Process: 578/2017-T

Date: July 17, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 578/2017-T) addresses the critical issue of VAT input deduction rights for SGPS holding companies conducting mixed activities. The claimant SGPS engaged in three distinct activities: (i) managing shareholdings (VAT-excluded), (ii) granting remunerated loans to subsidiaries (VAT-exempt), and (iii) providing technical administration and management services (VAT-taxable). The Tax Authority challenged the company's deduction of €540,543.27 in VAT on general expenses for 2014, arguing improper allocation. The claimant argued that the taxable service provision consumed most resources, and that if activities were separated organizationally, minimal VAT expenses would relate to shareholding management and financing. The tribunal examined Article 23 of the Portuguese VAT Code (CIVA), which governs the pro-rata deduction method for mixed taxable and exempt activities. The decision establishes important precedent regarding how SGPS companies should calculate input VAT deductions when general expenses serve multiple purposes. The case demonstrates that the materiality of resource consumption by each activity is crucial for determining proper VAT allocation, particularly when exempt activities like loan-making incur minimal third-party costs bearing VAT. This ruling provides essential guidance for holding companies structuring their VAT compliance and defending assessment challenges through administrative arbitration.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Presiding Arbitrator), Sílvia Oliveira and Olívio Mota Amador (Arbitrator Members), designated by the Ethics Council of the Administrative Arbitration Centre to form an Arbitral Tribunal, hereby decide as follows:

ARBITRAL DECISION[1] (consult full version in PDF)

I – REPORT

On 2 November 2017, A..., SGPS, S.A., Tax ID Number..., with registered office at Rua..., n.º..., ...-... Lisbon, filed a request for constitution of an Arbitral Tribunal, pursuant to the combined provisions of Articles 2 and 10 of Decree-Law No. 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, briefly referred to as LFATM), seeking the declaration of illegality of the decision denying the gracious objection No. ...2017..., as well as of the following acts, valued at €217,665.00 (two hundred and seventeen thousand six hundred and sixty-five euros):

  • Value Added Tax ("VAT") assessment acts No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016..., No. 2016... and No. 2016..., relating to the tax periods of 2014 and the tax period of September 2015;

  • Compensatory interest assessment acts No. 2017 ... to No. 2017 ... and No. 2017...; and

  • Statements of account adjustment No. 2017 ... to No. 2017 ..., No. 2017 ... and No. 2017....

To substantiate its request, the Claimant alleges, in summary, that:

  • The Claimant: (i) manages shareholdings (activity excluded from VAT); (ii) makes remunerated loans to its subsidiaries (activity subject, but exempt from VAT); (iii) and provides to the latter technical administration and management services (activity subject and not exempt from VAT);

  • Among the three activities that the Claimant undertakes, the provision of services to its subsidiaries is materially the most important, the one that consumes the greatest part of its resources [whether working hours (without VAT), or goods and services acquired from third parties (with VAT)];

  • If the Claimant were to separate organizationally or accountingly each of its activities, the VAT-taxed expenses that would be allocated to the management of shareholdings and financing would be close to zero.

  • In light of the foregoing, and applying the provisions of Article 23 of the VAT Code, the Claimant considered deductible the tax borne on passive operations related to general expenses incurred in the tax periods of 2014 [acquisition of other goods and services (field 24 of periodic VAT declarations)], in the total amount of €540,543.27 (five hundred and forty thousand, five hundred and forty-three euros and twenty-seven cents).

On 03-11-2017, the request for constitution of the Arbitral Tribunal was accepted and automatically notified to the Tax Authority.

The Claimant did not appoint an arbitrator, so, pursuant to the provisions of subsection a) of No. 2 of Article 6 and subsection a) of No. 1 of Article 11 of the LFATM, the President of the Ethics Council of the CAAD designated the undersigned as arbitrators of the Collective Arbitral Tribunal, who communicated their acceptance of the assignment within the applicable timeframe.

On 27-12-2017, the parties were notified of these designations, and did not express any intention to refuse any of them.

In accordance with the provisions of subsection c) of No. 1 of Article 11 of the LFATM, the collective Arbitral Tribunal was constituted on 17-01-2018.

On 22-02-2018, the Respondent, duly notified for such purpose, filed its response defending itself solely by way of objection.

Pursuant to Article 421 of the Code of Civil Procedure, applicable under Article 29(1)(e) of the LFATM, the utilization of the testimony of the witness examined in CAAD process 316/2015T was determined.

Pursuant to subsections c) and e) of Article 16 and No. 2 of Article 29, both of the LFATM, the holding of the meeting referred to in Article 18 of the LFATM was waived.

Having been granted a deadline for the submission of written arguments, these were submitted by the Claimant, commenting on the evidence produced and reiterating and developing its legal positions.

A period of 30 days was set for the issuance of the final decision, after the submission of arguments by the Respondent, or the expiry of the deadline for such submission, and this period was extended until the expiry of the period set in Article 21(1) of the LFATM.

Within the scope of the proceedings, the Claimant was also warned that it should proceed with payment of the subsequent arbitration fee and communicate such payment to the CAAD up to 10 days before the date of issuance of the arbitral decision.

The Arbitral Tribunal has material competence and is regularly constituted, pursuant to Articles 2, No. 1, subsection a), Article 5 and Article 6, No. 1, of the LFATM.

The parties have legal standing and capacity, are legitimate and are legally represented, pursuant to Articles 4 and 10 of the LFATM and Article 1 of Administrative Order No. 112-A/2011, of 22 March.

The proceeding does not suffer from any nullities.

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

Having considered all the foregoing, it is necessary to issue

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proved

  • The Claimant is a company managing shareholdings ("SGPS"), subject to the legal framework established in Decree-Law No. 495/88, of 30 December.

  • In terms of VAT tax treatment, the Claimant was classified in 2014 under the normal monthly periodicity regime.

  • The Claimant (i) manages shareholdings (activity excluded from VAT); (ii) makes remunerated loans to its subsidiaries (activity subject, but exempt from VAT); (iii) and provides to the latter technical administration and management services (activity subject and not exempt from VAT).

  • Among the three activities that the Claimant undertakes, the provision of services to its subsidiaries is the one that consumes the greatest part of its resources.

  • In the course of 2014, the Claimant did not carry out any significant operations to recompose its portfolio of shareholdings.

  • The amount of income earned by the Claimant in 2014 under its shareholding management activity amounted to €1,912,062.10 (one million nine hundred and twelve thousand and sixty-two euros and ten cents).

  • When the Claimant carries out shareholding management operations, the main expenses it incurs are (i) the costs of acquisition of shareholdings; (ii) the interest associated with financing these operations, and (iii) the working hours of the company's administration.

  • The Claimant does not bear VAT on (i) the costs of acquisition of shareholdings; (ii) the interest associated with financing these operations, and (iii) the working hours of the company's administration.

  • The number of working hours spent by the Claimant's employees with shareholding management activities is minimal.

  • In the course of 2014, the Claimant did not carry out any significant financing operations, limiting itself to continuing support for the treasury of its subsidiaries.

  • The Claimant continuously has complete and updated information about the situation of its subsidiaries, and does not need to resort to third-party services to assess the financing conditions to be applied in operations in which it grants them credit.

  • When the Claimant carries out financing operations to its subsidiaries, the main expenses it incurs are the interest on its own financing.

  • The Claimant does not bear VAT on the interest on its own financing.

  • The amount of income earned by the Claimant under VAT-taxed activities amounted, in 2014, to €3,843,019.57 (three million, eight hundred and forty-three thousand and nineteen euros and fifty-seven cents), corresponding to the sum of the amount of €3,762,000.00 (three million, seven hundred and sixty-two thousand euros) recorded in account 72 (administration services to subsidiaries), with the amount of €103,591.56 (one hundred and three thousand, five hundred and ninety-one euros and fifty-six cents), recorded in sub-account 781 (supplementary income), purged of the amount not subject to VAT.

  • The Claimant established an organizational structure appropriate for the pursuit of its three activities, having chosen not to separate organizationally or accountingly each of them.

  • Taking this structure into account, the Claimant regularly incurs expenses whose use is not directly allocated to a particular operation or a certain type of operations, but rather to the company's overall activities.

  • If the Claimant did not incur these general expenses, it would not be in a position to provide services to its subsidiaries.

  • These general expenses incurred by the Claimant are integral elements of the prices charged in the context of all its operations, including the provision of services to its subsidiaries.

  • The Claimant considered deductible the tax borne on passive operations related to general expenses incurred in the tax periods of 2014 [acquisition of other goods and services (field 24 of periodic VAT declarations)], in the total amount of €540,543.27 (five hundred and forty thousand, five hundred and forty-three euros and twenty-seven cents).

  • On 29 December 2016, the Claimant was notified of the Tax Inspection Report drawn up following the inspection action carried out in compliance with Service Order No. OI2016..., of 4 May 2016.

  • In the said report, the Tax Authority concluded that VAT was improperly deducted in the total amount of €199,355.34 (one hundred and ninety-nine thousand, three hundred and fifty-five euros and thirty-four cents).

  • This amount corresponds to the result of the sum of the following three corrections:

    • The Tax Authority disregarded, pursuant to Article 20 of the VAT Code, the VAT deductions that accrued on the commissions charged by supplier B..., S.A., in the total amount of €7,950.71 (seven thousand, nine hundred and fifty euros and seventy-one cents), being understood in the Tax Inspection Report that the tax was borne by the Claimant in the "acquisition of services not related to the provision of services to subsidiaries, but rather allocated to the shareholding management activity, which, for VAT purposes, is classified as non-economic, and does not give the right to deduction under Article 20 of the VAT Code";

    • The Tax Authority disregarded, pursuant to Articles 20 and 23 of the VAT Code, 35% of the amount of the VAT deductions borne by the Claimant for the acquisition of legal services provided by a law firm, in the total amount of €13,235.77 (thirteen thousand, two hundred and thirty-five euros and seventy-seven cents), having been considered that "the deduction of VAT is improper insofar as it exceeds 65% of the VAT borne on the acquisition of these services" because, notwithstanding that it is admitted that these are general expenses of the Claimant, according to the cost allocation key used by the Claimant to comply with the transfer pricing regime provided for in the Corporate Income Tax Code, only 65% of the expenses of the cost allocation centre to which the legal services were allocated ("Structure CA") were being recharged to the subsidiaries; and

    • The Tax Authority corrected, pursuant to subsection a) of No. 1 of Article 23 of the VAT Code, part of the deductions relating to the Claimant's remaining expenses, in the total amount of €178,168.86 (one hundred and seventy-eight thousand, one hundred and sixty-eight euros and eighty-six cents), a value corresponding to the fraction of the remaining VAT relating to general expenses (used both in the performance of taxed operations and in non-taxed operations) which was considered non-deductible, taking into account the allocation key referred to in the previous point.

  • The commissions charged by supplier B..., S.A. were intended to provide investors with updated and accurate information about the situation of the Claimant and each of the companies in the group.

  • The Tax Inspection Report contains, among other things, the following:

[Content regarding specific audit findings]

  • On 30 December 2016, the Claimant was notified of the following additional VAT assessment acts, whose total value amounts to €227,118.33 (two hundred and twenty-seven thousand, one hundred and eighteen euros and thirty-three cents), which implement the corrections described above:[2]

  • Also on 30 December 2016, the Claimant was notified of the following compensatory interest assessment acts, whose total value amounts to €18,326.85 (eighteen thousand, three hundred and twenty-six euros and eighty-five cents):

  • At that same time, the Claimant was notified of the statements of account adjustment No. 2017 ... to No. 2017..., No. 2017 ... and No. 2017..., relating to the VAT and compensatory interest mentioned above.

  • These statements of account adjustment reproduce the amount determined in each of those aforementioned assessments and indicate the voluntary payment deadline for the respective amounts.

  • On 10 March 2017, the CLAIMANT was cited for tax execution proceedings with the numbers ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017..., ...2017... and ...2017... (subsequently consolidated under No. ...2017... and related cases), instituted by the TAX SERVICE OF LISBON - ... for coercive collection of the tax and interest assessed in the assessment acts described above.

  • On 6 April 2017, the Claimant requested, pursuant to Article 169, No. 2, of the Tax Procedure and Process Code (TPPC), the suspension of the aforementioned tax execution proceedings (No. ...2017... and related cases).

  • For this purpose, the Claimant informed the tax enforcement officer that it intended to contest the assessment acts underlying the executive proceeding and presented as security a personal guarantee from the subsidiary C..., S.A., legal entity No. ..., in the amount of €279,241.18 (two hundred and seventy-nine thousand, two hundred and forty-one euros and eighteen cents).

  • The aforementioned C..., S.A. incurred Stamp Tax in the amount of €1,675.45 (one thousand six hundred and seventy-five euros and forty-five cents) with the provision of the said guarantee, an amount that was re-debited to the Claimant.

  • On 8 June 2017, the Claimant was notified of the Order of suspension of the tax execution proceedings No. ...2017... and related cases, issued by the Head of the Lisbon Tax Service – ..., following the acceptance of the guarantee provided, by decision of the Director-General of the Large Taxpayers Unit.

  • On 28 April 2017, the Claimant filed a Gracious Objection against the aforementioned VAT assessment acts and compensatory interest assessment acts.

  • On 7 August 2017, the Claimant was notified, through Official Letter No. ..., of the decision denying, issued by the Head of Tax Management and Assistance Division of the Large Taxpayers Unit, in the context of that Gracious Objection, meanwhile filed under No. ...2017....

A.2. Facts Established as Not Proved

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

A.3. Substantiation of Proved and Unproved Factual Matters

Regarding factual matters, the Tribunal does not need to rule on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to discriminate between proved and unproved matters (see Article 123, No. 2 of the TPPC and Article 607, No. 3 of the Code of Civil Procedure (CCP), applicable by virtue of Article 29, No. 1, subsections a) and e), of the LFATM).

Thus, the facts relevant to the judgment of the case are chosen and defined according to their legal relevance, which is established in light of the various plausible solutions of the legal question(s) (see former Article 511, No. 1, of the CCP, corresponding to the current Article 596, applicable by virtue of Article 29, No. 1, subsection e), of the LFATM).

Thus, having regard to the positions taken by the parties, in light of Article 110, No. 7 of the TPPC, the documentary evidence and the procedural file, as well as the testimony produced in CAAD process 316/2015T, the facts listed above were considered proved, with relevance to the decision, taking into account that, as was stated in the Decision of the South Court of Auditors of 26-06-2014, delivered in process 07148/13[3], "the probative value of the tax inspection report (...) may have evidential force if the assertions therein are not contested".

The allegations made by the parties, presented as facts, consisting of strictly conclusive affirmations, incapable of proof and whose truthfulness must be assessed in relation to the specific factual matter consolidated above, were not given as proved.

B. LAW

The situation at hand was already the subject of analysis in tax arbitration proceedings, with respect to the years 2011 and 2012, within the scope of arbitral processes No. 316/2015T and No. 16/2016T[4], whose reasoning provides no basis for divergence, and it is certain that in the present proceedings no new argument in that sense was presented by the Respondent.

Accordingly, for brevity and procedural economy, and bearing in mind the imperative to obtain a uniform interpretation and application of the law, in accordance with Article 8(3) of the Civil Code, the reasoning already set forth in said arbitral decisions will be followed here.

Accordingly, subscribing to the general frameworks with respect to case law and doctrinal understandings on the right to VAT deduction and on the classification of SGPS activities in the context of that tax, it is also considered here that[5]:

"Given the factual matter established as proved and the legal matter to be stated, it is necessary to assess the legitimacy of the Claimant's claim to deduct the VAT borne on the services in question.

As we have seen, the right to deduction is an integral part of the VAT mechanism and is a guarantee of a correct application of the fundamental principle of tax neutrality and cannot, in principle, be limited, from which it follows that any limitation thereon must be interpreted restrictively.

As a general rule, in order to be deductible, goods or services acquired upstream must have a direct and immediate relationship with downstream operations that give the right to deduction, and it is irrelevant what final objective the taxpayer pursues.

According to the CJEU, the mere acquisition and simple holding of shareholdings should not be considered economic activities.

However, the involvement of one company in the management of affiliated companies is considered an economic activity insofar as it involves the performance of transactions subject to VAT such as the provision of administrative, financial, commercial and technical services.

As we have seen, in the context of the acquisition and holding of shareholdings, the existence, by the shareholder, of direct or indirect involvement in the management of the subsidiary conditions the classification as an economic activity of holdings, giving rise to the right to deduct VAT borne with upstream-related expenses.

To this extent, since the acquisition is an operation, by nature, upstream, the deductibility of VAT for associated expenses, in whole or in part, would, strictly speaking, be conditioned by the manner in which ownership of the same will be exercised in the future, that is, in a purely passive manner, limiting itself to the receipt of the profits associated therewith or, alternatively, in an active manner, with direct or indirect involvement in the management of the same, resulting therefrom a continuation of a taxed activity.

The Claimant argues that, by undertaking an economic activity subject to VAT and not exempt therefrom, the VAT borne with general expenses is deductible and that by reason of the predominant allocation of general expenses to such activity, considered therefore principal, the VAT borne with such general costs is deductible in full.

The evidence produced confirms that the main activity undertaken by the Claimant (...) was the provision of administration and management services to its subsidiaries, since it did not carry out any significant operations to recompose its shareholding portfolio.

It also emerges from the evidence produced that, if the Claimant ceased to manage shareholdings, its structure would not have to undergo changes, since shareholding management activity involves residual resources.

As properly explained in already cited case law, a company managing shareholdings that, alongside the management of shareholdings, acquires services which it then invoices to the companies it controls, is authorized to deduct the value added tax paid upstream, on condition that the services acquired upstream have a direct and immediate nexus with downstream economic operations giving the right to deduction. Thus, in cases where all services acquired have a direct and immediate nexus with downstream economic operations giving the right to deduction, the taxpayer has the right to deduct all the VAT that has burdened the upstream acquisition of services.

The right to deduction arises from a relationship of use: if the resources were used by the Claimant in activities that give the right to deduction, the VAT will be deductible, regardless of the legal nature of the Claimant and the relative weight of the income generated by each type of activity.

On the other hand, the right to deduction of VAT borne is also admitted, even where there is no direct and immediate nexus between the acquisition of services upstream and taxed operations downstream, where the costs of the services in question form part of the taxpayer's general expenses and are presented as constituent elements of the taxed services it provides, as these costs do, in fact, have a direct and immediate nexus with the entirety of the taxpayer's economic activity.

Thus, in light of this CJEU case law, the Claimant's deduction of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its subsidiaries giving the right to deduction or which, not having a direct and immediate nexus with determined services, is VAT borne with costs that form part of the Claimant's general expenses having a direct and immediate nexus with the entirety of its economic activity of providing services, has legal coverage.

Thus, in order to conclude that the VAT borne is non-deductible, it is necessary to establish that there is no direct and immediate nexus between the upstream operation and the downstream operations that give the right to deduction and also to demonstrate that the costs of the services in question do not form part of its general expenses, necessary to carry out the entirety of the activity.

In the case at hand, the Tax Authority disregarded or corrected VAT previously considered deductible by the Claimant in three cases thus classified:

  • (...);

  • VAT borne on operations allocated to non-economic activity;

  • VAT borne on general expenses.

(...)

The Tax Authority also considered that the VAT borne with costs of audits and review of accounts and others could not be deducted because the acquisition of these services was exclusively allocated to the use by the Claimant itself due to its legal form and necessary for its proper and legal functioning. In this regard, it is important to note that if the Claimant ceased to manage shareholdings, its structure would not have to undergo changes, since management activity involves few resources. This suggests that, in fact, there is a direct and immediate relationship between the expenses necessary to ensure this overall functioning of the Claimant and the economic activity that it carries on, embodied in the provision of technical management services to its subsidiaries.

Thus, in light of the said CJEU case law, it is wrong the understanding of the Tax Authority in considering as necessarily not connected with the provision of services to the subsidiaries the costs relating to the functioning of the Claimant since its principal activity, the provision of services, could not be exercised if the company did not incur costs necessary for its adequate overall functioning.

Recall that the Claimant is a SGPS that does not engage, as its main activity, in the management of shareholdings, but rather primarily undertakes an economic activity embodied in the provision of administration and management services to its subsidiaries.

The Tax Authority also corrected VAT borne with general expenses, considering that the same should not be allocated, in full, to the activity of providing services, choosing instead, in accordance with Article 23 of the VAT Code, to admit only the deduction of the part of VAT proportional to the amount relating to taxed operations.

Thus, the Tax Authority considered that it was not possible to allocate these expenses entirely to one of the Claimant's activities, so it considered that the same constitute common expenses to the different activities of the company, proceeding to determine what part of the tax borne on their acquisition is allocated to the service provision activity.

To determine the allocation of general expenses to service provisions, the Tax Authority and Customs used the proportion used by the Claimant, in Corporate Income Tax proceedings, to determine "the proportion of expenses incurred with the only activity exercised that is subject to VAT and not exempt". In the calculations it presented, the Tax Authority was not sufficiently explicit in the values it used.

The application of the real allocation method derives from the provisions of Article 23, No. 1, subsection a), of the VAT Code with respect to the right to deduction relating to VAT borne on goods or services partially allocated to the performance of operations not arising from the exercise of an economic activity, which in this case would be the shareholding management activity.

On the other hand, the obligation to adopt the real allocation method for apportioning the amounts of value added tax paid upstream between economic and non-economic activities is admitted by EU law, as was recognized in the already cited decision of the CJEU relating to process No. C-437/06.

The application of the real allocation method translates into the use of a formula that reflects, with the greatest possible approximation, the proportion of use in each of the activities of the resources burdened with VAT, as, as referred to in No. 2 of Article 23 of the VAT Code, what is at issue is determining the real allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of such goods and services in operations giving the right to deduction and in operations not giving such right.

In light of the evidence produced, it is manifest that the key applied by the Tax Authority to determine the apportionment of the amounts of value added tax paid upstream between economic activity and non-economic activity does not adhere to reality, because during 2012 the main activity undertaken by the Claimant was the provision of administration and management services to its subsidiaries, being residual the resources with VAT that are connected with the mere management of shareholdings, so that the degree of allocation to these activities of general VAT-taxed expenses must also be very reduced.

For this reason, it must be concluded that the allocation key adopted by the Tax Authority cannot be adequate, based on the Claimant's estimates, for the purpose of determining transfer prices to be considered in Corporate Income Tax proceedings, on the proportion of personnel expenses that each department allocated to the provision of services, which was determined by the Claimant considering all relevant expenses, which include, mostly, personnel expenses, not subject to VAT, as well as the unexplained amount (...).

In conclusion, (...) the Claimant is right with respect to the deduction of VAT borne with expenses for audit and legal certification of accounts (...) as well as VAT borne with the Claimant's remaining expenses (...)"

Similarly, it is judged that:

"4.2. Question of the legality of the correction made by the tax authority pursuant to No. 1 of Article 20 of the VAT Code, (...)

The Claimant argued during the inspection and argues in the present proceedings that, by undertaking an economic activity subject to VAT and not exempt therefrom, the VAT borne with general expenses is deductible and that the general expenses incurred occur mostly by reason of the service provision activity, taking it therefore as principal, thus allowing the deduction of the tax borne on the acquisitions of goods and services considered as general costs.

The evidence produced confirms that the main activity undertaken by the Claimant (...) was the provision of administration and management services to its subsidiaries, as it did not carry out any significant operations to recompose its shareholding portfolio, with only two partial disposals of shareholdings of group companies being carried out.

It also emerges from the evidence produced that, if the Claimant ceased to manage shareholdings, its structure would not have to undergo changes, since shareholding management activity involves few resources.

In this context, as this is a similar situation, the most recent CJEU case law must be taken into account, particularly the decision of 06-09-2012, delivered in process No. C-496/11.

Although the decision was issued applying the regime of the 6th Directive (No. 77/388/CEE, of 17-5-1977), which was repealed by Directive No. 2006/112/CE of the Council, of 28-11-2006, which entered into force on 1-1-2007, the regime of the latter is essentially similar to the former, insofar as is relevant here, so that case law should be applied to the situation in the case at hand (...).

Specifically, with respect to the VAT deduction regime, this Directive No. 2006/112/CE demonstrates concern with harmonization, in point 39 of the Preamble, which states that "the deduction regime should be harmonized, since it influences the amounts actually collected, and the calculation of the deduction pro rata should be carried out in the same way in all Member States". (...)

For the purposes of the right to VAT deduction, it is irrelevant whether, in light of Decree-Law No. 495/88, of 30 December, the management of shareholdings or the provision of services to its subsidiaries should be considered the principal activity.

In fact, it is expressly stated in that CJEU decision, with respect to a holding company which, like the Claimant, provided services to its subsidiaries, that "if it is to be considered that all services acquired upstream have a direct and immediate nexus with downstream economic operations giving the right to deduction, the taxpayer in question would have the right, under Article 17, No. 2, of the Sixth Directive, to deduct all the VAT that has burdened the upstream acquisition of the services in question in the main proceeding. This right to deduction cannot be limited by the simple fact that the national regulation, by reason of the corporate purpose of the said companies or their general activity, qualifies the taxed operations as accessory to their principal activity".

That is, in light of EU case law, if a holding company undertakes an economic activity, such as the active management of shareholdings materialized in the provision of administration and management services to the subsidiaries, it is a VAT taxpayer, and there is no limitation to the exercise of the right to deduction with respect to all VAT that has burdened the acquisition of goods and services connected with the exercise of that activity.

Thus, the right to deduction arises from a relationship of use: if the resources were used by the Claimant in activities that give the right to deduction, the VAT will be deductible, regardless of the legal nature of holding company that the Claimant has and the relative weight in terms of value generated by that activity compared to the entirety of the income.

The said CJEU case law has explicit support in EU legislation, in Article 168 of the VAT Directive (Directive 2006/112/CE), which establishes that, when goods and services are used for the purposes of its taxed operations, the taxpayer has the right, in the Member State in which it carries out these operations, to deduct from the amount of tax for which it is liable the amounts of VAT due or paid in that Member State in relation to goods which have been or will be delivered to it and in relation to services which have been or will be provided to it by another taxpayer.

National legislation is in line with that provision, by establishing in Article 20 of the VAT Code that the tax that has accrued on goods or services acquired, imported or used by the taxpayer for the performance of the operations indicated there may be deducted, among which are included transmissions of goods and provision of services subject to tax and not exempt therefrom.

Furthermore, still in line with the cited CJEU decision, the involvement of the Claimant "in the management of the companies in which it held shareholdings constitutes an economic activity", for the purposes of VAT taxation, and the Claimant is authorized to deduct the VAT paid upstream, on condition that the services acquired upstream have a direct and immediate nexus with downstream economic operations giving the right to deduction.

Furthermore, as mentioned in the same decision (...), "the right to deduction is also admitted in favor of the taxpayer, even in the absence of a direct and immediate nexus between a particular upstream operation and one or several downstream operations giving the 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 do, in fact, have a direct and immediate nexus with the entirety of the taxpayer's economic activity". (...)

Thus, in light of this CJEU case law, the Claimant's deduction of all VAT borne with services and goods acquired that have a direct and immediate nexus with the services provided to its subsidiaries giving the right to deduction or which, not having a direct and immediate nexus with determined services, is VAT borne with costs that form part of the Claimant's general expenses having a direct and immediate nexus with the entirety of its economic activity of providing services, has legal coverage.

"The deduction regime aims to entirely free the businessman from the burden of VAT, due or paid, in the context of all his economic activities.

Thus the common VAT system ensures perfect neutrality with regard to the tax burden of all economic activities, whatever the purposes or results of these activities, on condition that the said activities are themselves subject to VAT".

It is in this light that the situations in which the Tax Authority and Customs considered VAT not deductible must be assessed.

From this case law, it follows, first and foremost, that it is not sufficient, in order to conclude that VAT is non-deductible, to establish that there is no direct and immediate nexus between a particular upstream operation and one or several downstream operations that give the right to deduction, as such conclusion can only be formulated if it is also demonstrated that the costs of the services in question do not form part of its general expenses, necessary to carry out the entirety of the activity, because, in this case, "these costs do, in fact, have a direct and immediate nexus with the entirety of the taxpayer's economic activity", as referred to in that decision.

In the case at hand, the Tax Authority and Customs considered that the VAT borne on the "shareholder costs", namely the costs with "the services of the Company Secretary, certification of accounts, GMTN program, provision of services by the Audit Committee, maintenance of shares on the stock exchange, General Assembly" (...) and others, such as costs with fees of official accounts reviewers, advertising and image for investors, employee training and office material transport (...) could not be deducted because the acquisition of these goods and services was exclusively allocated to the use by A... SGPS itself.

However, depending on the overall functioning of the Claimant, the provision of management and administration services to the subsidiaries, there is a direct and immediate relationship between the general expenses necessary to ensure this overall functioning and the economic activity that embodies the provision of services, since, as emerges from the evidence produced, "if the Claimant ceased to manage shareholdings, its structure would not have to undergo changes, since management activity involves few resources" [item y) of the factual matters established].

Thus, in light of the said CJEU case law, it is wrong the understanding of the Tax Authority and Customs in considering as necessarily not connected with the provision of services to the subsidiaries the costs relating to the functioning of the Claimant that "would always be incurred even if the taxpayer did not provide any ancillary service", because, in order to demonstrate such connection, it suffices that those costs are necessary to ensure the functioning of the Claimant, since the provision of services, which was the main activity of the Claimant, could not be carried out without the company incurring costs necessary to ensure its overall functioning.

On the other hand, as referred to in the Tax Inspection Report and in line with the transfer pricing regime provided for in Article 63 of the Corporate Income Tax Code, the costs of acquisition of goods and services which were referred to there as "shareholder costs" were considered for the formation of the prices of the services provided by the Claimant to its subsidiaries. In fact, the assertion made in (...) of the Tax Inspection Report that "it is not sufficient to justify the deduction of VAT borne on the acquisition of those services the alleged inclusion of costs in question in the price test of the provision of services, as to the verification of the arm's length principle, particularly by the fact that such activities cannot be qualified as intra-group service provisions, with respect to shareholder costs", cannot be justified, since what is at issue in this context is not the formation of the prices of the said shareholder costs, but rather the formation of the prices of intra-group services provided. And in the formation of the prices of such intra-group services, the Claimant was obliged by Article 63, No. 1, of the Corporate Income Tax Code to practice "terms or conditions substantially identical to those which would normally be contracted, accepted and practiced between independent entities in comparable operations" and, therefore, it harmonizes with this obligation to consider in the formation of the prices of its services the general operating costs of the company itself which, under normal market conditions, would also be borne by an independent company that devoted itself exclusively to the provision of the services that the Claimant provided to its subsidiaries.

Thus, it must be concluded that the requirements referred to in the cited CJEU decision as necessary for VAT deduction are met, because it is considered there that it is viable for a holding "even in the absence of a direct and immediate nexus between a particular upstream operation and one or several downstream operations giving the 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". The criterion for assessing deductibility that results from this case law is not whether or not these are costs that a pure holding would have borne, but rather, in this case, whether or not these costs are general costs of the company, because, according to that case law, general costs, by being such, should be considered constituent elements of the price of the services provided, as they were in the case at hand.

Furthermore, this is the understanding that accords with the basic idea underlying the VAT regime, which is to ensure its neutrality for companies as long as they are not final consumers and use goods or services acquired in their economic activity, which, in this case, is the principal activity undertaken by the Claimant (...)

Thus, it is concluded that it is wrong the understanding adopted by the Tax Authority and Customs in not considering as deductible all the VAT borne on the acquisitions of goods and services connected with the said shareholder costs, which constitute general costs of the Claimant and were considered in the formation of the prices of the services it provided to its subsidiaries. (...).

4.5. Question of the legality of the correction made by the tax authority pursuant to subsection a) of No. 1 and No. 2 of Article 23 of the VAT Code (...) relating to expenses connected with goods and services of mixed use

In accordance with the provisions of Article 23, Nos. 1 and 2, of the VAT Code, and Article 173, No. 1, of Directive No. 2006/112/CE of the Council, of 28-11-2006, when the taxpayer, in the exercise of his activity, carries out operations giving the right to deduction and operations not giving such right, under Article 20, the deduction is only admitted with respect to the part of VAT proportional to the amount relating to the first category of operations.

The Claimant deducted VAT borne on the acquisition of other goods and services, (...), and the Tax Authority and Customs considered that VAT (...) relating to goods and services acquired, exclusively for use in the non-VAT-taxed activity of shareholding management, had been improperly deducted, a question that was addressed in the previous section.

With respect to the remaining services acquired, the Tax Authority and Customs considered that part of the costs wholly related to service provisions to the subsidiaries.

In the remaining part, the Tax Authority and Customs considered that it was not possible to allocate entirely to one of the Claimant's activities, so it considered that these are expenses common to the different activities of the company, proceeding to determine what part of the tax borne on their acquisition is allocated to the service provision activity.

Thus, it was stated in the Tax Inspection Report that "constituting the remaining costs allocated to service provisions 30.65% of the total specialized services (removing the recharged costs, those allocated 100% to service provisions and those 100% allocated to the main activity of the SGPS), and applying the same ratio to the deducted VAT on general expenses, we arrive at the amounts of deductible VAT under Articles 19 and 20 of the VAT Code, relating to goods or services acquired by the taxpayer, for the performance of service provisions subject to tax and not exempt therefrom:

Following the gracious objection, the Tax Authority and Customs considered that, in this context, the value of VAT on expenses 100% allocated to the SGPS was repeated, so it corrected it (...).

To determine the allocation of general expenses to service provisions, the Tax Authority and Customs used the proportion used by the Claimant, in Corporate Income Tax proceedings, to determine "the proportion of expenses incurred with the only activity exercised that is subject to VAT and not exempt".

The Claimant disagrees with the use of this proportion, arguing that it is consensual that the consumption of mixed-use resources (burdened with VAT) by operations relating to shareholdings that do not constitute the exercise of an economic activity is extremely reduced.

The Claimant states, in summary, in the part that finds support in the established factual matters:

– that, "(...) significant operations to recompose its shareholding portfolio, being, therefore, insignificant the degree of allocation to this activity of its general VAT-taxed expenses";

– that if it is true that "part of the general expenses recorded in the account 'Account 63 - Personnel Costs' namely those referring to members of the Board of Directors - benefit, in large part, the non-taxed activity of the Claimant" "such expenses are not, themselves, subject to tax and were not subject to analysis in the Inspection Report, being, therefore, irrelevant to the analysis of the correction at issue";

– that "the application of the pro rata method - or any other based on the distribution of income earned - to the Claimant or to another complex taxpayer that obtains dividends or gains arising from the simple management of shareholdings would violate the principles underlying the common VAT system and would, to that extent, be contrary to EU law";

– that "the granting of financing to the subsidiaries also does not involve the performance of significant volumes of upstream operations subject to VAT", "as evidenced by the fact that the tax administration did not directly allocate any expense to this activity, the weight of these works (...) was very small";

– that "the criterion concretely applied in the present case is inadequate and results, itself, in the violation of the neutrality principle, underlying, as has been demonstrated, the wording of No. 2 of Article 23 of the VAT Code";

– that "the allocation key used by the Tax Administration (and made available by the Claimant within the scope of the analysis of Group results in Corporate Income Tax proceedings) is, in no way, adequate to the allocation of general VAT-taxed expenses, since the same was drawn up using the analysis of a much broader universe of expenses than that which is at issue in the present proceedings and, in that universe, approximately two-thirds of expenses are VAT-excluded expenses";

– that "such key was not drawn up taking into account only expenses on goods and services subject to VAT, but rather all expenses recorded in the account '62 - Supplies and external services' and, more importantly of all, expenses relating to work recorded in the account '63 - Personnel Costs' - which are not, naturally, subject to VAT and represent approximately 65% of the calculation basis";

– "to assume that the goods and services subject to VAT acquired by the Claimant (...) were allocated to service provisions exactly in the same proportion as the set of expenses that served as the basis for the drawing up of the allocation key in question is abusive";

The application of the real allocation method derives from the provision of Article 23, No. 1, subsection a), of the VAT Code with respect to the right to deduction relating to VAT borne on goods or services partially allocated to the performance of operations not arising from the exercise of an economic activity.

On the other hand, the obligation to adopt the real allocation method for apportioning the amounts of value added tax paid upstream between economic and non-economic activities is admitted by EU law, as was recognized in the CJEU decision of 13-03-2008, delivered in process No. C-437/06, in which the following is stated:

"The determination of the methods and criteria for apportioning the amounts of value added tax paid upstream between economic and non-economic activities, within the meaning of the Sixth Directive 77/388, relating to the harmonization of the legislations of the Member States with respect to taxes on turnover, falls within the discretionary power of the Member States, which, in the exercise of this power, must take into account the purpose and economy of this directive and, to that end, provide a method of calculation that objectively reflects the proportion of the actual allocation of upstream expenses to each of these two activities. The Member States are authorized to apply, where appropriate, either an allocation key according to the nature of the investment, or an allocation key according to the nature of the operation, or else any other appropriate key, without being obliged to limit themselves to a single one of these methods."

"Real allocation is not to be confused with direct allocation: what is at issue in real allocation is not to associate input A with input B, something impractical at the outset, but to allocate these mixed costs according to a formula other than the volume of turnover" (...). However, the formula to be adopted must reflect, with the greatest possible approximation, the proportion of use in each of the activities of the resources burdened with VAT, since, as referred to in No. 2 of Article 23 of the VAT Code, what is at issue is determining "the real allocation of all or part of the goods and services used, based on objective criteria that allow determining the degree of use of such goods and services in operations giving the right to deduction and in operations not giving such right".

In this light, the result reached by the Tax Authority and Customs demonstrates, from the outset, the inadequacy of the method used, as it clearly emerges from the evidence produced that the allocation of resources to the mere holding and enjoyment of shareholdings was insignificant and the use of almost all goods and services acquired should be allocated to the activity of providing administration and management services by the Claimant to its subsidiaries. In fact, the conclusion reached in light of the evidence produced in this proceeding is in line with what has been consensual among the Authors who have addressed situations of this type. (...)

In fact, in light of the evidence produced, it is manifest that the key applied by the Tax Authority and Customs to determine the apportionment of the amounts of value added tax paid upstream between economic activity and non-economic activity has no relation whatsoever to reality, because it has been proved that, (...) the main activity of the Claimant was the provision of administration and management services to its subsidiaries, being insignificant the quantity of resources burdened with VAT that are connected with the mere holding and enjoyment of shareholdings (namely, only the partial disposal of capital of two group companies occurred), so that the degree of allocation to these activities of general VAT-taxed expenses must also be very reduced.

For this reason, it must be concluded that the allocation key adopted by the Tax Authority and Customs cannot be adequate, based on the Claimant's estimates, for the purpose of determining transfer prices to be considered in Corporate Income Tax proceedings, on the proportion of personnel expenses that each department allocated to the provision of services, which was determined by the Claimant considering all relevant expenses, which include, mostly, personnel expenses, not subject to VAT.

In these terms, it must be concluded that the assessments objected to, also in the part in which they were based on the correction relating to mixed-use resources, suffer from an error regarding factual and legal presuppositions, which justifies their annulment (Articles 20, No. 1, and 23, Nos. 1 and 2, of the VAT Code and Article 135 of the Administrative Procedure Code of 1991)."

At issue in the present arbitral proceeding is also a correction based on facts distinct from those addressed in the aforementioned decisions, namely that which concerns the disregard of VAT deductions that accrued on the commissions charged by supplier B..., S.A., in the total amount of €7,950.71 (seven thousand, nine hundred and fifty euros and seventy-one cents), being understood in the Tax Inspection Report that the tax was borne by the Claimant in the "acquisition of services not related to the provision of services to subsidiaries, but rather allocated to the shareholding management activity, which, for VAT purposes, is classified as non-economic, and does not give the right to deduction under Article 20 of the VAT Code".

The legal basis for such correction, however, is identical to that of other corrections addressed in the aforementioned decisions, and no basis for diverging from the understanding has been discerned that "it is wrong the understanding of the Tax Authority and Customs in considering as necessarily not connected with the provision of services to the subsidiaries the costs relating to the functioning of the Claimant that 'would always be incurred even if the taxpayer did not provide any ancillary service', because, in order to demonstrate such connection, it suffices that those costs are necessary to ensure the functioning of the Claimant, since the provision of services, which was the main activity of the Claimant, could not be carried out without the company incurring costs necessary to ensure its overall functioning".

Indeed, as the Claimant points out, the expenses in question are general expenses, intended to provide investors with updated and accurate information about the situation of the Claimant and the group, and just as expenses for audits, legal certification of accounts or the holding of general assemblies, these expenses are necessary for the normal and general functioning of the Claimant.

The remaining corrections, as detailed in the passages previously transcribed, are based on the application of an inadequate allocation key, which is why they also cannot be accepted.

Thus, and in light of the foregoing, the tax acts subject to the present arbitral action should be annulled, and the decision denying the gracious objection presented with respect to the said tax acts should also be annulled, considering the arbitral request to be well-founded.

The Claimant makes, accessorily, a request for the award of indemnification for the provision of an improper guarantee.

With respect to the provision of a guarantee, the arbitral decision on the merits of the claim from which no appeal or objection is available binds the tax administration as from the expiry of the period provided for appeal or objection, and the latter must, in the exact terms of the substantiation of the arbitral decision in favor of the taxpayer and until the expiry of the period provided for the voluntary execution of the sentences of the tax courts, restore the situation that would have existed if the tax act which is the object of the arbitral decision had not been performed, adopting the necessary acts and operations for that purpose, as expressly results from subsection b) of No. 1 of Article 24 of the LFATM.

In the same provision, "the legislator made clear that the effects provided for therein are (…) without prejudice to the other effects provided for in the Tax Procedure and Process Code". It is considered in this respect that the legislator is here referring to all effects resulting from the TPPC for the taxpayer, and which are applicable after the consolidation in the legal order of a given tax law situation, resulting from a final decision, whether gracious or judicial."[6]

Notwithstanding the fact that the judicial objection proceeding is essentially a process of mere annulment, condemnation of the Tax Authority to payment of indemnification for improper guarantee can be handed down therein, as results from Article 171 of the TPPC.

As was stated in the decision delivered in Process No. 28/2013-T[7], "it is unequivocal that the judicial objection proceeding embraces the possibility of condemnation to payment of improper guarantee and it is, in principle, even the adequate procedural means to formulate such a request, which is justified by obvious reasons of procedural economy, because the right to indemnification for improper guarantee depends on what is decided regarding the legality or illegality of the assessment act. The request for constitution of the arbitral tribunal has as a corollary that it is in the arbitral proceeding that the "legality of the debt being executed" will be discussed, so that, as results from the express wording of that No. 1 of the said Article 171 of the TPPC, it is also the arbitral proceeding that is adequate to assess the request for indemnification for improperly granted guarantee."

It is concluded, therefore, that this Tribunal is competent to assess the request for indemnification for improperly granted guarantee.

The regime governing the right to indemnification for improper guarantee is set forth in Article 53 of the General Tax Law, which establishes the following:

"1. The debtor who, in order to suspend execution, offers bank guarantee or equivalent shall be indemnified in whole or in part for losses resulting from its provision, if he has maintained it for a period exceeding three years in proportion to success in administrative objection, judicial impugnation or opposition to execution which have as their object the guaranteed debt.

  1. The period referred to in the previous number does not apply when it is verified, in gracious objection or judicial impugnation, that there was error attributable to the services in the assessment of the tax.

  2. The indemnification referred to in No. 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the indemnificatory interest rate provided for in this law and can be requested in the very proceeding of objection or judicial impugnation, or autonomously.

  3. Indemnification for the provision of improper guarantee shall be paid by deduction from the receipt of the tax of the year in which payment was made."

In the case at hand, the errors from which the assessment acts suffer are attributable to the Respondent entity, and the Claimant in no way contributed to these errors being committed.

The Claimant therefore has the right to indemnification for the guarantee provided, with reference to the period during which it was in effect.

Having been determined that the guarantee in question caused the Claimant to incur charges in the amount of €1,675.45 (one thousand six hundred and seventy-five euros and forty-five cents), it is necessary to recognize reimbursement of the same.

C. DECISION

For these reasons, this Arbitral Tribunal decides to render judgment fully in favor of the arbitral request filed and, consequently:

  • Annuls the following acts:

    • Decision denying the gracious objection No. ...2017...;

    • Value Added Tax ("VAT") assessment acts No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016..., No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016 ..., No. 2016 ... and No. 2016 ..., relating to the tax periods of 2014 and the tax period of September 2015;

    • Compensatory interest assessment acts No. 2017 ... to No. 2017 ... and No. 2017...; and

    • Statements of account adjustment No. 2017 ... to No. 2017 ..., No. 2017 ... and No. 2017...;

  • Condemns the Respondent to payment of indemnification for improper guarantee, in the amount of €1,675.45 (one thousand six hundred and seventy-five euros and forty-five cents);

  • Condemns the Respondent to payment of the costs of the proceeding, set out below.

D. Value of the Proceeding

The value of the proceeding is set at €217,665.00, pursuant to Article 97-A, No. 1, subsection a), of the TPPC, made applicable by subsections a) and b) of No. 1 of Article 29 of the LFATM and No. 2 of Article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is set at €4,284.00, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the Respondent, since the request was wholly well-founded, pursuant to Articles 12, No. 2, and 22, No. 4, both of the LFATM, and Article 4, No. 4, of the said Regulation.

Notify accordingly.

Lisbon, 17 July 2018

The Presiding Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Sílvia Oliveira)

The Arbitrator Member

(Olívio Mota Amador)

[1] The writing of this decision is governed by the spelling prior to the Orthographic Agreement of 1990, except for transcriptions made.

[2] Where it reads additional assessment No. 2016..., it should read additional assessment No. 2016....

[3] Available at www.dgsi.pt, as is the remaining case law cited without mention of source.

[4] Available at https://caad.org.pt/tributario/decisoes/.

[5] See process 316/2015T.

[6] Carla Castelo Trindade – Legal Framework for Tax Arbitration – Annotated, Coimbra, 2016, page 122.

[7] Available at www.caad.org.pt.

Frequently Asked Questions

Automatically Created

Can an SGPS holding company deduct VAT on general expenses related to services provided to subsidiaries?
Yes, an SGPS holding company can deduct VAT on general expenses, but only to the extent those expenses are attributable to taxable activities. When providing management services to subsidiaries (a taxable activity), the SGPS may deduct input VAT on related general expenses. However, expenses related to managing shareholdings (excluded from VAT) or granting loans (exempt activity) do not generate deduction rights. The key determination involves properly allocating mixed-use general expenses according to Article 23 of the CIVA.
How does Article 23 of the Portuguese VAT Code apply to mixed-activity SGPS companies?
Article 23 of the Portuguese VAT Code applies to SGPS companies performing both taxable and exempt activities by requiring a pro-rata calculation for input VAT deduction. When general expenses cannot be directly attributed to specific activities, the deduction percentage is calculated based on the ratio of taxable turnover to total turnover. For SGPS companies, this means analyzing which activities consume resources bearing VAT. The provision of management services typically qualifies for full deduction, while shareholding management and loan activities do not support VAT recovery.
What are the VAT implications of the three activities performed by an SGPS: holding participations, granting loans, and providing management services?
The three SGPS activities have distinct VAT implications: (1) Managing shareholdings is excluded from VAT scope entirely, generating no deduction rights; (2) Granting remunerated loans to subsidiaries is subject to VAT but exempt under Article 9 of the CIVA, also precluding input deduction; (3) Providing technical administration and management services is fully taxable, allowing complete VAT deduction on related inputs. Understanding this distinction is critical because most SGPS expenses—acquisition costs, financing interest, and internal labor—typically bear no input VAT, making proper expense allocation essential for compliance.
How should VAT input deduction be calculated when an SGPS performs both exempt and taxable activities?
VAT input deduction for mixed-activity SGPS companies should be calculated using the methodology in Article 23 of the CIVA. Direct attribution is the primary method: expenses exclusively supporting taxable activities generate full deduction rights. For general expenses serving multiple activities, a pro-rata deduction applies based on the proportion of taxable turnover to total turnover. SGPS companies must demonstrate which activities actually consume resources bearing VAT. Since shareholding management and financing typically involve costs without VAT (share purchases, interest, internal salaries), the calculation often favors attributing VAT-bearing general expenses to the service provision activity.
What is the procedure to challenge VAT assessments through CAAD tax arbitration in Portugal?
To challenge VAT assessments through CAAD (Administrative Arbitration Centre), taxpayers must file a request for arbitral tribunal constitution within the legal deadline after exhausting or choosing to bypass gracious procedures. The request must identify the contested acts (assessment notices, interest calculations, account adjustments) and their value, state legal grounds, and pay the initial arbitration fee. The tribunal is constituted with three arbitrators unless parties agree otherwise. Proceedings follow streamlined rules under RJAT (Decree-Law 10/2011), with written submissions, limited evidence production, and decisions typically within six months. CAAD arbitration offers an alternative to judicial tax courts with specialized arbitrators and faster resolution of complex VAT disputes.