 97 and Article 99 of the same Code.

In fact, in the tax courts, even when, assessment acts having been carried out, we are faced with a situation in which it could be more useful for the taxpayer to use an action for recognition of a right or legitimate interest (by enabling, in addition to assessment of the legality of acts, definition for the future of the taxpayer's rights), the use of an action instead of judicial review is merely optional, as follows from the very text of Article 145, No. 3, of the CPPT, when it says that "actions may only be brought whenever this procedural means is the most appropriate to ensure full, effective and actual protection of the right or legally protected interest". That is, what is provided for in this rule is limitation on the use of an action and not limitation on the use of judicial review proceedings.

Indeed, it is manifest that judicial review proceedings include the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to indemnifying interest and the right to compensation for improper guarantee, so that the fact that recognition of rights is at issue is not an obstacle to the use of judicial review proceedings.

Thus, as arbitral tax proceedings were created as an alternative to judicial review proceedings, it is to be concluded that there is no obstacle to the legality of the assessment acts at issue in this case being assessed by this Arbitral Tribunal, since in the tax courts that legality could be assessed in judicial review proceedings.

The fact that an act denying a VAT refund request was carried out regarding which identical questions of legality can be raised to those that the Applicant raises regarding the assessment act does not prevent it from being considered autonomous, namely as to the prerequisites on which it was based, which do not depend on any other act carried out by the Tax and Customs Authority.

Therefore, the exception of lack of material jurisdiction raised by the Tax and Customs Authority is without merit.

3. Factual Matters

3.1. Proven Facts

a) A... is a company constituted in 2003 as a joint venture between the V... Group and the R... Group, with the objective of carrying out construction and marketing for sale of real estate developments;

b) On 17-12-2013, the Applicant submitted the periodic VAT return for the period 2013/11, which is contained in document No. 13 attached with the request for arbitral pronouncement, the contents of which are reproduced;

c) An inspection of the Applicant was carried out within the scope of service order No. ...2014..., which led to the denial of a VAT refund request for the period of November 2013;

d) In the Tax Inspection Report drawn up in this inspection, which is contained in document No. 14 attached with the request for arbitral pronouncement, the contents of which are reproduced, the following is stated, among other things:

II.3.3.2 - In the context of VAT

For VAT purposes and since the beginning of activity on 04/11/2003, the taxable person presents the following classifications:

III - DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETICAL CORRECTIONS

The refund request here under analysis was effected in the periodic VAT return for the period 2013/11 (annex No. 11, with 4 sheets), as per the values indicated below:

III.1 - SITUATIONS THAT ORIGINATED THE REFUND REQUEST IN THE AMOUNT OF € 2,488,248.78

A) The value of the refund requested derives, as demonstrated, from the values entered in fields 20 and 40, respectively € 1,763,140.51 and € 729,574.10, which in turn result from the imputation of 84.15% (Annex II, with 1 sheet - calculations relating to the imputation percentage) of the VAT contained (€ 2,962,227.70) in the construction cost of the "..." development, since December 2005 (although the beginning of construction was earlier), such percentage referring to the per mille of 82 units (C, O, E, G, H, I, J, K, L, M, N, P, R, S, T, U, W, X, Y, Z, AA, AB, AD, AF, AG, AH, AI, AJ, AK, AL, AM, AN, AO, AP, AS, AU, AV, AW, AX, AY, AZ, BA, BE, BG, BH, BI, BJ, BK, BL, BN, BP, BQ, BR, BS, BT, BU, BV, BX, BY, BZ, CA, CB, CC, CO, CE, CH, CI, CJ, CK, CL, CM, CP, CQ, CR, CS, CT, CU, CV, CW, CX, CY, CZ) underlying the lease agreement concluded on 20/11/2013 between A... and the company M..., SA (hereinafter referred to as M), VAT ID No. ... .

B) The construction costs of the ... development recorded total € 22,605,667.30 (as detailed in Annex III, with 15 sheets), this value being confirmed through analysis of the documents, which were visaed. For this purpose, accounts were requested from the beginning of construction, given that in accordance with what is established in No. 3 of Article 45 of the General Tax Law in case tax deduction has been made, the limitation period is that of the exercise of this right.

C) The deducted VAT is supported, for the most part, by invoices issued by "E..., S.A.", VAT ID:..., the company that carried out the construction of the development.

D) It should be noted that between E... and A..., as well as between M... and A..., there are special relationships in light of paragraph b) of No. 4 of Article 63 of the CIRC (as one has the power to exercise directly or indirectly a significant influence on the management decisions of the other), because:

• The V... Group, SGPS, SA owns all (100%) of the share capital of V... I..., which in turn owns 100% of the share capital of A... .

• The V... Group, SGPS, SA owns all (100%) of the share capital of V... T..., which in turn owns 99.83% of the share capital of M... .

• The V... Group, SGPS, SA owns all (100%) of the share capital of V... G..., which in turn owns 100% of the share capital of E....

E) It should be noted that the lease operation of the 82 units carried out between A... and M..., on 20-11-2013 [referred to in paragraph A)], was exempt from VAT under No. 29 of Article 9 of the VAT Code, however, it made use of the possibility of waiver of exemption provided for in Nos. 4 and 6 of Article 12 of the VAT Code, by submission in November 2013 of "Certificate of Waiver of VAT Exemption in the Lease of Real Property" (in Annex IV, with 1 sheet the certificate of waiver of exemption of unit AA is attached as an example, the remaining certificates of waiver of exemption being in work papers), having declared that it met the conditions established for this purpose in the cited rule as well as in the Regime of waiver of VAT exemption in operations relating to real property, approved by Decree-Law No. 21/2007, of 29/01.

F) However, it cannot be overlooked that it is stated in the Waiver Certificates issued for each of the units that: "The certificate is intended to justify the choice for VAT taxation at the time of conclusion of the contract, but will have no effect if, in the exercise of its supervisory powers, the Tax and Customs Authority finds that the legal prerequisites for the waiver of exemption were not met." (in Annex IV, with 1 sheet).

Therefore, it is now important to analyse whether the legal prerequisites for the waiver of exemption are met:

III.2 - CONDITIONS FOR WAIVER OF EXEMPTION

The regime for waiver of VAT exemption in operations relating to real property is governed by Decree-Law 21/2007, of 29-01, the annex of which defines the respective prerequisites, formalities and accounting-tax procedures to be observed by taxable persons.

III.2.1 - Formalities

In accordance with this regime of waiver of exemption and consequent choice for VAT taxation, interested parties must first request from the DGCI, electronically, a certificate for this purpose, and must provide a set of elements for identification of the property and the purchaser, namely the activity to be carried out in the property and the value of the rent.

After receipt of the request by the DGCI, the latter must, also electronically, inform the lessee so that the latter confirms the data electronically.

The certificate is issued within 10 days and is valid for 6 months, producing effects in relation to the persons involved in the operation (lease) regarding which the exemption was requested, underlying the conclusion of the contract (lease).

In parallel, certain requirements must be observed in relation to both contracts concerning the property and the persons involved (lessor or lessee), so that the waiver of said exemption can take effect.

Thus simultaneously, after verification of compliance with the formal matter, for the waiver of exemption to produce effect the legal prerequisites contained in Article 12 of the VAT Code must be verified and specifically (real estate operations) in Decree-Law No. 21/2007, of 29 January and which are summarized below.

III.2.2 - Legal conditions to be verified in the waiver of exemption - Article 12 of the VAT Code and Decree-Law No. 21/2007, of 29 January

III.2.2.1 - General Considerations

In exercise of the legislative authorization granted by paragraph c) of No. 3 of Article 45 of Law No. 60-A/2005, of 30 December "Review the requirements necessary for the exercise of the right to waive the VAT exemption contained in Nos. 4 to 7 of Article 12 of the VAT Code, introducing restrictions on such right when, in the operations carried out or to be carried out, taxable persons without full right to deduction are involved or when special relationships exist between them as defined for IRC purposes...", amendments were introduced to the VAT Code and its supplementary legislation on taxation of real estate operations, changes to the regime of waiver of VAT exemption in the transfer and lease of real property.

Decree-Law No. 21/2007, of 29/01 introduced into VAT legislation a set of measures intended to combat certain situations of fraud, evasion and abuse that are occurring in the conduct of real estate operations subject to taxation.

With this purpose, the rules for waiver of VAT exemption in the lease and transfer of property covered by Nos. 29 and 30 of Article 9 of the respective Code were substantially revised, subjecting the waiver to the verification of cumulative conditions relating to the property and the taxable persons that may be involved in these operations. Without calling into question the possibility of tax exemption by economic operators when properties are used by them in taxed activities, certain restrictions are nevertheless imposed on the possibility of choosing taxation when the habitual activity of those involved does not configure significant VAT deduction rights, unless that activity consists of the construction or purchase of property for sale or lease.

Article 3 of Decree-Law No. 21/2007, of 29/01 approves the regime for waiver of VAT exemption in operations relating to real property (hereinafter referred to as Waiver Regime), published in annex to this decree-law and forming an integral part thereof.

III.2.2.2 - Objective Conditions for Waiver of Exemption in the Case of Transfers or Leases

• As regards real property, waiver is permitted when the following objective conditions are cumulatively satisfied (No. 1 of Article 2 of the Waiver Regime):

a) The property is an urban building or an autonomous unit thereof or, in the case of transfer, land for construction;

b) The property is registered in the land register in the name of its owner or registration has been requested, and is not intended for housing:

c) The contract has as its purpose the transfer of ownership rights of the property or its lease and concerns the whole of the real property;

d) The property is allocated to activities that provide a right to deduction of VAT borne in acquisitions;

e) In the case of lease, the value of the annual rent is equal to or greater than 1/25th of the value of acquisition or construction of the property.

Provided the above conditions are met, the waiver is only permitted when the real property is in one of the following circumstances (No. 2 of Article 2 of the Waiver Regime):

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

b) It is the first transfer or lease of the property after it has been subject to major works of transformation or renovation, which resulted in a change of more than 50% of the taxable patrimonial value for the purpose of municipal property tax, when it is still possible to proceed with deduction, in whole or in part, of the VAT borne in such works;

c) In the transfer or lease of the property subsequent to an operation carried out with waiver of exemption, when the regularization period provided for in No. 2 of Article 24 of the VAT Code is still running in relation to the tax borne in the costs of construction or acquisition of the property,

III.2.2.3 - Subjective Conditions for Waiver of Exemption

• As regards taxable persons, waiver of exemption is permitted, in the case of lease, when the lessor and lessee are taxable persons referred to in paragraph a) of No. 1 of Article 2 of the VAT Code, who meet the following conditions (No. 1 of Article 3 of the Waiver Regime):

a) They conduct operations that provide a right to deduction or, in the case of taxable persons who simultaneously conduct operations providing a right to deduction and operations not providing such right, when the totality of operations providing a right to deduction is more than 80% of total turnover;

b) They are not covered by the special regime for small retailers contained in Articles 60 and following of the VAT Code;

c) They have organized accounts in accordance with the Personal Income Tax Code or the Corporate Income Tax Code.

III.3 - VERIFICATION OF COMPLIANCE WITH CONDITIONS FOR WAIVER OF EXEMPTION

III.3.1 - Certificates of Waiver of Exemption

The taxable person, in compliance with the formal requirement, submitted in relation to 82 units "Certificates of Waiver of VAT Exemption in the Lease of Real Property", expressing the intention, under Nos. 4 and 6 of Article 12 of the VAT Code, to waive the VAT exemption provided for in No. 29 of Article 9 of the VAT Code, declaring that it meets the conditions established for this purpose in the aforementioned provisions of Article 12 of the VAT Code and in the Regime for waiver of VAT exemption in operations relating to real property, approved by Decree-Law No. 21/2007, of 29/01, choosing instead VAT taxation (lease for tourist accommodation in relation to the 82 units, belonging to the ... Development (registered in the land register with No.....)).

III.3.2 - The Property is Not Intended for Housing (paragraph b) of No. 1 of Article 2 of the Waiver Regime)

A..., a company dedicated to construction of residential real estate developments for sale and/or lease, began construction of a development consisting of 100 apartments and 4 single-family houses on 11/10/2004, as per partial license corresponding to registration No. ... (Annex No. V, with 3 sheets), which was completed on 06/05/2011, as per certificate of occupancy No.../2011, issued on 17/11/2011 (Annex No. VI, with 10 sheets), having registered it in its name in the land register with No. ... of Parish ...- ... (...) on 05/07/2011, allocated to housing, as per Form 1 presented by itself (Annex VII, with 22 sheets).

Of that development, consisting of 100 apartments and 4 single-family houses, until November 2013, A... had sold 7 units (B, O, AC, BB, BW, CF, CO) and leased 15 (A, F, Q, V, AE, AQ, AR, AT, BC, BD, BF, BM, BO, CG, CN), with 82 units remaining (C, O, E, G, H, I, J, K, L, M, N, P, R, S, T, U, W, X, Y, Z, AA, AB, AO, AF, AG, AH, AI, AJ, AK, AL, AM, AN, AO, AP, AS, AU, AV, AW, AX, AY, AZ, BA, BE, BG, BH, BI, BJ, BK, BL, BN, BP, BQ, BR, BS, BT, BU, BV, BX, BY, BZ, CA, CB, CC, CD, CE, CH, CI, CJ, CK, CL, CM, CP, CQ, CR, CS, CT, CU, CV, CW, CX, CY, CZ).

On 22-10-2013 and 23-10-2013, A... submitted a new Form 1 for municipal property tax for the 82 units in order to change their allocation to services (in Annex No. VIII, with 1 sheet, Form 1 of unit AB is attached as an example, the Forms 1 of the remaining units are in work papers).

III.3.2.1 - Lease Agreement (for Local Accommodation)

Underlying the waiver of exemption, the taxable person presented, in relation to the unsold/unlet units of the ... Development, the lease agreement (in Annex IX, with 14 sheets), concluded on 20/11/2013, with M... .

From reading the said agreement, it is evident that:

• A... is the owner and legitimate proprietor of the urban development called "...";

• A... leases to M... the 82 units licensed for Local Accommodation, in accordance with licenses issued by the Municipal Council of …;

• It is concluded for one year, renewing automatically for equal periods;

• It may be terminated by either party by means of prior written notice with 90 days' notice;

• Any unit subject to this lease agreement may be excluded, namely in case of sale of the excluded unit, with 30 days' notice;

• The total monthly value relating to the 82 leased units is € 58,250.00 plus VAT at the applicable rate;

• The exclusive utilities relating to the leased units, namely electricity, water and air conditioning shall be the responsibility of M...;

• The autonomous units leased are intended to be subleased by M... in the local accommodation regime, in accordance with the Legal Framework for the Installation, Operation and Functioning of Tourist Facilities, approved by Decree-Law No. 39/2008, of 7 March and within the scope of its corporate purpose;

In summary, it results from the agreement that the 82 units would be allocated, both by the taxable person and by M..., to the conduct of operations providing a right to deduction, given that they would be leased for local accommodation, as provided for in Decree-Law No. 39/2008, of 7/03 and in Order No. 517/2008 of 25/06 (which establishes the minimum requirements to be observed by local accommodation establishments), as is explicitly stated in the said agreement.

Thus, it is important to present in relation to the operation providing a right to deduction - lease for local accommodation the regulation that exists in our Country and as well as the requirements to be verified.

III.3.2.2 - Local Accommodation (Article 3 of Decree-Law 39/2008, of 7 March)

III.3.2.2.1 - General Considerations

Local accommodation establishments are understood to be houses, apartments and hospitality establishments that, having authorization for use, provide temporary lodging services, in return for remuneration, but do not meet the requirements to be considered tourist facilities.

Local accommodation establishments must comply with minimum safety and hygiene requirements defined by Order No. 517/2008, of 25 June, amended by Order No. 138/2012, of 14 May.

Local accommodation establishments are obligatorily registered in the municipal council of the respective area and may in these cases be marketed for tourist purposes either by their owners or by travel and tourism agencies; however, they must be identified as local accommodation and may in no case use the qualification tourism or tourist, nor any classification system.

III.3.2.2.2 - Registration (Article 3 of Order No. 517/2008, of 25/06)

The registration of local accommodation establishments presupposes the existence of authorization for use or a valid title of use of the property, the verification of which is the responsibility of the municipal council of the respective area, with the exception of establishments installed in property built before the entry into force of Decree-Law No. 38382, of 7 August 1951.

III.3.2.2.2.1 - Mere Prior Notification for Registration (No. 2 of Article 3 of Order No. 138/2012)

The mere prior notification for registration of local accommodation establishments addressed to the president of the municipal council shall be accompanied by the following elements:

a) Document evidencing the legitimacy of the applicant;

b) Term of responsibility, issued by a qualified technician, certifying that the electrical installations, gas and water heaters comply with legal standards in force;

c) Plan of the property indicating which accommodation units are to be allocated to the intended activity;

d) Name and tax identification number of the operator of the establishment, namely for online consultation of the urban property register relating to the property in question.

When the establishment has a capacity of 50 or more persons, in addition to the documents referred to above, the mere prior notification must also be accompanied by the fire safety project, as well as a term of responsibility of its author certifying that the fire safety system implemented is in accordance with the project.

Within 60 days of submission of the mere prior notification, the municipal council may carry out an inspection to verify compliance with the necessary requirements, and in case of non-compliance, registration is cancelled and the establishment is closed.

III.3.2.2.3 - Types (Article 2 of Order No. 517/2008, of 25/06)

1 - Local accommodation establishments may be classified as one of the following types:

a) House - local accommodation establishment whose accommodation unit consists of an autonomous building of single-family character;

b) Apartment - local accommodation establishment whose accommodation unit consists of an autonomous unit of a building;

c) Hospitality establishments - local accommodation establishment whose accommodation units consist of rooms.

III.3.2.2.4 - Minimum Requirements of Local Accommodation Establishment (Articles 5, 6, 7 and 10 of Order No. 517/2008, of 25/06)

• Connection to public sewerage and water supply network or possession of a private water supply system with controlled source; in case of septic tank, the size must be in accordance with accommodation capacity;

• Accommodation units must have a window or balcony with direct communication to the outside; adequate ventilation and airing conditions; necessary furniture and utensils, light-blocking systems and doors ensuring user privacy;

• One sanitary facility for every three rooms, consisting of washbasin, toilet and bathtub and/or shower;

• Hygiene and cleanliness conditions; cleaning and tidying services of the accommodation unit, as well as change of towels and bed linen, must take place at least once per week and whenever there is a change of user.

• Extinguishers, fire blankets, first aid equipment, instruction manual for electrical appliances and indication of the national emergency number (112);

• Complaints book in accordance with terms and conditions established by Decree-Law No. 156/2005, of 15/09, as amended by Decree-Law No. 371/2007, of 06/11 (in case of complaints, the original of the sheet must be sent to the Food and Economic Safety Authority - ASAE).

III.3.2.3 - From the Visit to the Development

On 08/04/2014, at 10:30 a.m., we went to the ... development with the intention of visiting it, which was not possible due to the fact that there was no one at the "supposedly" reception desk (sales office/shop).

However, it was possible to verify that:

• On the door of the reception desk (sales office/shop), A... was identified and not M... (Annex No. X, with 1 sheet);

• There was no evidence that the property was intended for local accommodation or that it was being operated by M... .

On that same day, at 3:00 p.m., we returned to the said development, where we witnessed the unloading of 70 refrigerators, 50 blankets, 50 decorative quilts, 50 pillow cases and 50 sheets, with loading location at "..." and unloading location "...", in accordance with the transport documents (which are attached in Annex XI, with 2 sheets), which were intended, as we were told by the architect ...(responsible for the development) to be placed in the properties.

III.3.2.4 — Information and Elements Collected from the Municipal Council of …

On that same day (08/04/2014), we were informed by the architect ..., in one of the visits to the Municipal Council of …, that this body had just been contacted by telephone to schedule an inspection for 11/04/2014, an inspection that was pending scheduling by A... since the date of 20/01/2014, when the Council carried out the first inspection and from which no local accommodation status was granted.

It should be noted that the date scheduled for the inspection (11/04/2014) would coincide with the date scheduled by the company for our visit to the development.

It was also requested, via email (Annex XII, with 1 sheet) on 09/04/2014, from the Municipal Council of …, within the scope of the principle of cooperation, provided for in Article 9 of the RCPIT and in accordance with paragraph d) of No. 1 of Article 63 of the General Tax Law (LGT), regarding the local accommodation process, located on Rua ... (... development), parish of ... and..., of the company A..., SA, VAT ID:..., the following elements/clarifications;

• Summary of the procedures in relation to it, namely: - Date of the application request;

• If as a result of this request, an inspection was carried out of all units of the property. If so, whether all units complied with the requirements necessary for approval of the request. In case not all units were inspected, state the reason for preventing such inspections; and . . - Current status of the process.

Having obtained from the Municipal Council of … the following response (Annex XIII, with 1 sheet):

"In view of what was requested by the Finance Department of …, a status report on works process No. .../2003 was prepared, and it is our duty to inform the following:

• On 21/10/2013 the applicant company A..., S.A. filed in the services of this Municipal Council requests relating to the application for local accommodation for 81 units (... Development):

• It was found that the necessary elements were submitted for proper processing of the file in light of applicable legislation in force, namely Decree-Law No. 39/2008, of 7 March supplemented by Order No. 517/2008, of 25 June with new wording given by Order No. 138/2012, of 14 May, verifying through use license No. .../2011 that the autonomous units in question are intended for housing, an inspection was proposed (in accordance with point 5 of Article 3 of Order No. 517/2008, of 25 June with new wording given by Order No. 138/2012, of 14 May);

• In accordance with Administrative Decision of 27/12/2013, official letter No. ... dated 7/01/2014 was issued, regarding the scheduling of the inspection (date 20/01/2014) and payment of the fee in accordance with the Municipal Tax and Other Revenue Regulation:

• On 20/01/2014, the inspection committee of the Municipal Council, composed of senior technicians ..., ... and ..., went to the location to verify compliance with the necessary requirements provided for in the aforementioned order; 20 units/local accommodation establishments met the necessary requirements, however, the remaining ones, as they were not equipped with all adequate equipment (lack of refrigerators in the kitchens), were given a period to complete the local accommodation establishments, with the applicant company remaining to contact the inspection committee to verify the units;

• On 08/04/2014 it was scheduled for 10/04/2014 a new visit to the location to conclude the inspection of the units/local accommodation establishment in default."

In view of the above, it is concluded that, following the requests submitted by A... on 21/10/2013 to the Municipal Council of … (in Annex XIV, with 1 sheet, the request for unit AA is attached as an example, the requests for the remaining units being in work papers), with a view to obtaining Registration as local accommodation, the inspection committee of the Municipal Council went on 20/01/2014 to the ... Development to verify compliance with the necessary requirements, having found that the general requirement provided for in paragraph b) of No. 2 of Article 5 of Order No. 517/2008, of 25/06 had not been met for all units, namely, they were not equipped with all adequate equipment.

III.3.2.5 - From Internet Advertising Consultation

Through consultations on the Internet, it is verified that the ... Development is not advertised for local accommodation but rather for sale or lease (Annex XV, with 3 sheets).

III.3.2.6 - Promise of Lease Agreement

On 5 July 2013 a promise of lease agreement was entered into between A... and M...(in Annex XVI, with 13 sheets - "Promise of lease agreement"), which stipulates in No. 2 of its Clause 5 that the units subject to the agreement are promised to be leased free of any furniture, with the exception of equipment installed in the kitchen, M... are authorized by A..., at the expense of the latter, to furnish as they best see fit the units that may be leased, in such a way as to permit and adapt their use to the purposes referred to in No. 1 of Clause 4, namely the autonomous units promised for lease are intended to be, after conclusion of the final lease agreement, subleased by M... in the local accommodation regime, in accordance with the Legal Framework for the Installation, Operation and Functioning of Tourist Facilities, approved by Decree-Law No. 39/2008, of 7/03 and within the scope of its corporate purpose.

No. 2 of Clause 5 of the promise of lease agreement was transposed into the lease agreement dated 20 November 2013.

III.3.2.7 - In Summary:

It was A... itself that after construction of the development registered it with the Tax Authority through submission of Form 1 of the municipal property tax on 05/11/2011 as intended entirely for housing, therefore its intent was unquestionably the sale or lease of the units comprising it and not allocation to local accommodation.

Indeed the Use License No. .../2011 (Annex No. VI, with 10 sheets) issued by the Municipal Council of … approves the use of the units for housing and not for services.

Only on 22/10/2013 did A... submit a new Form 1 of the municipal property tax for the 82 units in order to change their allocation to services, without it being associated with any alteration or improvement, let us see:

Nevertheless, although A... submitted on 21/10/2013 requests to the Municipal Council of …, with a view to obtaining Registration as Local Accommodation, one of the general requirements to be observed by local accommodation establishments being that they are equipped with adequate furniture and utensils (No. 2 of Article 5 of Order No. 517/2008), it never proceeded to actually equip the properties for this activity, as demonstrated by its accounts (as from said accounts, from the year 2003 until the period of the refund request, there is no purchase of furniture or other equipment necessary for local accommodation).

Such failure is also demonstrated in point 2 of Clause 5 of the agreement dated 20/11/2013, which is transcribed below: "Given that the units subject to this lease agreement are leased free of any furniture, with the exception of equipment installed in the kitchen, the SECOND PARTY is authorized by the FIRST PARTY, at the expense of the latter, to furnish in the manner it best sees fit the said units, in such a way as to permit adapting their use to the purposes referred to in No. 1 of CLAUSE FOUR." (bold and underline ours).

To alter the intended use of the property from residential to services, A... requested local accommodation status, however after registration of the property in the land register as housing, no remodeling or adaptation works were carried out on the 82 units for the provision of local accommodation services.

Thus the properties (82 units) were not equipped for the exercise of a taxed activity (local accommodation), maintaining the same allocation for which they had been constructed and registered in the land register on 05/11/2011 (housing).

The cession of the property was then carried out as "bare walls", and at the date of the waiver of exemption request, the property remained allocated to residential purposes, because at the date of conclusion of the second agreement, the requirements for Local Accommodation were not met, as requested from the Municipal Council of ….

Nor can it be said that on 08/04/2014 (date of our visit to the development) this was the case since the elements (refrigerators and bed linen) unloaded on that same day in "..." and intended to be placed in the units were unloaded on that day, as per the transport document already mentioned.

Even if the Municipal Council of … were to consider, in the inspection carried out on 11/04/2014, that the necessary conditions for Local Accommodation were already met, the fact is that on the date of the Certificate Request and its issuance on 15/11/2013, this was not the case.

Moreover, in the advertisements published on the internet relating to the ... Development (whose remaining units are the 82 that A... claims are for Local Accommodation) it is stated that the units comprising it are intended for sale or lease and never for local accommodation, which proves the maintenance of their allocation to housing.

Given that the request for waiver of VAT exemption in the lease of the ... Development presupposed the allocation of the property (82 units) to services and the same was in the same state as it had when registered in the land register on 05/07/2011, residential purposes, it is clear that the requirement provided for in paragraph b) of No. 1 of Article 2 of the Waiver Regime is not met.

III.3.3 - The Property is Allocated to an Activity Providing a Right to Deduction (paragraph d) of No. 1 of Article 2 of the Waiver Regime)

In view of what has been stated in the various sub-sections of section III.3.2, the requirement that the 82 units are allocated to an activity providing a right to deduction, a condition provided for in paragraph d) of No. 1 of Article 2 of the Waiver Regime, is also not met, because as was demonstrated, at the date of the certificate request and its issuance, the allocation of the units remained for housing, since although A... requested local accommodation status, it did not proceed to any alteration of the 82 units, which would have to be furnished and equipped in such a way as to comply with the requirements provided for in Order 517/2008, of 25/06.

Nor is there any record in the accounts of A... (which are presumed to be accurate in accordance with No. 1 of Article 75 of the General Tax Law), from the beginning of construction until the period of the refund request, of any purchase of furniture or other equipment necessary and capable of equipping the properties for the exercise of the activity providing a right to deduction (local accommodation), as the only purchase recorded is the purchase of furniture and utensils for the model apartment (invoice No. ..., of 02/08/2010, issued by X..., Lda, VAT ID:..., in the total amount of € 24,209.38).

And it did not meet the requirements for local accommodation so much so that in the agreement of 20/11/2013, No. 2 of Clause 5 of the promise of lease agreement mentions that the units subject to the agreement are leased free of any furniture, with the exception of equipment installed in the kitchen.

Therefore, at the time of request for local accommodation license with the Municipal Council of …, which occurred on 21/10/2013, the properties were not equipped for this purpose and therefore were not allocated to activity providing a right to deduction.

Also from the information obtained from the Municipal Council of …, it results that at the date of the inspection, which occurred after conclusion of the agreement and the request for local accommodation license for recognition as local accommodation, the legal requirements were not met in accordance with Order 517/2008, of 25/06, for the property to have been recognized as Local Accommodation.

And they were not met on the date of the agreement, on the date of the waiver of exemption request, on the date of the response of the Municipal Council of … and on the date we visited the Development, because as was previously reported on the day of the visit to the development we verified that they were unloading equipment (refrigerators) and accessories (bed linen) that would be necessary to comply with the requirements.

The cession of the property was carried out as "bare walls", thus constituting an operation exempt from VAT, without the possibility of recovering the VAT incurred in its construction.

Now, resulting from the above stated that the units were allocated to housing and not to services they would always be intended for sale or lease, operations exempt under Nos. 29 and 30 of Article 9 of the VAT Code.

It should be noted that the exemptions provided for in Article 9 of the VAT Code constitute simple or incomplete exemptions since they result in non-taxation in the operations conducted or carried out downstream, but in return do not grant the right to deduction of tax borne in acquisitions upstream, since paragraph a) of No. 1 of Article 20 of the VAT Code provides that "Only tax borne on goods or services acquired, imported or used by the taxable person for the conduct of the following operations may be deducted: supplies of goods and provision of services subject to tax and not exempt from it;".

Whereas if the provision of services were in fact that of local accommodation it would be an operation subject to VAT, pursuant to No. 1 of Article 4 of the VAT Code, and not exempt from it, since it is covered by the exception in paragraph a) of No. 29 of Article 9 of the VAT Code which provides that the VAT exemption provided for the lease of property does not cover services of accommodation provided in the context of hotel or other similar activities, including camping parks, and as such would provide a right to deduction in accordance with the already cited Article 20 of the VAT Code,

Given this, as the request for waiver of VAT exemption in the lease of the ... Development presupposed the allocation of the 82 units to Local Accommodation, an activity which, as has just been stated, provides a right to deduction, and that they were previously allocated to housing and therefore were intended for sale or lease, an exempt activity not providing a right to deduction, the requirement provided for in paragraph d) of No. 1 of Article 2 of the Waiver Regime is not met.

III.3.4 - First Lease of the Property Occurring After its Construction (paragraph a) of No. 2 of Article 2 of the Waiver Regime)

Even if the conditions provided for in No. 1 of Article 2 of the Regime for waiver of VAT exemption in operations relating to real property were met (which, as we have seen, is not the case), the waiver is only permitted when we are faced with one of the circumstances established in No. 2 of the mentioned provision.

III.3.4.1 - Z..., SA

In order to gather information it was considered necessary to visit the company Z..., SA, VAT ID:..., located in Travessa..., No. 4, in..., in the district of ..., and for purposes of decision on issuance of order to gather information, it was requested from the Finance Director of …, extension of jurisdiction as provided for in Article 17 of the RCPIT, concerning the taxable person Z..., SA, for the years 2011 and 2013 (letter..., of 2014/04/16 - Annex XVII, with 1 sheet), which was authorized (carrying out of inspective acts in accordance with Article 17 of the RCPIT), culminating in the opening of order No. DI2014..., of 2014/04/17.

On 2014/04/17, during a visit to the company Z..., SA, we gathered the following clarifications and information:

• Contracts for water and sewage supply relating to the ... development (located on Rua Sr...., parish of ... and..., in ...) and documents presented for the conclusion of the respective contracts.

Among the information gathered is the promise of lease agreement dated 5 July 2013, concluded between A... and M...(in Annex XVI, with 13 sheets - "Promise of lease agreement").

Under the said agreement, A... promises to lease to M..., who accepts to take on lease, the 82 autonomous units of the said urban development "...".

III.3.4.2 - P..., SA

We also requested from P..., SA, VAT ID:..., through letter No. ... of 2014/04/16 (Annex XVIII, with 2 sheets), within the scope of the duty of cooperation and presentation of documents, the following clarifications and information:

• Identification of the holder (current and previous) of the water supply contract(s), as well as the date of possible change in ownership, in relation to the units that were leased for local accommodation, belonging to the ... development, located on Rua..., parish of ... and... , in ...;

• Photocopy of the documents presented for the conclusion/change of ownership (if it occurred) of the aforementioned contract(s) (current and previous).

Among others, we were also supplied with the promise of lease agreement, dated 5 July 2013, concluded between A... and M... (in Annex XVI, with 13 sheets - "promise of lease agreement").

III.3.4.3 - In Summary:

In the course of the inspection action, we verified and concluded from the documents presented by M... for contracting and requesting water and electricity supply, in accordance with the information gathered at Z..., SA and submitted by P..., SA in response to requests/circularizations, that the first agreement was the agreement designated as "Promise of lease agreement", dated 5 July 2013, concluded between A... and M... (Annex XVI, with 13 sheets).

In accordance with No. 1 of Article 410 of the Civil Code, A... promised to lease to M..., who accepts to take on lease, the 82 autonomous units of the said urban development "...".

Notwithstanding the name given to it, the fact is that this constitutes the first lease of the property occurring after its construction, as is demonstrated:

Now the lessee/tenant (M...) took possession of the property on 5 July 2013, date of the promise of lease agreement, so much so that he used this agreement to proceed with registration of the ownership of the water and sewage supply contract, which took effect on 17/07/2013 (in Annex No. XIX, with 1 sheet, an example of water and sewage supply agreement of unit AD, those of the remaining units are in work papers), from that date onwards, M... bearing the charges relating to water and sewage supply.

M... also use the promise of lease agreement, dated 05/07/2013, to proceed with registration of the ownership of the electricity supply contract, which took effect on 21/08/2013 (in Annex No. XX, with 13 sheets, electricity supply agreement), from that date onwards, M... bearing the charges relating to electricity supply.

Thus it is the lease agreement concluded on 05 July 2013 that constitutes the first lease of the property after construction, this being the true moment of leasing and not the agreement of 20 November 2013.

Now, at the date of submission of the certificates (November 2013) the lease had already taken place and the company M... was in full use of the thing, so the condition of being faced with the first lease of the property after construction (paragraph a) of No. 2 of Article 2 of the Waiver Regime) is not met.

Paragraph c) of No. 2 of Article 2 of the waiver regime only applies to transfers or subsequent leases following operations carried out with waiver of exemption (with the operation in question here being the one that would be subject to waiver of exemption).

Taking into account that the first lease of the property occurring after construction is not at issue (since the first lease occurred well before the certificate request), the possibility of exercising the option for waiver could only occur if, in accordance with paragraph b) of No. 2 of Article 2 of the waiver regime "It is the first transfer or lease of the property after it has been subject to major works of transformation or renovation, which resulted in a change of more than 50% of the taxable patrimonial value for the purpose of municipal property tax when it is still possible to proceed with deduction, in whole or in part, of the VAT borne in such works".

But neither is the prerequisite of carrying out major works verified, because as has been abundantly emphasized from 05/07/2011 (date of submission of Form 1 of the municipal property tax in which allocation for housing appears) until 22-10-2013 (moment when it presents new Form 1 of the municipal property tax with change of allocation to services) there are not reflected in the accounts any construction costs relating to the ... Development centre, except for bank charges and depreciation.

Therefore neither is any of the circumstances described in No. 2 of Article 2 of the waiver regime verified.

III.4 - Conclusion:

The lease of the 82 units of the ... Development by A... to M... is exempt from VAT in accordance with No. 29 of Article 9 of the VAT Code.

However, this VAT exemption can be waived through the waiver of exemption as provided for in Article 12 Nos. 4 and 6 of that Code.

It results from the current Waiver Regime (Decree-Law No. 21/2007, of 29/01) that for the exercise of the right to choose the waiver of exemption in the transfer and lease of real property, the taxable persons involved and the property or units subject to the contract must cumulatively meet the objective and subjective conditions provided therein and possess the respective valid certificates of waiver, a mandatory formal condition for the exercise of the choice for taxation, on the date of conclusion of the respective agreements.

As these are conditions that must be cumulatively met, the non-verification of any one of them implies by itself the non-application of this regime.

It is further to be emphasized that the fulfillment of such conditions must necessarily be verified on the date of the waiver request, as is apparent from the Case Law of the Supreme Administrative Court, note the Decision of 19-09-2007, case 460/07: "The conclusion of a lease agreement only on 31/10/97, even though having its effects reported to 1/2/95, does not have the virtue of validating the refund effected in 06/95, since on the date on which the plaintiff requested the refund request it did not yet meet the requirements provided by law to have the right to it and therefore such situation violates expressly what is provided for in No. 2 of Article 4 of Decree-Law 241/86, of 20 August."

In the case at hand, the following objective conditions imposed by the Waiver Regime are not met, consonant with said request:

• Paragraph b) No. 1 of Article 2 of the Waiver Regime - As the property on the date of the waiver request was intended for housing;

• Paragraph d) of No. 1 of Article 2 of the Waiver Regime - The property on the date of the waiver request was not in conditions to be allocated to local accommodation (activity taxed pursuant to No. 1 of Article 4 and paragraph a) of No. 29 of Article 9 of the VAT Code, which provided a right to deduction in light of Article 20 No. 1 paragraph a) of the VAT Code), since the requirements of No. 2 of Article 5 of Order No. 517/2008, of 25/06 were not met;

• Paragraph a) of No. 2 of Article 2 of the Waiver Regime - As it is not a matter of a first lease agreement, since the taxable person concluded a promise of lease agreement for the property which took effect before the date of the waiver request, as it transferred to its ownership the contracts for water and electricity supply, evidencing full use of the thing.

It not being lawful for the taxable person to waive the VAT exemption in the lease of the 82 units of the ... Development, consequently it could not deduct the VAT incurred in its construction, thus it violated paragraph a) of No. 1 of Article 20 of the VAT Code, as only tax borne on goods or services acquired, imported or used by the taxable person for the conduct of supplies of goods and provision of services subject to tax and not exempt from it may be deducted.

It should be noted that besides the deductions being improper in accordance with the provisions of Articles 19 to 26 of the VAT Code, the taxable person must proceed with the delivery of the VAT assessed and declared in field 4 of the declaration of 2013/11, € 4,465.83, as it concerns the assessment of VAT in the invoices issued to M... relating to the collected rents.

Being VAT improperly assessed, since we would be faced with an operation exempt pursuant to No. 29 of Article 9 of the VAT Code, it would have to be delivered to the State coffers within 15 days of issuance of the invoice, pursuant to No. 2 of Article 27 of the VAT Code, with A... being a taxable person as provided for in paragraph c) of No. 1 of Article 2 of the VAT Code.

Thus we propose correction of the deducted VAT in the amount of € 2,492,714.61 and the consequent proposal for denial of the refund, maintaining the VAT assessed in the periodic VAT declaration of 2013/11 in the amount of €4,465.83, so an assessment of that amount will be issued.

e) Following the same inspection, the Tax and Customs Authority issued the VAT assessment No. 2014..., in the amount of € 4,465.83, the assessment of compensatory interest No. 2014 ... in the amount of € 82.22, and the assessment of interest on arrears No. 2014..., in the amount of € 33.10 (document No. 1 attached with the request for arbitral pronouncement, the contents of which are reproduced);

f) On 21-10-2014, the Applicant filed a request for reconsideration against the assessment that came to have number ...2014... (document No. 3 attached with the request for arbitral pronouncement, the contents of which are reproduced);

g) The request for reconsideration was not decided until 30-03-2015, date on which the Applicant filed a hierarchical appeal against the implied denial of the request for reconsideration;

h) The hierarchical appeal was not decided until the date of 20-08-2015, when the Applicant presented the request for arbitral pronouncement that gave rise to this case.

3.2. Facts Not Proved

3.3. Justification of the Decision on Factual Matters

The facts were established as proved based on the documents attached with the request for arbitral pronouncement and in the case file.

3. Matters of Law

Following the inspection carried out by the Tax and Customs Authority of the Applicant, a VAT refund request was denied, as the Tax and Customs Authority understood that the waiver of exemption was not lawful, and an assessment was issued relating to tax of € 4,465.83 which the Applicant had been assessed in invoices issued relating to rents collected from the company M..., in addition to assessment of compensatory and arrears interest relating to the assessment of this amount.

Only this VAT assessment is at issue in this case, regarding which the Tax and Customs Authority states:

It should be noted that besides the deductions being improper in accordance with the provisions of Articles 19 to 26 of the VAT Code, the taxable person must proceed with the delivery of the VAT assessed and declared in field 4 of the declaration of 2013/11, € 4,465.83, as it concerns the assessment of VAT in the invoices issued to M... relating to the collected rents.

Being VAT improperly assessed, since we would be faced with an operation exempt pursuant to No. 29 of Article 9 of the VAT Code, it would have to be delivered to the State coffers within 15 days of issuance of the invoice, pursuant to No. 2 of Article 27 of the VAT Code, with A... being a taxable person as provided for in paragraph c) of No. 1 of Article 2 of the VAT Code.

Thus we propose correction of the deducted VAT in the amount of € 2,492,714.61 and the consequent proposal for denial of the refund, maintaining the VAT assessed in the periodic VAT declaration of 2013/11 in the amount of €4,465.83, so an assessment of that amount will be issued.

The Applicant summarizes its position in the following conclusions (Articles 222 to 226 of the request for arbitral pronouncement):

1. (...)

a).- An objective situation of confidence was created (regarding the possibility of applying the regime for waiver of VAT exemption and consequently deducting the tax relating to construction of the units allocated to local accommodation, based on the respective certificates of waiver);

b).- There was an investment in confidence (based on the position assumed by the Tax Authority regarding the possibility of the waiver operating in the circumstances described in the statements submitted by the taxable person);

c).- The Applicant always acted in good faith, providing spontaneously and diligently all elements at its disposal regarding the leases carried out.

1. • In this context and as the waiver of VAT exemption was validly exercised in relation to the units in question - with the statements submitted by the taxable person producing the due effects by means of issuance of the corresponding certificates by the Tax Service – the Applicant understands that the deducted tax regarding the leased units does not merit correction, and as such the additional VAT assessment and interest should be annulled (Doc. No. 1);
2. • In this sense, the focus of the inspection carried out by the Services of the DFV should not have been so much on what equipment, utensils and (other details mentioned without legal protection in the scope of this regime) should be present in the local accommodation units but rather on the analysis of the operation itself, its substance and the effects resulting from its proper functioning in the local accommodation regime.
3. • In this context, in light of the facts described and the set of arguments expended in this application, it appears that the regime for waiver of VAT exemption should be considered as valid under pain of violation of the basic principle of VAT – the principle of neutrality –, so the amount corresponding was improperly corrected by the Tax and Customs Authority, and the respective annulment of the additional VAT assessment and interest should proceed.
4. • Furthermore, should this not be the understanding adopted, the Applicant would find itself in a situation of extreme disadvantage compared to its competitors, seriously breaching what is one of the pillars of VAT, namely the neutrality of the tax, since that, comparatively to other entities conducting the same activity, it will have, as a result of the non-deduction of the tax and imposition of additional VAT assessments and interest, embedded in its assets a cost superior by 21%.

The defects that the Applicant attributes to the challenged assessment act are:

a).- Defect of violation of law due to error in legal prerequisites as to the requirements governing the regime for exploitation of property in local accommodation;

b).- Defect of violation of law due to error in legal prerequisites as to the requirements on which the valid exercise of the right to waive VAT exemption depended, namely as to paragraphs b) and d) of No. 1 of Article 2 and paragraph a) of No. 2 of Article 2 all of the Regime for waiver of VAT exemption in operations relating to real property.

Regarding the issue of the stated assessment, the Tax and Customs Authority sustains in this case, in summary, that "in any situation, whether because the operations in question are subject and not exempt (as the Applicant argues), or because VAT was improperly mentioned in the invoices documenting the operations (as the Tax Inspection concluded), the delivery to the State of the tax in question in the assessment is mandatory" and that therefore the challenged assessment does not have as its basis the classification of the Applicant under the regime for waiver of VAT exemption (Articles 24 to 26 of the Response).

It is manifest that the Tax and Customs Authority is correct as to the issue of the assessment as in accordance with the Decision of the CJEU of 31-01-2013, handed down in case No. C-643/11, "the value added tax mentioned in an invoice by a person is owed by them, regardless of the actual existence of a taxable operation".

In fact, Article 203 of Directive No. 2006/112/EC is categorical: "VAT is owed by all persons who mention this tax in an invoice".

It is in accordance with this regime of the VAT Directive, of value higher than ordinary law (Article 8, No. 4, of the Constitution of the Portuguese Republic), that No. 2 of Article 27 and paragraph c) of No. 1 of Article 2 of the VAT Code, referred to by the Tax and Customs Authority to justify the issued assessment, must be interpreted.

Therefore, the assessment of the tax mentioned by the Applicant in the invoices issued to M... is owed regardless of whether the Applicant has or does not have the right to waive the exemption it claims.

Thus, the assessment of the tax mentioned in the invoices is not dependent on the regime for exploitation of property in local accommodation or the requirements demanded for exercise of the right to waive VAT exemption, it cannot be concluded otherwise than that the assessment act is not tainted by the defects that the Applicant imputes to it, relating to the application of that regime and the right to waive exemption and its compatibility with the principle of neutrality.

On the other hand, as the mentioned VAT in the invoices is owed, the assessment of compensatory and arrears interest is justified, and it is certain that the Applicant does not even attribute any autonomous defect in relation to the respective assessments.

For the foregoing, the request for arbitral pronouncement must be judged without merit.

4. Decision

Accordingly, the arbitrators agree to judge the request for arbitral pronouncement as without merit and to absolve the Tax and Customs Authority from the claims.

5. Value of the Case

In accordance with the provisions of Article 306, No. 2, of the 2013 CPC, Article 97-A, No. 1, paragraph a) of the CPPT and Article 3, No. 2 of the Regulation of Costs in Tax Arbitration Proceedings, the case is valued at € 4,465.83.

Lisbon, 20-01-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Clotilde Celorico Palma)

(Emanuel Vidal Lima)