VAT on SGPS Holding Companies: Arbitration on Additional Tax Assessments and Undue Guarantee Compensation (CAAD 553/2015-T)

ARBITRAL DECISION

The arbitrators Dr. José Baeta de Queiroz (arbitrator-president), Dr. Luís Miranda da Rocha and Dr. Magda Feliciano, appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Court, constituted on 11 November 2015, agree as follows:

I. REPORT

A…– …, SGPS, S.A. (hereinafter abbreviated as "Claimant"), entity number…, under article 2, no. 1, (a), and 10, nos. 1 and 2, both of Decree-Law no. 10/2011, of 20 January, and articles 1 and 2 of Ordinance no. 112-A/2011, of 22 March, requests the annulment of the following VAT assessments issued by the Tax and Customs Authority (hereinafter AT) relating to VAT for the year 2012:

a) VAT assessment acts no. 2015 … and assessment of corresponding compensatory interest no. 2015…;

b) VAT assessment act no. 2015… and assessment of corresponding compensatory interest no. 2015…;

c) VAT assessment acts no. 2015 … (January 2012);

d) VAT assessment acts no. 2015… (February 2012);

e) VAT assessment acts no. 2015 … (March 2012);

f) VAT assessment act no. 2015 … (April 2012);

g) VAT assessment act no. 2015 … (May 2012);

h) VAT assessment act no. 2015 … (August 2012);

i) VAT assessment act no. 2015… (October 2012);

j) VAT assessment act no. 2015 … (November 2012);

k) VAT assessment act no. 2015 … (December 2012);

l) VAT assessment act no. 2015 … (March 2013);

m) VAT assessment act no. 2015… (April 2013).

The Claimant thus seeks to have the illegality of the said VAT assessment acts and corresponding compensatory interest declared.

The Claimant further requests compensation for losses resulting from the provision of undue guarantees calculated on the basis of the costs incurred with their provision, plus interest at the legal rate calculated on such costs and counted from the dates they were incurred until the date the Claimant is reimbursed.

Subsidiarily, the Claimant requests preliminary referral to the Court of Justice of the European Union (CJEU).

In accordance with the provision of article 11, no. 1, (c) of the Regulation of Administrative Tax Arbitration, the collective Arbitral Court was constituted on 11-11-2015.

The AT responded contesting the admissibility of the request for arbitral pronouncement, as not proven.

On 15 February 2016, the meeting provided for in article 18 of the Regulation of Administrative Tax Arbitration (RJAT) was held, with witness evidence being produced and agreement reached that the proceedings would continue to written submissions.

On 4 March 2016, the Claimant requested enlargement of the claim to encompass additional VAT assessment acts and compensatory interest acts no. 2015 … (March 2013) and no. 2015 … (April 2013), which the AT did not contest.

The Arbitral Court was properly constituted and is competent.

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

The proceedings do not suffer from defects of nullity.

II. FACTS

1. Proven Facts

The following facts are deemed proven:

a) The Claimant is a commercial company, with headquarters in national territory, which exercises, as its principal activity, the management of equity investments, corresponding to CAE 64202, and provides technical services of administration and management to the companies in which it holds investments;

b) The Claimant is a company managing equity investments;

c) For VAT purposes, the Claimant is subject to the normal regime with monthly periodicity, under article 41, no. 1, (a) of the VAT Code;

d) Following Service Order no. OI2014…, of 12 March 2014, an external tax inspection procedure of general scope was conducted with respect to the Claimant for the year 2012;

e) From this procedure, a Draft Tax Inspection Report was produced and notified to the Claimant on 2 January 2015, in which a VAT correction was proposed in the amount of € 805,618.30 corresponding to tax allegedly deducted excessively by it;

f) The Claimant exercised, on 16 January 2015, the right to prior hearing, and was notified, on 23 March 2015, of the Final Tax Inspection Report/Report which maintained the correction originally proposed;

g) The AT concluded, in its Tax Inspection Report, that the Claimant improperly deducted VAT in the total amount of € 805,618.30, a figure itemised as follows:

h) In the Tax Inspection Report, the full contents of which are hereby incorporated, reference is made, among other things, to the following:

"III. VAT – Tax Shortfall

III.2.1. Improper deduction of supported tax: € 805,618.30

(A) Description of Facts

From the analysis of periodic VAT declarations submitted by the taxpayer relating to the tax period within the scope of this inspection procedure, it was verified, through cross-reference with the respective accounting records (account "2432 – Deductible VAT") for the period, that the taxpayer deducted in the respective tax calculation values originating from VAT that fell on acquisitions of fixed assets and other goods and services, in the total amount of €1,322,694.41 and which correspond entirely (100%) to the total amount of tax that was supported during the period.

In the breakdown of taxable operations for which the taxpayer supported VAT, it is observed that the deducted tax values had the following origin:

· € 21,952.76 in the acquisition of fixed assets;
· € 1,300,741.65 in the acquisition of other goods and services;
(…)

1. The Activity of A… SGPS

In terms of cash flows, it was verified that the taxpayer obtained actual income from the management of equity investments, which resulted, during the period under analysis, in the receipt of dividends in the amount of € 309,738,277.

(...)

But it is the management of such complex and extensive network of equity investments that requires great activity from its holder, from which the need for the existence of a structure of material and human support is easily understood, involving a group of qualified collaborators, including executive and non-executive administrators, who daily develop effective activity supporting the management, control and protection of the company's assets.

(…)

It is verified that the set of non-economic activities, reflected in "income and gains in subsidiaries", resulting from the accounting appropriation of results of the participating companies through the use of the equity method in valuing capital shares, added to the extraordinary gain from the extinction of the administrators' pension plan, presents a greater weight or contribution to the formation of income during the period, contributing 89% of the total declared income for the period."

1. The Cost Resulting from Shareholder Activity

(…)

These expenses and costs do not vary depending on the quantity of services provided to the participating companies, that is, whether or not A… engaged in the complementary activity of providing technical services of management and administration to participating companies, it would always incur the following expenses or costs:

· Charges related to the issuance of a bond loan: the taxpayer proceeded to acquire services related to organisation, arrangement and disclosure of the issuance of the bond loan "A…2012/2015". The objective of this was to "obtain funds" for use in the scope of its activity, namely in the realisation of investments, whether in new projects or in the context of existing projects", such as for example strengthening its position in B… . ;

· Charges related to defence in the arbitration proceedings: the taxpayer proceeded to acquire legal services in the arbitration process that opposed A… to the Irish company C… over control of the part not held in the participating company B… . The result was a decision favourable to A…, which thus consolidated its participation in this company;

· Charges related to legal audit of accounts: the taxpayer proceeded to acquire services related to legal audit of accounts of the company that derive from its legal obligations as a commercial company;

· Charges related to various legal services: the taxpayer proceeded to acquire services of a legal and tax nature diverse related to matters of interest to the company;

(…)

IX. 3. Tax Shortfall – VAT – Deductibility of Supported VAT

(…)

"The taxpayer's position is based on the conviction that A… develops a predominantly economic activity, namely, the provision of services to its participating companies.

(…)

It is recalled that the activity of providing services of a SGPS does not even fit within market practice since it is legally prohibited from being performed for non-participating companies (see Decree-Law no. 496/88, of 30 December), which defines it as an accessory activity.

(…)

o) The reality of the right to deduction depends on a case-by-case assessment, so the decisions that the company refers to in previous periods cannot be directly applied.

p) And the very jurisprudence of the CJEU, to which the taxpayer refers (see point 51), adopted in the Kretztechnik judgment, admits "a right to deduction in favour of the taxpayer, even in the absence of a direct and immediate nexus between a given upstream transaction and one or several downstream transactions with a right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or of the services it provides. These costs have, in effect, a direct and immediate nexus with the entirety of the taxpayer's economic activity."

r) In this field, in the operation of "issuance of the bond loan" one cannot understand that the respective charges are general expenses, because as already explained in this report, they are specific costs that would always be incurred, due to the need for financing of the company, and regardless of whether or not A… SGPS provided any accessory service.

s) No direct and immediate nexus is established here with the set of downstream economic transactions with a right to deduction.

(…)

v) Here we have the expenses with the issuance of the bond loan that are not intended for the financing of the provision of services, but rather for the indirect acquisition of capital shares through the granting of supplementary contributions to associated companies, an activity that does not confer a right to deduct the tax."

i) The Claimant actively monitors and advises the management of its participating companies;

j) The Claimant has a team of personnel dedicated to monitoring the management of the participating companies of at least 20 collaborators (document no. 4);

k) The provision of support, monitoring and advisory services to the participating companies, an activity developed by the Claimant, requires the existence and maintenance of a structure of permanent character, both human and material, which includes occupation of space and the realisation of various consumptions, including computer, office materials and engagement of specialised external advisory services (document no. 4);

l) Within the scope of this activity, the Claimant, in the year 2012, provided remunerated services in the amount of € 7,005,471.00, on which it charged VAT in the amount of €1,263,562.50 (considering only invoicing still issued in 2012), and received financing interest granted on a complementary basis in the amount of € 17,239,669.00 (see pp. 25, 33 and 34 of the Tax Inspection Report; see further Documents nos. 10, 11 and 12 attached hereto);

m) The collaborators and productive resources of A… are used overwhelmingly in the activity of providing services to its long-standing participating companies, embodied in the daily monitoring of their activity and management, with the portion of these resources allocated to the component of financing them or to receipt of dividends being insignificant and occasional;

n) In the year 2012, the Claimant did not dispose of any equity investment;

o) In the year 2012, the Claimant acquired 49% of B…;

p) The Claimant was notified of the following additional VAT assessment acts and compensatory interest acts:

· VAT assessment acts no. 2015 … and assessment of corresponding compensatory interest no. 2015…;
· VAT assessment act no. 2015 …and assessment of corresponding compensatory interest no. 2015…;
· VAT assessment acts no. 2015… (January 2012);
· VAT assessment acts no. 2015 …(February 2012);
· VAT assessment acts no. 2015 … (March 2012);
· VAT assessment act no. 2015… (April 2012);
· VAT assessment act no. 2015 … (May 2012);
· VAT assessment act no. 2015 … (August 2012);
· VAT assessment act no. 2015 … (October 2012);
· VAT assessment act no. 2015 … (November 2012);
· VAT assessment act no. 2015 … (December 2012).

q) The total value of the additional VAT assessment acts is € 805,618.30, with the compensatory interest value being € 20,395.89;

r) Bank guarantees were provided for suspension of enforcement proceedings for the collection of the additional VAT assessment acts identified;

s) Following the submission of the arbitration petition subject to this decision, the Claimant was notified of the following additional VAT assessment acts and compensatory interest acts, consequent to the VAT assessment acts identified in p):

· VAT assessment act no. 2015… (March 2013);
· VAT assessment act no. 2015 … (April 2013).

t) The Claimant submitted a request for enlargement of the subject matter of the proceedings to the additional VAT assessment acts above identified;

u) The additional VAT assessment acts above identified are consequent to the corrections made by the Defendant to the Claimant's VAT declarations relating to the year 2012;

v) Bank guarantees were provided for suspension of enforcement proceedings for the collection of the additional VAT assessment acts identified;

w) Taking into account the enlargement of the subject matter of the proceedings, the current value of the additional VAT assessment acts is € 1,045,492.54, with the compensatory interest value being € 20,395.89.

2. Basis for Determining the Facts

The facts were deemed proven on the basis of the documents attached with the request for arbitral pronouncement and in the administrative proceedings and also on the testimony of witnesses (namely regarding the facts of items i), j), k), m) and n) of the preceding chapter), who demonstrated knowledge of the activity carried out by the Claimant and testified with apparent impartiality.

III. LEGAL QUESTIONS

The main question that arises in the present proceedings concerns whether the additional VAT assessment acts, subject to this petition, are or are not valid, considering the right to deduct VAT provided for in articles 20 et seq. of the VAT Code.

a. Position of the Claimant

To this end, the Claimant alleges in its request for constitution of the Arbitral Court, in summary, the following:

1. The Claimant intervenes actively and very significantly in the management of its participating companies, in which context it provides technical management services, under the terms defined in the service provision contracts celebrated with them, and those services are remunerated. Additionally, on an accessory basis, it provides them with financing, receiving interest (see articles 4 and 5, (f) of Decree-law no. 495/88);

2. In this context, the CJEU has been very clear in distinguishing the treatment to be given, on one hand, to the "mere taking of equity investments in the capital of other companies" – as cited in the Report – and, on the other, to the activity of a holding "when the investment is accompanied by direct or indirect interference in the management of the companies in which the equity investment was made" – see Polysar Judgment, points 13 and 14;

3. It is clear that the Claimant, in light of the CJEU jurisprudence mentioned above, since it intervenes in its participating companies and develops an economic activity subject to VAT for the provision of technical management services, in which its corporate centre functions are embodied (in addition to, incidentally, also granting them financing), undoubtedly develops an economic activity, since the "investment is accompanied by direct or indirect interference in the management of the companies" and implies transactions subject to VAT;

4. A… is an active holding in name and in practice, as evidenced by its significant team of personnel and remaining consumed resources and the activity of providing support services to the management of participating companies to which they are dedicated;

5. Proceeding, given what has been set out, and as follows from the consolidated CJEU jurisprudence on this matter, the activity developed by the Claimant, insofar as it is based on direct interference in the management of its participating companies, embodies an economic activity for VAT purposes. Indeed:

(a) It involves the management of equity investments which it has held for a long time heading an economic group. Indeed, the Claimant, incorporated in 1991, has held B… stably since 1994 (21 years therefore); D… since 2004 (11 years) and E… since 2008 (seven years), in a strategy of continued expansion and development of three sectors of activity [cement, paper and paper pulp and environment and waste] and not of investment in securities as an end in itself. Over the years, it has acquired stakes or strengthened existing stakes in these entities;

(b) This management is active, encompassing the continuous monitoring of the three subsectors of activity in which the participating companies operate and the study and taking of strategic decisions for development and expansion of those activities, through the provision of technical services for the benefit of the group and the participating companies and, when necessary, the complementary financing of those participating companies;

(c) Both the provision of various support services to the management of the participating companies and the financing of them embody the exercise of an economic activity within the meaning of VAT, so that the management of equity investments carried out within this factual framework corresponds to the exercise of an economic activity.

1. There is not, in these terms, two or more activities, economic and non-economic, principal or accessory, developed by the Claimant. It develops a single activity, which is economic for VAT purposes, of management of equity investments as a corporate centre, providing services that fall within the scope of VAT and which confer the right to deduct;

2. Accordingly, for the inputs [goods and services] acquired by the Claimant for this activity of management of equity investments intervening in the participating companies and with the carrying out of operations (transactions) subject to VAT, there must be the right to deduct;

3. Taking into account that:

(a) The Claimant's activity is economic;
(b) That dividends are extraneous to the system of the right to deduction and do not derive from the Claimant's activity;
(c) That dividends are not capable of consuming resources burdened with VAT – goods or services acquired – (at least significantly), in the sphere of the shareholder;

the application of a method of deduction (direct allocation) that limits this right in terms similar to what would result from the application of a pro rata deduction that would consider dividends as turnover, in other words, that would lead to a substantial restriction of the right to deduct (in this case greater than 50% of the total VAT incurred in the period), is nothing more than the manifest and illegal distortion of the mechanism of VAT neutrality and violates not only the provision of the Securenta Judgment, by not objectively reflecting the actual use of the resources acquired by the Claimant in the year 2012, but represents a violation of the body of CJEU jurisprudence relating to the impact of dividends on the right to deduct VAT. Nor would it be admissible an interpretation of the Securenta Judgment that would result in the annihilation of the repeated and uniform jurisprudential construction (of the CJEU) of the last twenty years.

1. In the cases pending before the CJEU under numbers C-108/14 and 109/14 (Larentia + Minerva, and Marenave), it was confirmed that, when a holding provides remunerated services to its participating companies (assisting them in management), it exercises an economic activity that confers the right to deduct VAT in expenses, for example, incurred with the acquisition of equity investments, or to obtain capital (financing) that allows acquisition of equity investments;

2. The deduction of VAT in these so-called directive (or active) holdings will be entire, continues the CJEU Judgment, unless the holding company, in addition to providing remunerated services to its participating companies, carries out other economic operations that perhaps are (unlike the services to the participating companies) VAT exempt without a right to deduction (e.g., medical services, etc.). In this latter hypothesis (which does not occur in the case of these proceedings), the deduction of the incurred VAT will no longer be entire, but rather a pro rata must be applied for its division between the two types of economic operation;

3. Moreover, it should be noted, in passing, that the operations in question in the issuance of the bond loan in reference in this specific case – i.e. organisation, arrangement and issuance – could even be framed within article 9, no. 27, (e) of the VAT Code – to the extent that they configure operations related to bonds –, thus benefiting from the exemption of this tax;

4. And, if this is understood, the AT, which is charged with ensuring the execution of the law, should always inform the taxpayer – the entity providing the services acquired by A… within this scope – of this fact, so that it would regularise the tax in question in its favour and would return it in this case to A… (which supported it), in the amount, it is recalled, of € 717,948.60;

5. In the specific case, since the acquisition of the equity investments, or their strengthening, is intended for the development and expansion of the Claimant's (economic) activity, in particular in the area of cement, which materialises in services provision (in the year in question amounting to approximately five and a half million euros) one cannot but conclude that there is a direct, immediate and adequate nexus with the entirety of its economic activity. For otherwise, one would conclude that 98% of companies in Portugal do not exercise economic activity because they have a turnover of less than 5 million euros. The right to deduction must be assessed in relation to this activity, for which dividends should not, and cannot, under Community law, be considered, much less the "records of mere accounting movements", in income or expense accounts, resulting from the use of the equity method, and even less the accounting reflection of a cut (extraordinary gain) in the administrators' pension plan;

6. It was explicit that the Claimant develops a single activity, an economic activity of management of equity investments with interference in the participating companies, which implies the provision of corporate services capable of VAT, and, as such, its right to deduct cannot be limited. The (acquisition, strengthening and maintenance of the) quality of shareholder constitutes a condition of the exercise of its taxable activity (of provision of corporate intragroup services) and not a limitation to its right to deduct;

7. Given the absence, in the sphere of the Claimant, of activities of a non-economic nature, the application of article 23, no. 1, (a) of the VAT Code is devoid of legal support, which provides for the imposition of the method of direct allocation for the determination of non-deductible VAT incurred in resources of mixed use partially allocated to the performance of operations not resulting from the exercise of an economic activity. This is because the respective conditions for application are not met, that is, because neither is verified "the performance of operations not resulting from the exercise of an economic activity", nor the existence of resources of mixed use allocated to the same;

8. As the preconditions of the legal hypothesis of article 23, no. 1, (a) of the VAT Code are not fulfilled (due to the non-existence of "non-economic activities" and mixed resources partially allocated to them), the imposition of the method of direct allocation sought by the Tax and Customs Authority is invalid, as inapplicable, and the VAT correction in the amount of € 805,618.30 (here in question) made on the basis of these grounds cannot be accepted;

9. The determination of the measure of deduction of VAT incurred by the Claimant in the exercise of an economic activity falls within (b) of no. 1 of article 23 of the VAT Code, according to which "in the case of a good or service allocated to the performance of operations resulting from the exercise of an economic activity provided for in (a) of no. 1 of article 2, part of which does not confer a right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction", a percentage determined in accordance with the formula of no. 4 of this provision, also called pro rata;

10. In the calculation of the said pro rata, however, financial operations that have an accessory character in relation to the activity carried out by the taxpayer are not included, under the provision of article 23, no. 5, of the VAT Code;

11. The Claimant's activity being economic and embodying itself in the provision of corporate services, subject to VAT, which confer the right to deduct (see article 20, no. 1, (a) of the VAT Code), and in the granting of loans, on an accessory basis, to the participating companies, in this case with VAT exemption (without the right to deduct) under article 9, no. 27, (a) of this instrument, it remains to assess the accessory character of the latter in order to conclude whether or not their inclusion in the fraction of determination of the percentage of deduction (pro rata) of the Claimant;

12. In this context, it should be noted the merely instrumental character of the financing granted by the Claimant and the fact that the expenditure of resources burdened with VAT associated with them is non-existent or diminutive;

13. In this sense, the CJEU decided that "the granting by a holding of remunerated loans, annually, to its participating companies, as well as the applications made by it in bank deposits or in securities, such as Treasury bonds or treasury operations, constitute economic activities carried out by a taxpayer acting in that capacity" (see EDM Judgment, of 29 April 2004, case no. C-77/01, point 70);

14. And that "must be considered operations accessory within the meaning of article 19, no. 2, second period, of the Sixth Directive, the granting of loans by a holding to its participating companies (…) to the extent that these operations only imply a very limited use of goods or of services for which VAT is due; although the scale of the income generated by the financial operations covered by the scope of the Sixth Directive may constitute an indication that these operations should not be considered accessory within the meaning of that provision, the fact that such operations generate income greater than that obtained by the activity indicated as principal by the company in question [which is not even the case of the Claimant] cannot by itself exclude their qualification as «accessory operations»" (see EDM Judgment, points 77 and 78);

15. Given that the accessory nature of the granting of loans in the Claimant's activity is established, the percentage of deduction determined by the Claimant is 100%, thus making deductible the entirety of the VAT incurred in the total amount of € 1,322,694.41 (see p. 24 of the Tax Inspection Report) – with the exception of expenses provided for in article 21 of the VAT Code, whose VAT the Claimant in any case did not deduct (nor was this questioned by the AT), all under the provision of articles 20, no. 1 (a), 23, no. 1, (b) and nos. 4 and 5 of the VAT Code.

b. Position of the AT

1. The Claimant is a company managing equity investments (SGPS), whose legal regime is provided for by Decree-Law no. 495/88, of 30 December, which exercises as its principal activity the management of equity investments, and also, as an accessory matter, as permitted by its legal regime, provides technical services of administration and management to its participating companies;

2. Article 1, no. 1 of Decree-Law no. 495/88, of 30 December, provides that SGPS "(…) have the sole contractual object the management of equity investments of other companies, as an indirect form of exercise of economic activities.";

3. Participation in the capital of other commercial companies shall be considered as an indirect form of exercise of an economic activity, under the terms of nos. 2 and 3 of that legal provision, if it does not have a merely occasional character, that is, if it lasts for a period exceeding one year, and also, if the holding of that participation is equal to or greater than "(...) 10% of the capital with voting rights of the participating company, either alone or jointly with investments of other companies in which the SGPS is dominant. ";

4. Furthermore, in accordance with the provisions of nos. 1 and 2 of article 4 of the Legal Regime of SGPS, it is permitted to this type of company, in addition to the principal activity, "the provision of technical services of administration and management to all or some of the companies in which they hold the investment provided for in no. 2 of article 1, or with which they have celebrated a subordination contract", provided that such provision is contained in a written contract celebrated between investor and invested, in which the value of the corresponding remuneration due is specified;

5. From the combination of these norms, and also from article 5 of the same Decree-Law, it follows that the corporate object of SGPS is limited, restricting it to the management of equity investments, being forbidden to it the possibility of performing other activities than those provided for above;

6. A relevant concept for the analysis here in question is what should be understood by economic activity for VAT purposes. In this matter, the second paragraph of no. 1 of article 9 of the VAT Directive provides that "any activity of production, commercialisation or provision of services, including extractive, agricultural and liberal professions or equivalent activities shall be considered. It is in particular considered economic activity the exploitation of a corporeal or incorporeal good with the aim of gaining income of a permanent character";

7. On the other hand, the Court of Justice of the European Communities (now Court of Justice of the European Union), has defined that the following are outside the concept of economic activity:

• Dividends from equity investments;
• Capital gains from the sale of shares or other negotiable securities;
• Income from investments in investment funds;
• Interest on bonds;
• Interest from the occasional granting of credit by holdings using distributed dividends from participating companies;
• Capital entries for companies;
• Issuance of shares representing the capital of a commercial company.

1. This is the understanding endorsed by the Tax Administration set out in Circular Letter no. 30103, of 23.04.2008, where in its "Point VII - Concepts - B - Operations excluded from the concept of economic activity", proceeded to clarify the meaning and scope of article 23 of the VAT Code, which came to apply precisely the Community discipline on the deduction regime, harmonising it, and removing the doubts raised by the previous wording of that article (making it compatible with no. 5 of article 17 of the Sixth Directive, which corresponds to article 173 of the VAT Directive);

2. The right to deduction is provided for, in Community terms, in Title X of the VAT Directive (articles 167 to 192), and at the level of internal law in Chapter V – Section I of the VAT Code (articles 19 to 26);

3. From articles 168 and 169 of the VAT Directive it follows that the taxpayer can deduct the supported tax to the extent that the goods and services are used for the performance of operations considered as integrating the concept of economic activities and which do not configure operations exempt, without the right to deduction (taxable outputs);

4. Which by a fortiori requires that, as a rule, the tax supported with inputs related to goods and services intended to be used in operations not subject, outside the field of tax, or which, being exempt, do not confer a right to deduction, cannot be deducted;

5. In that same sense, the provision of no. 1 of article 20 of the VAT Code provides that:

"1. Only the tax that has fallen on goods or services acquired, imported or used by the subject for the performance of the following operations may be deducted:

a) Transmissions of goods and provision of services subject to tax and not exempt from it;

b) Transmissions of goods and provision of services consisting of:

I) Exports and operations exempt under article 14;

II) Operations performed abroad that would be taxable if performed in national territory; (…)"

1. The application of these norms to the specific case would allow concluding that, in the circumstance that A… has acquired services whose VAT deduction was the subject of corrections made in the inspection phase, to use them exclusively and entirely in the provision of technical services of administration and management to the participating companies (as is permitted, as an accessory matter, under the legal regime of SGPS, which, in principle, would be considered as economic activities, taxed and with a right to deduction), then it could deduct entirely the supported tax;

2. In the inverse situation, here subject to analysis, being used only and solely in the exercise of the activity of management of equity investments, the right to deduction is forbidden in its entirety;

3. Furthermore, if we are faced with goods and services used by the taxpayer to perform both operations with a right to deduction and without it, this faculty is limited to the part of VAT proportional to the amount relating to the first operations, due to the provision of article 173 of the VAT Directive, transposed into the VAT Code through article 23;

4. As already demonstrated in the Tax Inspection Report, A…, practices activities that confer a right to deduction and others that do not permit it, which is why it is important to make this distinction ex ante (using the terminology of J. L. Saldanha Sanches), between activities subject and not subject or exempt, since, being possible to make the separation between the expenses related to each of them, the VAT supported would be, respectively, deducted in its entirety, or conversely, would be, wholly, excluded from that possibility (direct attribution or using the British terminology, direct attribution of the input tax);

5. On the other hand, it uses certain resources in both activities, that is, it performs VAT operations that confer a right to deduction (remunerated service provisions from the participating companies), simultaneously, with others that although subject to tax, are exempt from it under article 9 of the VAT Code (granting of credit), and also, with operations resulting from its principal activity, which is outside the field of tax incidence (acquisition, holding, disposal, management of equity investments, from which it earns dividends);

6. It is in this respect, in particular, that another question raised by the Claimant and subject to the present proceedings arises, which comes down to assessing what method to use to make the allocation of the charges of "mixed" or promiscuous use, which will be explained further below;

7. Accordingly, given the circumstances of the specific case, it is necessary, prior to the task of analysing the methods of "ex post" separation, to examine each of the activities carried out by A…, subject to divergence between the Claimant and the AT;

8. With respect to dividends and holding of equity investments, as was said before, the same cannot be considered as integrating the concept of economic activity;

9. This is the understanding of the Tax Administration, contained in Circular Letter no. 30103, of 23.04.2008, of the Office of the Deputy Director General, Area of Tax Management - VAT, where it is expressly stated that:

"B. Operations excluded from the concept of economic activity

1. The receipt of dividends or profits resulting from the holding of equity investments, does not constitute the consideration for operations within the scope of the tax, being operations not resulting from an economic activity for VAT purposes, because it results from the mere ownership of those and depends, to a large extent, on random factors.

2. The same occurs with capital gains resulting from the mere acquisition and disposal of such equity investments, as well as of other securities, including bonds, because it is understood that simple acquisition and sale do not constitute the exploitation of a good with a view to the production of a good with a view to the production of income of a permanent character.

3. Also, income resulting from investments in investment funds and capital gains generated by simple sale of these investments, should not be considered as the consideration for operations resulting from the performance of an economic activity for VAT purposes.

4. Equally, capital entries for companies, namely by admission of a new partner, or the issuance of shares by public companies with a view to their subscription by new shareholders, do not meet the concept of relevant economic activity and are not, therefore, considered as encompassed by the scope of VAT.

Note that, in the context described, the consideration of the profits or income above indicated as resulting from operations not encompassable within the concept of economic activity, therefore outside the field of tax incidence, is, as a rule, independent of the nature of the taxpayer who accrues or of the activity pursued by it, being also irrelevant whether that taxpayer has or does not have direct or indirect interference in the management of the participating companies. (...)".

1. Thus, the Tax Administration understands that the simple acquisition and sale of equity investments does not constitute the exploitation of a good with a view to the production of income of a permanent character and as such are considered as operations excluded from the concept of economic activity;

2. It is the mere enjoyment of an asset, hence the interest or dividends resulting from the same, embody mere fruits resulting from ownership of a good and not income derived from its exploitation;

3. In that measure, there are no doubts that the principal activity of the Claimant, of management of the equity investments held by it, cannot be considered as economic, which is why the legal regime itself of SGPS qualifies it as "an indirect form of exercise of economic activities", as already said above;

4. With respect to interest resulting from loans to participating companies, the same result from operations subject to tax, but exempt from it, under the provision of no. 27 of article 9 of the VAT Code, not conferring, under the provision of (b), of no. 1 of article 20, a right to deduction;

5. On the other hand, the Claimant alleges that it performs "broad spectrum services" that are remunerated, which, in principle, would always be subject to taxation;

6. Given this, it is concluded that the Claimant, contrary to what is suggested throughout its argument, could never be considered a taxpayer with an integral right to deduction, that is, with a right to deduct 100% of the VAT supported upstream with the acquisition of goods and services;

7. In fact, the Claimant is configured as a holding whose object consists in the activity of management of a set of equity investments in other companies, which constitute its assets, from which it draws the fruits (in the form of dividends, loans, etc.) on which it depends, almost exclusively, for the fulfilment of the obligations imposed on it and assumed by it;

8. In that measure, it is important to note that, contrary to the understanding endorsed by the Claimant, it is not irrelevant, in general terms for the effect of the right to deduction, the weight that those income derived from the exercise of the so-called principal activity have in the total income obtained by it;

9. Which is why the same is qualified by its principal activity (that is, the management of equity investments), namely, for the purposes of the Legal Regime of SGPS;

10. And hence to it are allocated a substantial number of resources, since the development of this activity implies, among others, the provision of advice and/or audit services related to the potential acquisition of a strategic investment; assessment of investment opportunities; actions aimed at assessing projects for development and internationalisation of the group, etc.;

11. These services are indispensable to equip the decision-making bodies with all relevant information for making choices and decisions, in order to achieve the strategic objectives of the group it represents;

12. With respect to service provisions to the participating companies it is unquestionable that it is permitted to SGPS, in certain circumstances, to develop these activities (parallel to the activity of management of equity investments), which are, however, merely accessory to that;

13. It results from the Tax Inspection Report that the Claimant celebrated service provision contracts with some of its participating companies, namely: D…, SA (NIPC…); B… SA (NIPC…) and E…- … SGPS, SA (NIPC…), for which it receives the respective remuneration;

14. In fact, the Claimant has a certain structure, equipped with its own means that allow it to gather all elements and information, related to the various areas inherent to taking decisions appropriate to its strategic objective which translates into maximising the profitability of the investments made, through the held equity investments - centralised and specialised management;

15. However, these means are not always sufficient or adequate, so it needs to resort to third party entities;

16. This is the case with the following services, related to (see pp. 37/38 of the Tax Inspection Report):

• the issuance of a bond loan;
• defence in the arbitration proceedings that opposed the Claimant to the Irish company C…;
• the legal audit of the company's accounts;

1. With respect to the charges related to the organisation, arrangement and disclosure of the issuance of the bond loan (A… 2012/2015), the following results, in summary, from the tax inspection report:

"a) Financial activity and charges related to bond loans

With the objective of obtaining funds for use in the scope of its activity, A… proceeded to issue a bond loan, supporting costs in the organisation, arrangement, issuance and publicity, and taking into account the type of transaction in question and the fact that such loans are intended to obtain financing indispensable for the pursuit of the economic and strategic objectives of the Group, there remain no doubts that we are faced with an expense in the sphere of the holding resulting from the exercise of the principal activity of the SGPS aimed at serving solely and exclusively its interests, in a framework of management of investment and development of business, embodied in "the realisation of investments, whether in new projects or in the context of existing projects, such as may be the case of strengthening its position in B…", as can be read in the public offer prospectus for subscription of the loan.

As already seen previously, the guidelines set out in various reports produced by the OECD, frame the "charges relating to the mobilisation of the resources necessary for the parent company for the acquisition of its equity investments" (§7.10 of the 1995 OECD report) as «shareholder costs».

We thus have that the total VAT supported during the period, in the development of financing operations, contracted in the exclusive interest of the SGPS, which fit within the framework of operations developed in a perspective of business strategy for valuing equity investments, expansion of activity and protection of the company's assets, whose effects produce results in the principal activity, not subject to tax, totalling € 717,948.60 is not capable of deduction."

1. That is, the bond loan referred to is nothing more than a form of financing, in which the issuing entities opt for issuing bonds, allowing investors to participate in the granting of credit, receiving as consideration the payment of interest on the respective coupons, being an alternative form of financing of companies;

2. So, taking into account the type of transaction in question, and the fact that such loans are intended to obtain financing indispensable for the pursuit of the economic and strategic objectives of the Group (see that the Claimant states that the same allowed the expansion of the group, through the acquisition of C's investment in B… - article 194° of the request for arbitral pronouncement), it should be concluded that we are faced with expenses resulting from the exercise of the principal activity of the SGPS, aimed at serving solely and exclusively its interests, and being related to its quality as shareholder, constituting a direct and necessary prolongation of the same, although it is admitted that they may have indirect reflections in the activity of the participating companies.

3. In that measure, the VAT supported does not appear to be capable of being deducted.

4. As for the costs supported with advisory/consulting services provided within the scope of the arbitration proceedings that opposed A… to C… over control of B…, it results from the tax inspection report that:

"A… incurred costs such as legal fees, legal assistance and advice related to its defence in an arbitration proceedings that opposed it to company C… over control of the financial investment not held in the capital of the participating company B… . Once again we are faced with an expense in the sphere of the holding resulting from the exercise of the principal activity aimed solely and exclusively at defending its assets, attending to the quality of principal shareholder it holds in the participating company in question, and as such find justification within the framework of "acquisition, holding and management of equity investments" which constitutes the principal activity of A… .

We thus have that the total VAT supported during the period, in services related to the arbitration proceedings, contracted in the exclusive interest of the SGPS, which fit within the framework of operations developed in a perspective of business strategy for valuing equity investments, expansion of activity and protection of the company's assets, whose effects produce results in the principal activity not subject to tax, totalling € 27,621.03 is not capable of deduction."

1. In fact, there are no doubts that these are also related to the activity of acquisition, holding and management of equity investments developed by the Claimant, in a perspective of business management and expansion of activity, relating to A… itself, as shareholder, and having no direct and immediate nexus with the taxed activity, although it is admitted, as an exceptional matter, that the same may be merely reflective, at the level of the effects it produces in the legal sphere of the participating companies;

2. They relate to procedures carried out by the Claimant with a view to evaluating the price of all shares representing the capital of B… held by C…, and subsequent exercise of the right of option to purchase the same. Following these procedures, company C… filed an appeal in the Paris Arbitral Court.

3. In summary, as is concluded, it is a matter of expenses related to the exercise of defending the rights inherent to the status of shareholder, and which clearly fit within the scope of its activity of acquisition and holding of equity investments, which as was said, is outside the field of tax.

4. With respect to legal audit of accounts, it is a legal obligation imposed by commercial legislation, imposed on the Claimant both individually and as parent company, and the respective charges cannot be imputed to the participating companies, as results from the 1995 OECD Report (§ 7,10), and from the 1984 OECD Report (§ 38 item b) where it is expressly referred to, as an example of the activities of the shareholder whose charges cannot be attributed to the affiliates: "b) Activities inherent to the parent company's obligations regarding presentation of accounts and activity reports, including consolidation at group level'".

5. Finally, as for charges related to legal services with tax matters, and with the remuneration of the administrators of A…, what was said in the Tax Inspection Report is reiterated (pp. 40/41), adding only with respect to the remuneration committee that it constitutes a body of the company, elected by shareholders, which has the function of defining the remuneration policy of the holders of social positions, fixing the applicable remuneration taking into account the functions exercised, the performance verified and the economic situation of the company;

6. In fact, SGPS embody entities of public interest, under the terms of the provision of article 2, (b) and (i) of Decree-Law no. 225/2008, of 20 November, and of article 2, no. 1 of Law no. 28/2009, of 19 June, so they are subject to certain obligations, including the annual obligation of approval and disclosure of the remuneration policy of the members of the respective bodies of administration and supervision;

7. From this it follows that we are faced with expenses associated with the very legal structure and corporate organisation of the Claimant, which were supported exclusively in its interest, presenting no relation or direct benefit, not even reflective, with any of the participating companies, nor with the economic activity developed by the Claimant.

8. On this matter, the 1995 OECD Report (§7.10) is referred to, and on the basis of the 1984 OECD Report (§ 38) gives as examples of "shareholder activities" whose charges cannot be imputed to the subsidiaries:

"a) the costs of activities inherent to the legal structure of the parent company itself, such as the organisation of shareholders' meetings of the parent company, the issuance of shares of this company and the charges for the operation of the supervisory board;"

1. Hence, once again, it is not apparent that the same can be related to operations of provision of technical services of administration and management to the participating companies and, consequently, to taxable operations.

2. It is important to emphasise that these expenses and costs do not vary depending on the quantity of services provided to the participating companies, that is, whether or not A… engaged in the complementary activity of providing technical services of management and administration to participating companies, it would always incur these expenses or costs;

3. Given the above, we are of the view that the Claimant is not correct, seeking the dismissal of the totality of the claims formulated in the arbitration petition, with all the legal consequences that apply to the case.

1.1. Applicable Legal Regime

1.1.1. Of the Legal Regime of SGPS

Decree-Law no. 495/88, of 30 December, which establishes the Legal Regime of Companies Managing Equity Investments (SGPS), was created "in order to create favourable conditions, in particular of a fiscal nature, which facilitate and encourage the creation of economic groups, as appropriate instruments to contribute to the strengthening of the Portuguese business fabric." – See Preamble of that Decree-Law.

Under article 1, no. 1 of the legal regime of SGPS, "Companies managing equity investments, hereinafter abbreviated as SGPS, have the sole contractual object the management of equity investments in other companies, as an indirect form of exercise of economic activities."

SGPS are permitted "the provision of technical services of administration and management of all or some of the companies in which they hold the investments provided for" (see article 4, no. 1 of the legal regime of SGPS), as an accessory matter.

The contractual object of SGPS implies a legal limit to the exercise of its commercial activity in that form, in that it is provided in no. 2 of article 8 of its legal regime the following:

"Companies which, having a different contractual object, have as their sole actual object the management of equity investments in other companies and also SGPS which in fact exercise direct economic activity shall be dissolved by the court, under the terms of article 144 of the Commercial Companies Code, without prejudice to the application of the penalty provided for in no. 1 of article 13 of this instrument."

As Mariana Gouveia de Oliveira teaches, "the concept of holding company is used at international level to designate very heterogeneous realities, being able to encompass, both companies that limit themselves to passively managing portfolios of securities, in a logic of risk allocation, as companies that only hold controlling investments and which intervene actively in the management of their participating companies, providing them or not with remunerated services.

Among other modalities, it is usual to distinguish between the pure holding and the mixed holding and between the financial holding and the directive holding.

In the first case, the criterion used refers to the exclusive character of its corporate object, allowing distinguishing between the pure holding, dedicated solely to the holding of equity investments and the mixed holding, whose corporate object also covers activities of a commercial and industrial nature.

Already the second of those criteria, relating to the purpose for which the management of equity investments is intended, implies the differentiation between the directive holding, which aims, more than the mere holding of equity investments, the framing and direction of the participating companies, thus performing taxable operations and operations outside the field of subjection and the so-called financial holding, directed only at the profitability of the investment concentrated in equity investments.

Now, in accordance with article 1, no. 1 of Decree-Law no. 495/88, of 30 December (and successive amendments), SGPS have as their sole contractual object the management of equity investments in other companies, as an indirect form of exercise of economic activities.

The participation in the capital of other companies shall be considered as an indirect form of exercise of an economic activity, under the terms of article 1, nos. 2 and 3 of that instrument, once two cumulative requirements are verified: on the one hand, the non-occasional character of the investment, i.e., the conservation of ownership of the same for a period exceeding one year; on the other, the holding of at least 10% of the capital, to which is associated the voting right of the participating company (individually or jointly with investments of other companies in which the SGPS is in a position of dominance).

(…)

On the other hand, the SGPS should qualify as a directive holding, achieving, through its activity, more than the mere holding of equity investments.

Because it is a directive holding, the SGPS can, under the terms of articles 4 and 5 of its legal regime, provide technical services of administration and management, treasury services and granting of credit to all or some of the companies in which it holds investments with the restrictions established in law.

In summary, it may be affirmed as follows: the management of equity investments in other companies, as an indirect form of exercise of an economic activity, constitutes the sole corporate object that, in the eyes of the law, any SGPS may have.

For this reason, these are equated to pure holdings.

However, this qualification does not prevent the respective activity from exceeding the mere acquisition, holding and disposal of equity investments, so that it appears perfectly possible the exercise of an economic activity by an SGPS, related to the management of the equity investments it holds under the terms permitted by law.

It should be noted, however, that the qualification as pure or mixed holding does not seem to find complete correspondence with the same concepts used in the context of CJEU jurisprudence.

In fact, and focusing our attention on the distinction between those two types of holdings, it must be recognised the different purpose of the criterion used in the corporate and community context.

Indeed, in the community context, the fundamental question to be analysed is whether the holding is a VAT taxpayer, i.e., whether it develops an economic activity, analysing for this purpose whether, beyond the simple holding of equity investments, any activity of production, commercialisation or provision of services is practised, in particular, provision of services to the participating companies.

If its activity is merely passive, it will be a company that does not exercise an economic activity for VAT purposes, since the dividends and interest it earns embody mere fruits resulting from ownership of a good and not income deriving from its economic exploitation, so the company in question will not be considered a taxpayer for VAT purposes.

We are speaking of entities which, in economic terms, do not constitute true enterprises, but only vehicles for holding and organisation of economic groups.

Differently, a holding company that intervenes actively in the management of its participating companies, having as a result the performance of taxable outputs, should be considered as an entity exercising an economic activity, assuming the status of VAT taxpayer.

Although the legal regime of SGPS does not preclude the existence of merely passive holdings, it follows from its legal regime and the preamble of DL 495/88 of 30 December, that the Portuguese legislator intended to create a legal framework for the creation of active SGPS, which managed in a "centralised and specialised" manner their participating companies.

As the legislator refers, the equity investments to be held by SGPS, "do not, however, translate into a mere application of capitals, rather assuming an active presence and intervention, as partners of the said participating company."

Indeed, its sole corporate object is management – and not mere holding – of equity investments, which is reinforced by the fact that it is the law itself that recognises it as competent for the provision of management services to the participating companies, resulting from this the exercise of an economic activity for VAT purposes.

(…)

Thus, we must conclude that Portuguese SGPS can be qualified as passive (generally referred to as pure holdings, in Community jurisprudence) or active holdings."

In the specific case under analysis, it was proven that the Claimant is an active holding, which provides support, monitoring and advisory services to the participating companies, its principal activity not being the management of equity investments, but rather the provision of corporate services.

In this context, let us examine what the legal framework of holdings is in respect of VAT.

1.1.2. Of VAT Incidence

In accordance with article 2, no. 1 (a) of the VAT Code, the following are liable to the tax: legal entities which, in an independent manner and with the character of habituality, exercise activities of production, commerce or provision of services.

In this light, SGPS may or may not be VAT taxpayers depending on whether or not they develop an economic activity for VAT purposes.

When holdings are passive, it has been understood that the simple taking, holding and disposal of equity investments and other financial assets does not constitute an economic activity within the meaning relevant for VAT purposes. In fact, in these cases we are faced with the mere enjoyment of an asset and not with its exploitation.

When holdings are active, the fact that its sole corporate object is "the management of equity investments of other companies, as an indirect form of exercise of economic activities" should not be relevant in any way in the assessment of the right to deduct VAT, which must be evaluated in accordance with the general criteria.

Thus, notwithstanding the rule being established that the mere acquisition and holding of shares and equity investments does not constitute an economic activity, the acquisition or holding of equity investments can be performed within the framework of a commercial activity, or constitute the direct, permanent and necessary prolongation of taxable activity.

Thus, considering that SGPS can have a dual status, for VAT purposes, as taxpayers and final consumers, to the extent that they can develop taxable activities, such as service provisions performed to their participating companies, and non-economic activities, such as the holding and enjoyment of equity investments, can SGPS with these characteristics qualify as partial taxpayers.

Given that, in the case in question, the Claimant is an active holding, which also develops an economic activity, it is important next to verify on what terms it may exercise its right to deduct VAT, as a VAT taxpayer.

1.1.3. Of the Right to Deduct VAT

As is well known, VAT is a general tax on consumption aimed at taxing the final use of goods and services, that is, its use by the final consumer.

Being an indirect tax of Community origin and multiphase, VAT tends to affect every act of consumption, and the right to deduction is an essential element of the functioning of the tax, and should ensure its principal characteristic – neutrality.

It is constant CJEU jurisprudence that, as the right to deduction is a fundamental element of the VAT regime, it is only possible to limit this right in cases expressly provided for by the VAT Directive and, even then, with respect for the principles of proportionality and equality, not being possible to empty the common VAT system of its content.

As is emphasised in the BP Soupergaz Judgment, the so-called indirect subtractive method, of invoices, tax credit or system of staggered payments, is the essential mechanism for the functioning of this type of tax. As referred to in the conclusions of this Judgment, "In this respect, the right to deduction provided for in articles 17 et seq. of the Sixth Directive, which forms an integral part of the mechanism of value added tax, cannot, in principle, be limited and is exercised immediately with respect to the entirety of the taxes that fell on the upstream transactions, has an impact on the level of the tax burden and must be applied similarly in all Member States, so that only derogations are permitted in the cases expressly provided for by the directive."

It is further argued that "the provisions that provide for derogations to the principle of the right to deduct VAT, which guarantees the neutrality of this tax, are of restrictive interpretation".

Therefore, the principle of VAT neutrality requires that the deduction of the tax paid upstream be granted if the substantial requirements have been complied with, even if the taxpayers have neglected certain formal requirements.

In this context, according to the CJEU, as long as the Tax Administration has the necessary data to determine that the taxpayer, as the recipient of the operations, is the debtor of VAT, it cannot impose, with respect to its right to deduction, additional conditions that might result in the absolute infeasibility of the exercise of that right.

In reality, the right to deduction is embodied as the essential element of the functioning of the tax, the "cornerstone of the value added tax system", based on the so-called method of deduction of the tax, method of tax credit, indirect subtractive method or further method of invoices.

According to this method, and in accordance with the provision of article 19 of the VAT Code, through an arithmetic operation of subtraction, to the tax determined in sales and service provisions (outputs) and identifiable in the respective invoices, the tax supported in purchases and other expenses (inputs) is deducted.

The rules for the exercise of the right to deduct the tax contemplate objective requirements, more related to the type of expenses, subjective, relating to the taxpayer, and temporal, relating to the period in which it is possible to exercise the right to deduct VAT, which must be verified simultaneously to exercise the right to deduction.

As objective requirements for the exercise of the right to deduct the tax we have, in particular, the fact that the supported tax must be contained in an invoice issued in the legal form, that it is Portuguese VAT, and that the expense itself confers a right to deduct VAT (that is, it should not be an expense excluded from the right to deduction, under the provision of article 21 of the VAT Code).

As subjective requirements for the exercise of the right to deduct the tax, it is determined, in particular, that the goods and services should be directly related to the exercise of the activity in question.

Thus, taking into account the Community jurisprudence and the VAT Directive, the right to deduction of SGPS is only recognised to the extent that those inputs are related to taxable outputs and, to the extent that those outputs are effectively taxed (or benefit from complete exemption).

To determine the right to deduct of active holdings, it is therefore necessary to verify:

1. Whether the VAT supported in inputs is directly related to taxable outputs;
2. Whether the VAT supported in inputs is directly related to one of the economic activities pursued;
3. Whether the VAT is supported on general costs of the economic activity.

In this context, it is concluded in Case BLP10, that the upstream goods or services must present a direct and immediate relationship with one or several downstream taxable operation(s), it being the case that the right to deduct VAT presupposes that the expenses in question must constitute an integral part of the constituent elements of the price of the taxed operations.

Inevitably, the analysis of the scope of that expression "(…) direct and immediate relationship (…)", should be carried out on a case-by-case basis, it being incumbent on the national judicial bodies to apply the criterion to the facts of each case presented to them and to take into account all the circumstances in which the operations in question are conducted.

However, the density of that relationship can be different depending on the quality of the taxpayer and the nature of the operations performed and these variables can also have repercussions on the burden of proof of the existence of the relationship, which falls to the operator interested in the deduction.

Thus, in accordance with CJEU jurisprudence, whenever a taxpayer exercises economic activities intended to realise exclusively taxable operations, it is not necessary, in order that the tax may be deducted in its entirety, to establish, with respect to each upstream transaction, the existence of a direct and immediate relationship with the specific taxable transaction.

In fact, it has been argued that it is sufficient that there is a relationship with the company's activity.

Thus, the costs incurred by an SGPS directly related to the provision of services to the participating companies justify the right to deduct the supported VAT, given the existence of a direct link between the VAT supported in inputs and the outputs taxed in the SGPS.

With respect to the right to deduct VAT supported in inputs directly related to one of the economic activities pursued by an SGPS, it is understood that the right to deduct VAT only exists if it is possible to establish a direct link between the inputs and a delimited set of taxable economic activities.

In fact, the CJEU has understood that, for example, the exploitation of capital with the objective of drawing income from it, whether in the form of dividends or of interest resulting from the simple ownership of the good, does not constitute an economic activity in itself, and there is therefore no right to deduct VAT with respect to expenses incurred related to non-economic activities, that is, not subject to VAT, and the same reasoning may be applied with respect to exempt activities without a right to deduction.

With respect to the right to deduct VAT supported on general costs of the economic activity, it has been understood that the cost of the services acquired by an SGPS fit within the general expenses of the taxpayer when those are constituent elements of the price of the products of an enterprise.

In this context, the CJEU decided in Case CIBO, that there is no direct and immediate relationship between the various services acquired by a holding in the context of taking an investment in a subsidiary and one or several downstream operations that confer a right to deduction, since the amount of VAT paid by the company with respect to expenses incurred with the services in question does not directly burden the price of the downstream operations that confer a right to deduction.

In summary, from CJEU jurisprudence it is clear that the exercise of the right to deduct VAT is a fundamental right, which cannot be limited except in cases expressly permitted by the norms of European Union Law or by the general principles of law accepted in this field, such as the principle of abuse of rights.

2. Application to the Specific Case

In light of the above, it follows that the fundamental question which it is important to resolve in this case consists in knowing whether the Claimant, in its capacity as SGPS, independently develops an economic activity, which permits it to deduct the VAT falling on the following expenses:

a) Charges related to the organisation, arrangement and disclosure of the issuance of the bond loan (A… 2012/2015);

b) Charges with legal audit of accounts;

c) Charges related to legal services with tax matters, and with the remuneration of the administrators of A…;

d) Costs supported with advisory/consulting services provided within the scope of the arbitration proceedings that opposed A… to C…, over control of B… .

2.1. Charges Related to the Organisation, Arrangement and Disclosure of the Issuance of the Bond Loan (A…2012/2015);

The Claimant presents the need to strengthen the financial investment held in B… as the reason for resorting to the issuance of a bond loan, in which it supports a series of charges burdened with VAT.

Although A… affirms that the bond loan is intended for its activity of "management of equity investments" (strengthening of a shareholder position), from a bookkeeping and financial perspective, it is not possible to establish a perfect correspondence between the assets and the liabilities of the Claimant. In other words, it is not possible to separate the liability (and equity) intended to acquire equity investments from the liability (or equity) intended to grant loans (advances) to the participating companies. Generically, the equity and borrowed capital of the Claimant are applied in all of its activities.

As a consequence, the VAT supported with the charges related to the organisation, arrangement and disclosure of the issuance of the bond loan (A… 2012/2015) is not directly related to any taxable operation, nor to any specific subject and taxed activity.

However, the charges in question are general expenses, relating to the functioning of the Claimant as an enterprise, which, therefore, from an economic perspective, are to be considered constituent elements of the price of the services provided by the Claimant to its participating companies. Such services pass through the provision of technical management services (transactions subject and not exempt from VAT), but also through the granting of financing (transactions subject, but exempt from VAT, under no. 27 of article 9 of the VAT Code).

In the terms exposed, the exercise of the right to deduct VAT in inputs of mixed allocation should be supported by the application of a percentage (pro rata) which, under (b) of no. 1 of article 23 of the VAT Code, would contain, in the numerator, the annual amount of operations that give rise to deduction (the subject and not exempt from VAT) and which, in the denominator, would include the annual amount of all activities considered economic (exempt or not exempt).

However, as decided in case EDM, "the granting by a holding of remunerated loans, annually, to its participating companies, as well as the applications made by it in bank deposits or in securities, such as Treasury bonds or treasury operations, constitute economic activities, performed by a taxpayer acting in that capacity, within the meaning of articles 2, no. 1, and 4, no. 2, of the Sixth Directive 77/388; however, the said operations are exempt from value added tax under article 13 B, (d), nos. 1 and 5, of that same directive; in the calculation of the pro rata deduction provided for in articles 17 and 19 of the Sixth Directive 77/388, these operations must be considered as accessory operations within the meaning of article 19, no. 2, second period, of the same directive, to the extent that they only imply a very limited use of goods or of services for which value added tax is due; although the scale of the income generated by the financial operations covered by the scope of application of the Sixth Directive 77/388 may constitute an indication that these operations should not be considered accessory within the meaning of that provision, the fact that such operations generate income greater than that produced by the activity indicated as principal by the company in question [which is not even the case of the Claimant] cannot, by itself, exclude their qualification as «accessory operations»".

In the case in question, as results from the evidence produced, the activity of the Claimant relating to the granting of loans and receipt of interest implies a very limited use of the resources for which VAT is due, so that the income which the Claimant obtained, in the year 2012, from those financing operations of the participating companies, are not to be considered relevant for the calculation of the percentage of VAT deduction, as follows from no. 5 of article 23 of the VAT Code, because they have "an accessory character in relation to the activity exercised by the taxpayer".

In these terms it is concluded that the VAT charged to A…, together with the charges related to the organisation, arrangement and disclosure of the issuance of the bond loan (A… 2012/2015), is deductible in its entirety.

2.2. Charges with Legal Audit of Accounts; Charges Related to Legal Services with Tax Matters, and with the Remuneration of the Administrators of A…; Costs Supported with Advisory/Consulting Services Provided Within the Scope of the Arbitration Proceedings that Opposed A… to C…, Over Control of B… .

It results from the facts found that the charges with legal audit of accounts, legal services, remuneration of administrators and advisory services provided within the scope of the arbitration proceedings incorporate VAT supported in inputs directly related to taxable outputs.

In fact, the said costs are directly related to the provision of management services provided by the Claimant to its participating companies, given that the Claimant intervenes actively in all its participating companies, providing them with various management and administration services.

Having already been decided in Case Cibo, in this respect, the following: "1) the interference of a holding in the management of the participating companies..."

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