Process: 58/2019-T

Date: June 21, 2019

Tax Type: IRS

Source: Original CAAD Decision

Summary

CAAD Process 58/2019-T addressed the challenge by two Spanish non-resident taxpayers against additional VAT assessments totaling EUR 40,529.64 and compensatory interest of EUR 37,875.84 for fiscal years 2015-2017. The claimants, represented fiscally in Portugal, contested corrections made by tax inspection regarding their right to VAT deduction on tourist accommodation units acquired in Portugal. The case involved tourist property units subject to exclusive exploitation contracts, where the Tax Authority initially limited the taxpayers' VAT deduction rights. However, before the arbitral tribunal could rule on the merits, the Tax Authority revoked the contested tax acts based on information from the VAT Services Directorate. The respondent moved for extinction of proceedings due to supervening uselessness (inutilidade superveniente da lide) under Article 277 of the Portuguese Civil Procedure Code, applicable via Article 29(1)(e) of the RJAT. The claimants agreed to the revocation but requested the tribunal verify its validity and condemn the Tax Authority to pay procedural costs. The collective arbitral tribunal was constituted under RJAT procedures with three arbitrators designated by CAAD's Deontological Council. This decision illustrates how Portuguese tax arbitration handles administrative revocation of tax acts during proceedings, the application of supervening uselessness doctrine, and procedural rights of non-resident EU taxpayers challenging VAT assessments related to Portuguese real estate investments with tourist exploitation purposes.

Full Decision

ARBITRAL DECISION

Claimants: A..., taxpayer no. ..., resident in ..., ..., ..., Spain, and B..., taxpayer no. ..., resident in ... — ..., ..., ..., Spain, both fiscally represented in Portugal by C..., taxpayer no. ..., with address at Rua ..., ..., Silves.

Respondent: TAX AND CUSTOMS AUTHORITY.

The Arbitrators, Counsellor Maria Fernanda dos Santos Maçãs (in the capacity of arbitrator-president), Dr. Elisabete Flora Louro Martins (in the capacity of arbitrator member) and Prof. Doctor Luís Menezes Leitão (in the capacity of arbitrator member), were designated by the Deontological Council of the Centre for Administrative Arbitration (hereinafter referred to only as CAAD) to form the Collective Arbitral Tribunal, which was constituted on 9 April 2019, agree as follows:

I. REPORT

  1. A... (hereinafter referred to only as First Claimant), taxpayer no. ..., resident in ..., ..., ..., Spain, and B... (hereinafter referred to only as Second Claimant), taxpayer no. ..., resident in ..., ..., ..., Spain (hereinafter jointly referred to as Claimants) filed on 29 January 2019 a request for constitution of an Arbitral Tribunal in accordance with Decree-Law no. 10/2011 of 20 January (Legal Framework for Arbitration in Tax Matters, hereinafter referred to only as LFATM), in which the TAX AND CUSTOMS AUTHORITY (hereinafter referred to only as Respondent) is respondent.

In the request for arbitral decision, the Claimants request the annulment of additional VAT assessments and compensatory interest in the total amounts of EUR 40,529.64 and EUR 37,875.84 respectively, issued by virtue of the corrections resulting from the conclusions of the tax inspection reports of 17 and 5 September 2018 respectively, which concerned the fiscal years 2015 to 2017, in coalition, in the terms and for the purposes set out in subparagraph (a) of paragraph 1 of article 2, paragraph 1 of article 3 and articles 15 et seq. of the LFATM.

  1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD on 30 January 2019 and notified to the Respondent on 5 February 2019.

  2. The Claimants did not proceed to nominate an arbitrator, wherefore, on 20 March 2019 pursuant to article 6, paragraph 2, subparagraph (a) of the LFATM (Decree-Law no. 10/2011 of 20 January), the President of the Deontological Council of CAAD designated the undersigned as arbitrators of the collective arbitral tribunal, all of whom (the designated arbitrators) communicated acceptance of the appointment within the applicable timeframe.

  3. On 20 March 2019, the parties were duly notified of such designation, and neither manifested their intention to refuse the designation of the arbitrators, in accordance with the combined provisions of subparagraphs (a) and (b) of paragraph 1 of article 11 of the LFATM and articles 6 and 7 of the CAAD Code of Ethics.

  4. In compliance with the provision of subparagraph (c) of paragraph 1 of article 11 of the LFATM, the Collective Arbitral Tribunal was constituted on 9 April 2019.

  5. On 9 April 2019, the Arbitral Tribunal issued an Arbitral Order for notification of the Respondent to submit its Answer, attach a copy of the Administrative File, and request, if so desired, the production of additional evidence. The Respondent was notified of this Order on 10 April 2019.

  6. The Respondent submitted on 24 April 2019 a motion in the Case Management System, addressed to the Esteemed Arbitrators of the Arbitral Tribunal, stating: "(1) On 22 April of the current month, the undersigned legal counsels were notified of Information no. ... provided by the VAT Services Directorate, in the context of the above-identified proceedings. (2) On the basis of that same information, which is hereby attached and whose content is deemed to be fully reproduced, an order was issued by the Deputy Director General of VAT to the effect of revoking the tax acts which constitute the object of the present request for arbitral decision. (3) In this manner, given what is explained therein, the instance should be judged extinct, by supervening futility of the claim, in accordance with the provisions of article 277 of the CPC, applicable ex vi article 29 paragraph 1 subparagraph (e) of the LFATM." The Respondent also presented the Information from the VAT Services Directorate which substantiates the motion presented.

  7. In compliance with the arbitral order of 24 April 2019, the motion as well as the information presented by the Respondent was notified to the parties on the same day (24 April 2019).

  8. In response to the identified order, the Claimants submitted on 6 May 2019 a motion in the Case Management System, addressed to the Arbitral Tribunal with the following content: "(...) that they have nothing to object to the revocation, being desirous, for reasons of legal certainty and safety, that Your Honours verify and declare its respective validity and effectiveness, in light of paragraphs 1 and 3 of article 13, combined with paragraph 3 of article 10, all of the LFATM, in particular, and condemn the respondent in the costs of the proceedings, as it gave cause for them".

  9. On 16 May 2019 the Arbitral Tribunal issued an Arbitral Order with the following content: "1. There being no occasion for the production of evidence to be constituted and there having been exercise of adversarial proceedings as to exception, the Tribunal waives the holding of the meeting provided for in art. 18 of the LFATM, which it does pursuant to the principles of the autonomy of the Tribunal in conducting the proceedings, and in order to promote expedition, simplification and informality thereof. See arts. 19, paragraph 2 and 29, paragraph 2 of the LFATM. 2. Considering the simplicity of the matter, the tribunal foregoes submissions and the proceedings shall follow their course. 3. The date of 9 October is designated as the deadline for issuance of the arbitral decision. 4. In the name of the principle of cooperation of the parties, the sending of procedural documents in WORD format is requested. The parties shall be notified of this order."

  10. To substantiate the claim, in summary, the Claimants invoke the illegality of the additional VAT assessment acts which are the subject of the request for arbitral decision, as they limit the right to deduction of the Claimants without the conditions therefor being met, as provided in paragraph 1 of article 26 of the VAT Code and in subparagraph (b) of paragraph 1 of article 10 of Decree-Law no. 21/2007 of 29 January, and further in that the Respondent limits the right to deduction of the Claimants in violation of the provisions of articles 167, 168, 284, 185 and 187, all of Council Directive 2006/112/EC of 28 November 2006.

  11. The Claimants allege that: (1) on 12 April 2011 the First Claimant acquired the autonomous unit designated by the letter "J", a unit intended for tourist accommodation of typology T1, of Block U, identified by number 10 of level 11 of the urban property located at the place of ..., in the parish and municipality of ..., registered in the property register of the said parish under article ... and described in the Land Registry under no. ...; (2) The identified unit was acquired with waiver of VAT exemption by the First Claimant and by the selling company, D... S.A.; (3) by supplementary document to the deed of acquisition, with the acquisition of the identified unit the First Claimant bound itself to the administration regulation of the enterprise and to the contract for assignment of tourist exploitation and management of the property, granting to Company D... the exclusive right to exploit the units; (4) on the same day, the Second Claimant acquired from the same company, under the same conditions described above, the autonomous unit designated by the letter "K", a unit intended for tourist accommodation of typology T1, of Block U, identified by number 11 of level 11 of the same property, above-identified; (5) Both autonomous units were handed over by the Claimants to Company D... specially equipped and wholly fit for tourist use;

  12. The Claimants allege that the tourist exploitation contracts concluded by them — in force until 31 December 2020 — establish that the Claimants will be remunerated through a consideration of uncertain verification and variable amount, subject to various circumstances and conditions, which depend solely on the performance and operational result of Company D..., within the scope of the functions and objectives to which, in its capacity as exploiting entity, it bound itself.

  13. In the inspection reports which substantiate the issuance of the additional VAT assessment acts, the Respondent concludes that both autonomous units were not effectively used for business purposes for a period exceeding five consecutive years, because: (i) the First Claimant submitted all periodic VAT declarations without having declared any type of taxable basis associated with both autonomous units; (ii) there are no electronic receipts issued in the name of the Second Claimant in the Respondent's computer system, and (iii) neither the periodic VAT declarations nor the personal income tax declarations submitted by the Second Claimant mention any income attributable to both autonomous units.

  14. The Claimants consider that such facts cannot justify the Respondent's decision to impose on the Claimants the regularization, all at once, of the deduction of VAT incurred on the acquisition of both units in 2011, without prejudice to annual regularization corresponding to 1/20 of the tax deducted in 2012, 2013, 2014 and 2015, because: (i) it is false that both units were not used for business purposes during 1 or more complete calendar years after the beginning of the 19-year period referred to in article 24 of the VAT Code; and (ii) it is false that both units were not effectively used for the performance of VAT-taxable operations for a period of five consecutive years; inasmuch as, (a) since 12 April 2011 neither of the Claimants occupied the autonomous units or in any way exercised the faculty of their personal use which is provided for in the tourist exploitation contract; (b) both autonomous units remained, until today, exclusively dedicated to the unitary exploitation of the ... tourist enterprise; (c) the profitability announced at the time of the acquisition of both autonomous units (6.5% and 7.5%) proved to be a sham, no product of the tourist exploitation having been distributed to the Claimants, which is due solely to the excessive debt and lack of profitability of the group of companies in which Company D... was integrated (the "E..." group, of F...); (d) despite the contingencies described in the request for arbitral decision, to which reference is made, since it reopened under the G... banner — in 2016, after having been closed for remodeling works in 2014 — the tourist enterprise was in continuous operation and was the subject of regular tourist occupancy; (e) both autonomous units remained always dedicated to tourist and hotel activity, and only did not generate profit distributable to the Claimants for reasons independent and beyond their control; (f) the Claimants were the subject of a tax inspection procedure in 2014, the Respondent's services having concluded, in summary, that the units were not intended exclusively for tourist exploitation activity, since the exploitation contract provided for the possibility of occupation of both autonomous units by the owner, for annual periods of up to 30 or 90 days; and (g) the additional VAT assessment acts which resulted from that inspection (of 2014) were annulled, by decision of the Administrative Court of Appeal of Loulé of 24 October 2017 already final;

  15. In the substantiation of law, the Claimants invoke the jurisprudence of the Court of Justice of the European Union (CJEU) to argue that the understanding assumed by the Respondent and better described above is contrary to the VAT Directive, since it being established that both units remained since their acquisition dedicated to an activity taxed in VAT (tourist exploitation) — remaining fit and available to be used in the performance of taxable operations — the right to deduction exercised at the moment of their acquisition is legitimate and cannot be conditioned by the effective distribution of income subject to tax. Thus, since the regularization in VAT is made in function of the changes to the right to deduction verified during the years following the year in which the property was acquired, there is no legal basis for any regularization to be determined, because the scope of the right to deduction never underwent any change.

  16. In the Information issued by the VAT Services Directorate, the Respondent assumed, in summary, the following understanding: "In the case at hand, the properties were dedicated to tourist exploitation, pursuant to the mentioned contracts for assignment of exploitation, whereby such properties contributed to the performance of taxable operations. What was not demonstrated was that, in the sphere of the Claimants, taxable income was obtained, but this appears to result from the lack of profitability of the contracts for assignment of exploitation, a fact which, in light of such contracts, does not appear to be attributable to the Claimants. Even if this understanding were not correct, it would still have to be concluded that the regularization of the tax cannot be imposed, in accordance with article 10, paragraph 1, of the Waiver Regime, and article 26, paragraph 1, of the VAT Code, with the substantiation contained in the tax inspection report, due to the jurisprudence of the CJEU opposing such action.

IV.2 Tax Acts relating to the period 2011-06T

As we have already referred, A... contested the additional VAT assessment no. ..., in the amount of €32,441.49, and the compensatory interest assessment no. ..., in the amount of €8,088.15, but such tax acts relate to the period 2011-06T. Such tax acts, which resulted from circumstances different from those to which the grounds of the request for arbitral decision presented to CAAD relate, are not due, annulment of them having already been requested, by the Head of the Tax Services of ..., through Communication no. ..., on the following grounds: "In the name of the taxpayer A... – TIN..., a VAT correction document (CD) was prepared for the period 201106T which gave rise to a VAT credit regularization (CR) in the amount of 41,860.00 Euros which was migrated from the old VAT current account system to the new VAT current account system, inflating the amount of excess to carry forward in the following periods. The preparation of the said VAT CD served to comply with the judgment in the Dispute Proceeding... ... BELLE, and the taxpayer's dispute was upheld and thus produced the effects of annulment of additional assessment no. ... and respective compensatory interest of the period 201106T. However, the said Credit Regularization should not have been migrated to the new system, inflating the excess to carry forward in the following periods. The additional VAT assessment no. ... of 2018-08-17 in the amount of 32,441.49 Euros and the VAT compensatory interest assessment no. ... of 2018-08-17 in the amount of 8,088.15 Euros, both relating to period 1106T, still remain in the situation of not being regularized in the current account system. Because it is not due, alteration of the amount in field 61 of the VAT DP of 1112T (excess to carry forward from prior period) is requested from 41,860.00 Euros to 0.00 Euros and consequent reliquidation in the following periods. Because they are not due, since the judgment in the dispute proceeding determined the annulment of the VAT assessments issued by the Inspection, annulment is requested of the additional VAT assessment no. ... of 2018-08-17 in the amount of 32,441.49 Euros and annulment of the VAT compensatory interest assessment no. ... of 2018-08-17 in the amount of €8,088.15 Euros, both relating to period 1106T. (...)". This request for annulment was, very recently, executed, in the Assessment Division of the VAT Services Directorate, and the said tax acts have already been annulled. It should be recalled that the Claimants deducted and assessed the VAT, in the amount of €41,860.00, relating to the aforementioned acquisition of the autonomous units, whereby the deduction effected could never give rise to an excess to carry forward, in the amount of €41,860.00.

V. COMPENSATORY INTEREST

Pursuant to article 43, paragraph 1, of the General Tax Law, "[c]ompensatory interest is due when it is determined, in an administrative claim or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due". However, consulting the "Tax Management" computer application, available in these Services, it is verified that there was no payment of the disputed tax, whereby no compensatory interest is owed.

VI. CONCLUSION

In light of the foregoing, and for purposes of the (re)evaluation provided for in article 13 of the LFATM, it is proposed that the tax acts which are the subject of the request for arbitral decision be revoked, annulling the SIT corrections."

  1. Pursuant to the Arbitral Order of 16 May 2019, no submissions were presented.

II. PRELIMINARY DETERMINATIONS

The parties have legal standing and capacity, are shown to be entitled to sue and are regularly represented (articles 4 and 10, paragraph 2, of the LFATM and article 1 of Ordinance no. 112-A/2011 of 22 March).

The tribunal is competent and regularly constituted.

The proceeding is not affected by any nullities.

III. SUPERVENING FUTILITY OF THE CLAIM

Article 277, subparagraph (e), of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraph (e), of the LFATM, provides as follows: "The instance is extinguished with the impossibility or supervening futility of the claim".

The impossibility of the claim occurs in the case of death or extinction of one of the parties, by disappearance or destruction of the object of the proceeding or by extinction of one of the conflicting interests.

The supervening futility of the claim occurs when, by virtue of new facts which have occurred during the pendency of the proceeding, the decision to be rendered no longer has any beneficial effect, either because it is not possible to satisfy the claim which the claimant wishes to assert in the proceeding or because the purpose sought with the action has been achieved by another means.

Thus, the impossibility or supervening futility of the claim translates into an impossibility or legal futility, whose determination takes as its reference what is established in law.

According to José Lebre de Freitas, Rui Pinto and João Redinha (Code of Civil Procedure Annotated, Volume 1, 2nd edition, Coimbra Editor, Coimbra, 2008, page 555), "the impossibility or supervening futility of the claim occurs when, by fact occurring during the pendency of the instance, the claimant's claim cannot be maintained, by virtue of the disappearance of the subjects or the object of the proceeding, or finds satisfaction outside the scheme of the requested remedy. In either case, the solution of the dispute ceases to be of interest – here, by impossibility of achieving the sought result; there, by it already having been achieved by another means".

Turning to the present case, we find that, after being notified to exercise its right of response, in accordance with the provisions of article 17 of the LFATM, the Respondent voluntarily and entirely satisfied the claims which the Claimants formulated in these proceedings.

Indeed, as has been stated, the Respondent exercised its right of response, in accordance with and for the purposes of article 17 of the LFATM, attaching the information prepared by the VAT Services Directorate which states that the annulment of the additional VAT assessment acts was proposed on the ground of (i) the illegality of the additional VAT assessment acts in that the regularization of the tax cannot be imposed, in accordance with article 10, paragraph 1, of the Waiver Regime, and article 26, paragraph 1, of the VAT Code, with the substantiation contained in the tax inspection report, due to the jurisprudence of the CJEU opposing such action and (ii) on Communication no. ... from the Head of the Tax Services of ... requesting the annulment of the tax acts in question in these proceedings, with the grounds better described in the said information to which reference is made.

The information prepared by the VAT Services Directorate was subject to the following Order from the Deputy Director General: "I agree with what is reported. I revoke the tax acts as proposed". This Order was, in turn, also subject to an Opinion from the Services Director in the following terms: "I agree with what is proposed. For the consideration of the Mr. Deputy Director General" and was also subject to an Opinion from the Head of Division in the same sense: "I agree with the content of this information, and the tax acts contested in CAAD should be revoked".

In that measure, the truth is that the results which the Claimants sought with the present arbitral proceeding are entirely achieved.

In this manner, it is beyond question that the arbitral decision which would normally be rendered, taking cognizance of the merits of the claims deduced, appears to be devoid of any beneficial effect, whereby its issuance is not justified.

In these terms, with the appropriate adaptations, the supervening futility of the claim is found to exist.

IV. LIABILITY FOR COSTS

Pursuant to article 536, paragraph 3, of the Code of Civil Procedure, applicable ex vi article 29, paragraph 1, subparagraph (e), of the LFATM, in cases of extinction of the instance due to impossibility or supervening futility of the claim (excepting those provided for in the preceding paragraphs), liability for costs falls upon the claimant or requester, unless such impossibility or futility is attributable to the respondent or requested party, in which case the latter is liable for all costs; paragraph 4 of the same article provides, as to what matters here, that it is considered, in particular, that the supervening futility of the claim is attributable to the respondent or requested party when it results from voluntary satisfaction, by the latter, of the claim of the claimant or requester.

In the case at hand, as has been demonstrated, the claim of the Claimants was voluntarily satisfied by the Tax Authority, by having revoked the tax acts, although on a different ground than the ground alleged in the request for constitution of the Arbitral Tribunal — although the Respondent's information confirms the Claimants' reason as to the illegality of the tax acts, also on the grounds alleged in the request for constitution of an Arbitral Tribunal.

However, as has likewise been demonstrated, the Respondent proceeded to the aforesaid revocation after the constitution of this Arbitral Tribunal, upon notification to exercise its right of response, in accordance with article 17 of the LFATM, despite having had the opportunity to do so, pursuant to articles 13, paragraph 1 and 10, paragraph 3 of the LFATM, when it was notified of the filing of the request for arbitral decision on 5 February 2019. Whereby, the continuation of the proceeding (or rather, of the arbitral procedure), can only be attributable to the Respondent. The costs of this proceeding should, therefore, be entirely attributable to the Respondent.

V. DECISION

In light of the foregoing, this Arbitral Tribunal decides:

a) To declare the present arbitral instance extinct, by supervening futility of the claim;

b) To condemn the Respondent to payment of the costs of the proceeding.

VI. VALUE OF THE PROCEEDING

In accordance with the provisions of articles 306, paragraph 2, of the Code of Civil Procedure, 97-A, paragraph 1, subparagraph (a), of the Code of Tax Procedure and 3, paragraph 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is valued at €78,405.48.

VII. COSTS

Pursuant to articles 12, paragraph 2, and 22, paragraph 4, of the LFATM and article 4, paragraph 4, and Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €2,448.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Respondent.

Notification shall be made.

Lisbon, 21 June 2019

The arbitrators

Fernanda Maçãs (arbitrator-president)

Dr. Elisabete Flora Louro Martins (arbitrator member)

Prof. Doctor Luís Menezes Leitão (arbitrator member)

Frequently Asked Questions

Automatically Created

What is supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration?
Supervening uselessness of proceedings (inutilidade superveniente da lide) in Portuguese tax arbitration occurs when the object of the dispute ceases to exist during the proceedings, making a substantive decision unnecessary. In Process 58/2019-T, this arose when the Tax Authority revoked the contested VAT assessments before the arbitral tribunal ruled. Under Article 277 of the Civil Procedure Code, applicable to tax arbitration via Article 29(1)(e) of RJAT, the tribunal must declare the proceedings extinct when the claim becomes moot. The claimants requested the tribunal verify the revocation's validity and rule on costs, demonstrating that even with supervening uselessness, procedural issues regarding costs and the effectiveness of administrative acts may require tribunal confirmation.
What IRS and IVA tax corrections were challenged in CAAD process 58/2019-T?
In CAAD Process 58/2019-T, the challenged tax corrections involved VAT (IVA), not IRS. The Tax Authority issued additional VAT assessments totaling EUR 40,529.64 plus compensatory interest of EUR 37,875.84 for fiscal years 2015-2017. These corrections resulted from tax inspection reports dated September 17 and 5, 2018, which limited the claimants' right to VAT deduction on tourist accommodation units. The claimants argued the Tax Authority illegally restricted their deduction rights under Article 26(1) of the VAT Code, Article 10(1)(b) of Decree-Law 21/2007, and EU VAT Directive 2006/112/EC Articles 167, 168, 284, 185, and 187. The units were acquired with waiver of VAT exemption and subject to exclusive tourist exploitation contracts.
How does the CAAD arbitral tribunal handle cases involving non-resident taxpayers in Spain with Portuguese tax obligations?
CAAD arbitral tribunals handle cases involving non-resident taxpayers through fiscal representation requirements and standard RJAT procedures. In Process 58/2019-T, two Spanish residents had Portuguese tax obligations related to tourist property ownership. They appointed a fiscal representative in Portugal (taxpayer C..., resident in Silves) as required for non-residents with Portuguese tax matters. The collective arbitral tribunal was constituted under Decree-Law 10/2011 (RJAT) with three arbitrators designated by CAAD's Deontological Council when claimants didn't nominate an arbitrator. The tribunal applied Portuguese procedural law and substantive VAT rules, including EU VAT Directive provisions. Non-resident EU taxpayers have the same arbitration rights as residents, can challenge tax assessments, and benefit from principles of expedition, simplification, and informality under Articles 19(2) and 29(2) of RJAT.