VAT on Early Termination Fees by Telecom Operators: CAAD Arbitration 581/2017-T

ARBITRAL DECISION

I. Report

1. A..., S.A., holder of the collective person identification number..., with registered office at..., no...., in Lisbon, hereby requests the constitution of an arbitral tribunal, pursuant to the provisions of articles 2, no. 1, letter a), and 10 of Decree-Law no. 10/2011, of January 20, to assess the legality of the tax acts concerning the assessment of Value Added Tax and compensatory interest relating to the period of 2012, in the total amount of €5,190,229.97, and, subsidiarily, the annulment of the assessments in the part corresponding to the amount of indemnifications that were invoiced but never actually paid, further requesting the annulment of the decision rejecting the hierarchical appeal filed against those assessment acts and compensation for undue provision of guarantee.

2. The applicant grounds its claim in the following terms:

2.1. In contracts concluded with its clients in which it offers promotional conditions, the obligation is established for them to remain contractually bound to the Applicant during a minimum time period, which is intended to allow recovery of investment costs in equipment essential to the provision of the service, as well as the costs of service activation and customer acquisition, and which determines, in case of breach, the payment of an indemnification corresponding to the value of the agreed monthly fee multiplied by the number of months needed to complete the minimum contract term.

2.2. In the invoices it issues to its clients, the Applicant does not subject to VAT the charging of amounts owed as indemnification for breach of the loyalty period, which determined, following an external inspection procedure concerning the year 2012, that the tax inspection services carried out a VAT correction in the total amount of €4,752,315.32 for failure to assess tax.

2.3. However, the indemnifications received by the Applicant under the service provision contracts concluded with its former clients do not constitute a taxable operation for VAT purposes, as there is no onerous service provision, in accordance with and for the purposes of the VAT Code, since these are counterparties intended to compensate the operator for the harm suffered with the early termination of the contract and which may be characterized as a penalty clause that has a sanctionary or compulsory function over the debtor in order to enforce the contract.

2.4. VAT is a general consumption tax intended to tax the supplies of goods and the provision of services effected for consideration, and in that sense, the absence of an act of consumption (regardless of whether there is some connection between two supplies effected within the scope of a synallagmatic relationship) leads to the exclusion of the operation from the scope of the tax, in so far as it does not reflect the performance of a service that confers a benefit capable of being considered as a constitutive element of the cost of activity of another person in the commercial chain.

2.5. Furthermore, notwithstanding article 16, no. 6, letter a), of the VAT Code providing that only amounts received as indemnification declared judicially for total or partial breach of obligations are excluded from the taxable amount, it is a unanimous understanding that all other indemnifications that do not constitute the counter-performance of any supply of goods or provision of services should not be subject to VAT.

2.6. Subsidiarily, it should further be considered that in relation to the charging of the amount of indemnifications resulting from breach of the loyalty period, which amounted to €20,662,216.75, only about 10% of that amount was actually received, whereby the additional VAT assessments and compensatory interest should be annulled in the proportion corresponding to the amount of indemnifications that, although invoiced, were not collected.

1. The Tax Authority, in its reply, maintains that the indemnification for breach of the loyalty period corresponds to the total revenues that the operator would receive if the contract were to run until its end and is intended to compensate for lost profits resulting from the obligations contractually assumed within the scope of service provision contracts, and therefore represents a counter-performance of operations taxable in VAT.

3.1. It emphasizes in this regard that, by virtue of the nature and general scope of the tax, the conceptualization of taxable operations (supplies of goods, provision of services or operations that may be assimilated to them) is carried out using definitions of broad scope, and VAT should be charged on any service provision effected for consideration by a taxable person.

3.2. In cases where the indemnification has as its basis a counter-performance by which a given entity obtains economic gains, the subjection to VAT cannot be excluded, with it being irrelevant to determine what the civil law classification of the amounts invoiced to clients as a consequence of early termination of service provision contracts.

3.3. Thus, only the payment of indemnification in a non-synallagmatic context, without any interdependence between the indemnificatory provision and another provision relating to the exercise of an economic activity, should be considered as excluded from subjection to VAT taxation.

3.4. Concluding that a provision due upon early termination of a service provision contract should have an identical framework to the regime of the principal contract, in so far as it aims to obtain revenues that are surrogates of the counter-performance contractually provided for the original service provision.

3.5. As to the subsidiary claim, the Tax Administration recalls that within the framework of the common VAT system, the taxable event is understood as that by which the legal conditions necessary for the tax to be enforceable are fulfilled and only when the taxable person had proceeded to assess the tax would it be able to exercise the right to regularization in respect of debts not collected in accordance with article 78 of the VAT Code.

3.6. As a preliminary matter, the Tax Administration requested the suspension of the arbitral proceedings until final decision by the CJEU in the preliminary ruling raised in arbitral process no. 282/2016-T in which it raises questions of identical nature and which is being processed as case C-295/17.

1. In the course of the proceedings, by order of March 9, 2017, the suspension of the instance was determined until the decision to be delivered by the CJEU in the preliminary ruling requested in Process no. 282/2016-T.

2. Following the decision delivered in the context of the preliminary ruling, the suspension of the instance was ordered to cease, by order of January 16, 2019, and the Applicant was notified to state whether it maintains interest in the witness evidence listed in the claim and, if so, to indicate the points of fact on which it should focus.

3. In response, the Applicant requested the substitution of the evidence proceedings by the extra-procedural use of evidence produced by witnesses heard in the context of arbitral processes no. 589/2017-T and 107/2018-T, which was granted by order of February 15, 2019.

4. In arguments, the Applicant commented on the probative results arising from the elements of the case and the witness evidence produced and, furthermore, concluded, in summary, as follows:

7.1. The double condition on which the CJEU in preliminary ruling makes the subjection to VAT of indemnifications dependent is not verified: the correspondence between the amount that the taxable person would have received as remuneration for the services it undertook to provide if the client had not terminated the contract and the amount that is charged to that former client as indemnification for termination of the contract before the end of the minimum term; and, on the other hand, the requirement that early termination of the contract does not alter the economic reality of the relationship between the taxable person and its client.

7.2. Subsidiarily, should it be decided that the indemnifications invoiced by the Applicant to its former clients as a result of breach of the loyalty period are subject to VAT, it should always be concluded that the assessments in question are illegal in so far as they relate to all invoiced amounts, and not only to amounts actually collected.

7.3. Furthermore, there is no possibility of imposing on the Applicant the obligation or burden of proceeding with regularization, pursuant to articles 78, nos. 7 and 8, 78-A, 78-B, of the VAT Code in order for the Applicant to remit to the State the VAT relating only to the amounts of indemnifications invoiced and received from its former clients.

7.4. Moreover, the tax allegedly due with respect to the indemnifications in question here, to be charged by the Applicant to its clients, would always have to constitute a component of the amount charged, and never an amount to be added to it, whereby the amount of tax to be remitted to the State with respect to the months of January to December 2012 should be considered as included in the amount already charged and collected from its clients.

7.5. Finally, the tribunal should always determine the annulment of the assessments of compensatory interest, since, in the absence of culpable conduct attributable to the Applicant, the prerequisites provided for in article 35, no. 1, of the General Tax Code for such interest to be owed to the Respondent are not verified.

1. The Tax Authority took a position on the factual matter that should be deemed established and defended the application to the situation of the case of the judgment delivered by the CJEU in preliminary ruling as the respective factual prerequisites are verified. As to the alleged illegality of the assessments that related to amounts invoiced and not collected, it considered that the regularization of VAT is at the initiative of the taxable person, in accordance with the rules defined in articles 78 to 78-D of the VAT Code, with it not being incumbent on the arbitral tribunal to formulate an assessment regarding the verification of the material and formal legal requirements required for this purpose. As to the alleged incorporation of VAT in the amount already charged and collected from clients, it maintains that, pursuant to no. 1 of article 16 of the VAT Code, the value which serves as the basis for calculating the tax owed is the total value of the counter-performance obtained or to be obtained from the purchaser of the service provision, whereby the taxable value does not include the tax.

8.1. It concludes, based on the above, that the claim is unfounded.

1. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax Authority in accordance with the applicable regulations.

2. Pursuant to the provisions of letter a) of no. 2 of article 6 and letter b) of no. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of December 31, the Ethics Council appointed as arbitrators of the collective arbitral tribunal the signatories, who communicated acceptance of the appointment within the applicable period.

3. The parties were duly and timely notified of this appointment and expressed no wish to refuse it, pursuant to the combined provisions of article 11, no. 1, letters a) and b), of the RJAT and articles 6 and 7 of the Code of Ethics.

4. Thus, in accordance with the provision of letter c) of no. 1 of article 11 of the RJAT, in the version introduced by article 228 of Law no. 66-B/2012, of December 31, the collective arbitral tribunal was constituted on December 11, 2017.

5. The arbitral tribunal was regularly constituted and is materially competent, in accordance with the provisions of articles 2, no. 1, letter a), and 30, no. 1, of Decree-Law no. 10/2011, of January 20.

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

7. The proceedings do not suffer from nullities and no exceptions were raised.

8. The period for delivery of the arbitral decision, disregarding the period during which the suspension of the instance occurred, ends on May 26, 2019.

II. Grounds

Matters of Fact

1. The relevant facts for the decision of the case that may be deemed established are the following:

A) A... is a limited company, whose corporate purpose consists of the establishment, design, construction, management and operation of electronic communications networks and infrastructures, as well as the provision of electronic communications services and the transport and broadcasting of telecommunications signals.

B) For VAT purposes, the Applicant is classified under the normal monthly periodicity regime and is a taxable person for VAT purposes.

C) In the course of its activity, the Applicant concludes with its clients contracts for the provision of telecommunications services, internet access, television and multimedia.

D) In certain contracts, the obligation is stipulated for clients to remain contractually bound for a minimum time period.

E) These contracts include a clause that, in case of early termination of the contract at the initiative or fault of the client, implies the obligation to pay, as indemnification, the number of monthly fees that would be missing to complete the minimum term.

F) The loyalty period is primarily intended to promote compliance with the contracts and recover the costs incurred with investments in equipment, service activation and customer acquisition.

G) In situations of breach of the minimum term, the Applicant issues invoices to its clients for amounts owed as indemnification without VAT assessment and with the express notation "Not subject to VAT".

H) In these invoices the Applicant mentions under the heading "Billing Detail" that this concerns "Indemnification for contractual breach – service".

I) Only a small part of the values relating to amounts charged in situations of breach are subject to payment.

J) The Applicant, at the moment of issuing the corresponding invoices, records the respective values in accounting item # 282 - Revenues to be recognized, and only recognizes these values, from an accounting point of view, as results at the moment when its defaulting client makes payment of the invoiced amount.

L) The Applicant was subject to an external inspection procedure of general scope, concerning the year 2012, authorized by Service Order no. OI2014..., of March 14, 2014.

M) Following this inspection procedure, the Applicant was notified, through Official Letter no. ..., of November 26, 2014, of the Draft Tax Inspection Report, in which the Tax Inspection Services proposed a VAT correction in the total amount of €4,752,315.32 for failure to assess tax on indemnifications charged to clients for breach of the loyalty period.

N) The Applicant exercised the right to be heard regarding the draft report, which did not prevent the initially proposed correction from being maintained.

O) Subsequently, the Applicant was notified of assessments nos. 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., concerning VAT, and of assessments nos. 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015..., 2015... and 2015..., concerning compensatory interest, in the total amount of €5,190,229.97, all concerning the period of 2012.

P) Having not proceeded with payment of the assessment acts within the voluntary payment period, the respective tax enforcement proceedings were initiated.

Q) On April 16, 2015, the Applicant presented to the Tax Authority, pursuant to and with the effects of article 169 of the Code of Tax Procedure, bank guarantee no. ..., issued by Bank B..., S.A., in the amount of €6,578,499.83, for purposes of suspension of the tax enforcement proceedings initiated for coercive collection of the sums owed.

R) On July 16, 2015, it filed a gracious claim against the assessment acts.

S) On November 3, 2015, it was notified of the draft decision rejecting the gracious claim, regarding which it exercised the right to be heard.

T) On December 11, 2015, it was notified of the final decision rejecting the gracious claim.

U) On January 8, 2016, it filed a hierarchical appeal against the decision rejecting the gracious claim previously filed.

V) On August 3, 2017, it was notified of the order rejecting the hierarchical appeal, dated August 1 of the previous year, delivered by the Assistant Director-General of the Tax Authority, pursuant to delegation of authority.

X) In the Tax Inspection Report, whose conclusions gave rise to the tax assessment acts challenged, the following is stated in summary: "It is concluded, therefore, that the indemnifications in question are intended to compensate for lost profits and result from compliance with obligations contractually assumed within the scope of service provision contracts, and therefore represent a counter-performance of operations taxable in VAT. In terms of classification under the VAT Code, the indemnifications in question constitute a counter-performance for a service provision, subject and not exempt, pursuant to article 4, no. 1, with the taxable event occurring and consequently the tax being owed at the moment of invoice issuance, pursuant to article 8, no. 1, letter a), the taxable value being that of the indemnification, in accordance with article 16, no. 1, the 23% rate provided for in article 18, no. 1, letter c), all of the VAT Code being applicable."

1. The Tribunal formed its conviction regarding the proven facts based on the documents attached to the petition and on the administrative file attached by the Tax Authority with its reply and on the testimony given in arbitral processes no. 589/2017-T and 107/2018-T.

Matters of Law

1. The question posed as primary consists in determining whether the indemnifications contractually established for cases of breach of the loyalty period agreed between the Applicant and its former clients can be understood as remuneration for a service provision effected for consideration for VAT purposes.

2. To justify non-subjection to tax, the Applicant argues, in summary, that the indemnifications are intended to compensate the operator for the harm suffered with early termination of the contract, and may be characterized as a penalty clause, and do not constitute a taxable operation for VAT purposes as there is no service provision effected for consideration that presupposes an act of consumption.

3. In the proceedings, suspension of the instance was determined until the decision to be delivered by the CJEU in Process no. C-295/17, following the preliminary ruling requested in Process no. 282/2016-T - with an object identical to that of the present case - with an order to cease the suspension of the instance being delivered after the delivery of the Court of Justice judgment dated November 22, 2018.

4. In the preliminary ruling request were essentially set out the following two questions: (a) whether the predetermined amount received by an economic operator in case of early termination of a service provision contract that provides for a minimum binding period, which corresponds to the amount that this operator would have received during the remainder of the binding period if early termination had not occurred, constitutes the remuneration of a service provision effected for consideration for VAT purposes; (b) whether it is determinant for the qualification that the fixed amount is intended to dissuade clients from breaching the minimum binding period and to compensate the harm resulting from the breach, the fact that the remuneration received from entering into contracts providing for a minimum binding period is higher than that provided for within contracts not providing for such a period, and the fact that the said amount is qualifiable under national law as a penalty clause.

5. The CJEU judgment delivered in preliminary ruling in said Process no. C-295/17 pronounced as follows:

A) Article 2, no. 1, letter c), of Council Directive 2006/112/EC, of November 28, 2006, on the common system of value added tax, must be interpreted in the sense that the predetermined amount received by an economic operator in case of early termination of the contract by its client, or due to a cause attributable to the client, of a service provision contract which provides for a minimum binding period, an amount that corresponds to the amount that this operator would have received during the remainder of that period if early termination had not occurred, a matter for the referring court to verify, should be considered as the remuneration of a service provision effected for consideration and, as such, subject to that tax.

B) It is not determinant for the qualification of the predetermined amount in the service provision contract, for which the client is liable in case of early termination of that contract, that the fixed amount is intended to dissuade clients from breaching the minimum binding period and to compensate the harm that the operator suffers with the breach of that period, the fact that the remuneration received by a commercial agent from entering into contracts providing for a minimum binding period is higher than that provided for within contracts not providing for such a period, and the fact that the said amount is qualifiable under national law as a penalty clause.

1. Following that pronouncement, in said Process no. 282/2016-T, the arbitral tribunal, by judgment of February 19, 2019, ruled unfounded the main claim for annulment of the assessments and the hierarchical appeal decision based on the understanding, in harmony with what was decided by the CJEU, that the said amounts received as indemnification for breach of the contracts should be considered as the counter-performance of a service provision for VAT purposes.

2. In a similar situation, and applying the judgment of the Court of Justice, the judgment of January 8, 2019, delivered in Process no. 596/2017-T had already decided in the same sense.

3. And there is no reason to alter that understanding now.

4. The jurisprudence of the CJEU has binding character for national courts when it concerns issues of European Union Law, being that the corollary of the principle of supremacy of Union Law over National Law (article 8, no. 4, of the Constitution) and the obligation to request a preliminary ruling when such a question is raised in proceedings pending before a national court whose decisions are not subject to judicial review provided for in internal law (article 267 of the Treaty on the Functioning of the European Union).

5. In the case, the CJEU, answering the first question posed to it, emphasized that "the amount due for breach of the minimum binding period to the contract remuneration the provisions carried out by A..., whether or not the client exercises the right to benefit from the said services until the end of the minimum binding period to the contract" (recital 48) and, thus, "should be considered that the amount due for breach of the minimum binding period to the contract forms an integral part of the total price paid for the service provision, divided into monthly installments, a price that becomes immediately enforceable in case of breach of the obligation to pay" (recital 50). Coming to conclude, consequently, that "the amount due for breach of the minimum binding period constitutes the counter-performance of an individually identifiable service provision" (recital 52).

6. Certainly, the CJEU refers to the referring court the verification that the predetermined amount in the service provision contract for which the client is liable in case of early termination corresponds to the amount that this operator would have received during the remainder of that period if early termination had not occurred (recital 44), being that the prerequisite on which the qualification of the counter-performance for early termination of the contract as remuneration of a service provision depends and which evidences that early termination does not alter the economic reality of the relationship between A... and its client (recital 51).

7. However, from the matters of fact deemed established, it clearly results that the contracts in question include clauses providing for the obligation of the client to make payment of an amount corresponding to the monthly fee multiplied by the number of months needed to complete that period, in case of deactivation of services before the end of the agreed contractual binding, at the initiative or due to fault of the client. It cannot fail to be recognized that, in this context, the condition is verified on which the application in the concrete case of the interpretation followed by the Court of Justice depends, in the sense that the amount due for breach of the minimum binding period constitutes a counter-performance of a service provision.

8. The Applicant argues, however, that the incidence of VAT presupposes the existence of an act of consumption and that clients do not enjoy any advantage or benefit, after termination of the contract, for which they should pay a certain price as counter-performance (article 185), with there being no direct connection between payment of indemnification and any hypothetically provided service (article 235).

9. It should be noted, in any case, that the CJEU decision also answers that question, by considering that "the counter-performance of the amount paid by the client to A... is constituted by the client's right to benefit from the performance by that operator of the obligations arising from the service provision contract, even though the client does not wish or is unable to exercise that right due to a reason attributable to the client" (recital 45). And in that circumstance – it is added – A... places the client in a position to benefit from that provision, in the sense of the jurisprudence, namely in the Air France-KLM judgment, in which it was decided, regarding the sale of airline tickets not used by passengers and whose reimbursement they failed to obtain, that the counter-performance of the price paid upon signature of a service provision contract is constituted by the right that the client derives from it to benefit from the performance of the obligations arising from the contract, regardless of whether the client exercises that right.

10. In that sense, the Court of Justice concluded that "the amount due for breach of the minimum binding period to the contract forms an integral part of the total price paid for the service provision, divided into monthly installments, a price that becomes immediately enforceable in case of breach of the obligation to pay" (recital 50).

11. It is therefore not possible to assert, in light of the interpretation of article 2, no. 1, letter c), of the Directive that was followed in preliminary ruling, that there is no act of consumption or that there is no synallagmatic relationship between indemnification and service provision.

12. Indeed, in the sense of the Court of Justice, it is the right to the provision of telecommunications services for a certain period of time that has as counter-performance the totality of the monthly fees that are charged to the client, regardless of whether early payment occurs due to termination of the contract before the end of the loyalty period.

13. It cannot fail to be concluded, in these terms, that the amounts received as indemnification for breach of the loyalty period constitute counter-performance of a service provision for VAT purposes, and are accordingly subject to the incidence of the tax.

14. The second question analyzed in the CJEU judgment delivered in preliminary ruling concerns the relevance, for the purpose of the objective scope of incidence of the tax, of the purpose pursued with the contractual provision of indemnification in cases of early termination of contract and the legal qualification that may be attributed to that indemnification under internal law.

15. In this regard, the Court of Justice noted that "the concept of service provisions, in the sense of the VAT Directive, must be interpreted independently of the purposes and results of the operations in question" (recital 60) and, consequently, the objective sought to "dissuade clients from not respecting the minimum binding period to the contract is not determinant for the qualification of the minimum contractual remuneration in the service provision contract" (recital 62).

16. On another plane, the Court considered that it is immaterial, for the purposes of interpreting the provisions of the VAT Directive, that the amount due for breach of the minimum binding period "constitutes, under national law, indemnification for extracontractual civil liability or a contractual penalty, or is further qualified as repair, indemnification or remuneration" (recital 68) and, specifically, understood that it is not determinant that "the said amount is qualifiable, under national law, as a penalty clause" (recital 70).

17. In this context, the alleged circumstance, in the situation of the case, that indemnification is intended to encourage clients to comply with the contract and to recover, in case of breach, investment costs, as well as the possible qualification of indemnification as a penalty clause to which a sanctionary or compulsory function may be attributed, has no relevance, in light of the interpretation formulated by the Court of Justice, to disqualify the amount due for breach of the loyalty period as remuneration of a service provision.

18. On the other hand, the allegation that the tax was already included in the amount charged and collected from clients is not admissible – nor is it demonstrated. Indeed, as results from the combined provisions of articles 16, no. 1, and no. 5, letter a), of the VAT Code, the taxable value of service provisions is the value of the counter-performance obtained or to be obtained from the beneficiary, with VAT itself not being included. This is in accordance with the provision of article 37, no. 1, where it is stated that "the amount of tax assessed must be added to the value of the invoice, for purposes of its enforcement (…) to the beneficiaries of the services".

19. Now, if the indemnification for breach of the loyalty period consists of payment in the remaining monthly fees that are contractually provided for the service provision, that is the value of the counter-performance that is taxable in VAT. This also explains why the invoices issued as indemnification contain the notation "not subject to VAT" (letter G of the matters of fact).

20. For all the above, the main claim formulated by the Applicant, aimed at annulment of the hierarchical appeal decision and the VAT assessment acts, proves to be unfounded.

Subsidiary Claim

1. Subsidiarily, the Applicant requests partial annulment of the assessment acts in the proportion of the amount of indemnifications that were invoiced but not actually paid, taking into account that the corrections made by the Tax Authority relate to the entirety of indemnifications owed for breach of the loyalty period, when only about 10% of that amount was subject to collection.

2. Non-payment of invoices cannot, however, constitute an autonomous ground for annulment of the additional assessment acts. The tax becomes enforceable in case of the obligation to issue an invoice and the amount of tax to be assessed must be added to the value of the invoice for purposes of enforcement to the beneficiaries of the services (articles 8, no. 1, 29, no. 1, and 37, no. 1, of the VAT Code).

3. As the Applicant did not proceed to assess the tax in the invoices issued, the ex officio correction may only give rise to regularization in accordance with the terms provided for in articles 78 and 78-A to 78-D of the VAT Code, to which article 90 of the VAT Directive also refers, and in any case, it is incumbent on the taxable person to demonstrate the facts on which the fulfillment of the respective prerequisites depends. It must be understood that regularization, in that circumstance, can only be effected at a time subsequent to the tax assessment itself.

4. And, moreover, that eventuality was also considered in the judgment delivered in preliminary ruling when it states: "it must be added, for all useful purposes (…) that, if necessary, it shall be incumbent on the competent national authorities to proceed, under the conditions laid down by national law, to the correction of VAT accordingly, as provided for in article 90 of the VAT Directive, so that VAT is deducted from the amount that the service provider actually received from its client" (paragraph 55).

5. It should further be noted that the "competent national authorities" to which the CJEU intends to refer are the tax authorities which are responsible for proceeding with regularization in accordance with the applicable tax organization rules.

6. For all the above, the subsidiary claim is unfounded.

Constitutional Issues

1. The Applicant further alleges that the challenged acts violate the principle of the primacy of European Union Law enshrined in article 8, no. 4, of the Constitution, as well as the principle of fiscal legality (article 103) and the parameters to which the attribution of consumption must comply (article 104, no. 4).

2. The principle of the primacy of European Union Law must be understood as a rule of prevalence of norms emanated from European institutions over sub-constitutional internal law. In the case, as set out above, due to subsisting doubts about the interpretation of provisions of the VAT Directive, the question was raised before the CJEU, which, by its judgment of November 28, 2018, pronounced itself in the sense that the amount due for breach of the minimum binding period constitutes a counter-performance of a service provision effected for consideration that, as such, is subject to tax.

3. It must be concluded that the tax acts are in accordance with the interpretative sense defined by the Court of Justice in a pronouncement issued on the situation of the concrete case, it is not possible to assert that there is a violation of the primacy of European Union Law.

4. In turn, the principle of fiscal legality, in its material sense, implies legal typicity, making it necessary that the essential elements of the tax are defined in the law in a sufficiently determinate manner (cf., among others, the judgment of the Constitutional Court no. 127/2004).

5. The objective scope of incidence of the tax and the concept of service provision are sufficiently characterized in the VAT Code (articles 1 and 4) and it is not evident – nor does the Applicant explain – in what terms an interpretation of the law according to which the predetermined amount for a certain period of duration of the service provision contract is the counter-performance of the service provided with reference to that period can put into question the determinability of the tax.

6. The Applicant further defends that the violation of the provision of article 104, no. 4, of the Constitution is demonstrated when taxation is subjected to situations that cannot be characterized as "acts of consumption". However, in providing that "[t]he taxation of consumption is intended to adapt the structure of consumption to the evolution of the needs of economic development and social justice", the Constitution is solely defining parameters for the taxation of consumption that involve economic and social determinants of fiscal policy. None of those parameters is in question when, through law interpretation, it is understood that the predetermined amount for a certain period of duration of the service provision contract is equated to an act of consumption for purposes of subjection to VAT.

7. Nor is the tax being made to fall on an act that should not be subject to taxation, but rather merely a legal qualification of the concept of service provision is being carried out which does not represent any disvalue in the constitutional law plane.

8. None of the invoked unconstitutionalities are therefore verified.

Compensatory Interest

1. The Applicant further challenges the assessment of compensatory interest in relation to any of the VAT assessment acts, arguing that there is no culpable conduct attributable to it that would permit considering the prerequisites referred to in article 35, no. 1, of the General Tax Code to be verified.

2. Pursuant to article 35, no. 1, of the General Tax Code, "compensatory interest is owed when, due to a fact attributable to the taxable person, the assessment of part or all of the tax owed or the delivery of tax to be paid in advance, or withheld or to be withheld in the framework of tax substitution, is delayed".

3. As has been the common understanding, the compensatory interest owed pursuant to the said provision constitutes a reparation of a civil nature intended to indemnify the Tax Administration for the loss of availability of a sum that was not assessed in a timely manner. Being a reparation of a civil nature, it is only enforceable if there is a causal nexus between the action of the taxable person and the delay in assessment and that action is able to be censurable on the ground of fraud or negligence.

4. And as was decided in the South Regional Administrative Court Judgment of October 11, 2011 (Process no. 04163/10), "compensatory interest is not owed when the delay in assessment was due, for example, to understandable divergence of criteria between the Tax Administration and the taxpayer regarding the classification and/or qualification of a certain tax situation".

5. That appears to be the situation of the case.

6. The legal question underlying the requirement to pay the tax is of special complexity, with it being possible to understand that the interpretation made by the taxable person presents some degree of plausibility, having also been defended in doctrine. Moreover, the doubts raised regarding the interpretative sense of article 2, no. 1, letter c), of the VAT Directive, when applicable to the case, justified that a preliminary ruling be requested in Process no. 282/2016-T and that suspension of the instance be determined in the present proceedings to await the decision to be delivered by the CJEU.

7. In this context, the delay in assessment of the tax owed cannot be attributed to culpable behavior of the taxable person, and it must be concluded that the unfoundedness of the claim for arbitral pronouncement regarding that additional assessment is not determinant of the recognition of the right to compensatory interest.

Indemnification for Undue Provision of Guarantee

1. The Applicant further requested payment of indemnification for undue provision of guarantee, invoking the provision of article 53 of the General Tax Code, having for this purpose alleged and demonstrated that it proceeded to the constitution of a bank guarantee for purposes of obtaining suspension of the tax enforcement proceedings initiated for coercive collection of the sums owed.

2. Without doubt, article 171 of the Code of Tax Procedure guarantees indemnification in case of bank guarantee or equivalent unduly provided, which may be requested in the proceedings in which the legality of the enforceable debt is contested, with it being necessary to understand that the arbitral proceedings are also the appropriate procedural means to deduce this claim as it may have as its object the assessment of claims concerning the declaration of legality of tax assessment acts (article 2, no. 1, letter a), of RJAT).

3. Article 53 of the General Tax Code further permits that the debtor who offers a bank guarantee or equivalent to suspend tax enforcement will be indemnified wholly or partially for the harm resulting from its provision, should the debtor have maintained it for a period exceeding three years, except when it is verified in judicial challenge that there was error attributable to the services in assessing the tax, in which case indemnification is not dependent on the period for which the guarantee was in force.

4. Still in application of the provision of this latter article, in case of partial success of the arbitral claim, indemnification will be owed in the proportion of success.

5. Thus being, as it has been found that error attributable to the Tax Authority exists regarding the assessment of compensatory interest, indemnification for the guarantee unduly provided is due.

6. On the other hand, given that the harm resulting from provision of guarantee is not immediately quantifiable, due to lack of allegation and proof of the burdens incurred, they can only be compensated in a separate liquidation incident to be deduced autonomously (in this sense, the arbitral tribunal judgment of February 12, 2018, Process no. 369/2017-T).

III. DECISION

In these terms, it is decided:

a) to rule unfounded the arbitral claim regarding the VAT assessment acts;

b) to rule founded the arbitral claim in the part concerning compensatory interest and to annul, consequently, the corresponding assessment acts;

c) to order the Tax Authority to pay indemnification for undue provision of guarantee with respect to compensatory interest, which is referred for execution of judgment.

Value of the Case

The Applicant indicated as the value of the case the amount of €5,190,229.97, which was not contested by the Respondent and corresponds to the value of the assessment that was intended to be contested, whereby the value of the case is fixed in that amount.

Court Costs

Pursuant to articles 12, no. 2, and 24, no. 4, of RJAT, and 3, no. 2, of the Court Costs Regulation in Tax Arbitration Proceedings and Annex Table I to that Regulation, the amount of costs is fixed at €65,178.00, which shall be borne by the Applicant and the Respondent in the proportion of their lack of success.

Let it be notified.

Lisbon, April 15, 2019.

The President of the Arbitral Tribunal

(Carlos Fernandes Cadilha)

The Arbitrator Member

(Clotilde Celorico Palma – with dissenting opinion attached)

The Arbitrator Member

(Miguel Patrício)

Dissenting Opinion

The undersigned presents her dissenting opinion with respect to the conclusions contained in letters a) and b) of the operative part of the Judgment, based on the following grounds of fact and law, set out in similar terms in Process no. 282/2016-T, of February 18, 2019, concerning an identical situation affecting the same entity.

1. Preliminary Note

We cannot agree with several aspects of the Arbitral Decision as drafted by our esteemed colleagues. From the facts deemed proven, to the appropriateness of certain statements of fact made and to the assessment of the matter of law.

From the outset, the entire Decision is supported on the CJEU Judgment of November 22, 2017 delivered in Process no. C-295/17.

Our esteemed colleague Arbitrators state in the present Arbitral Decision that "24. Following that pronouncement, in said Process no. 282/2016-T, the arbitral tribunal, by judgment of February 19, 2019, ruled unfounded the main claim for annulment of the assessments and the hierarchical appeal decision based on the understanding, in harmony with what was decided by the CJEU, that the said amounts received as indemnification for breach of the contracts should be considered as the counter-performance of a service provision for VAT purposes."

Now, it is important to clarify that, as we began by emphasizing, in the said Decision the undersigned presented a dissenting opinion in similar terms to those now being expounded.

Moreover, in our view, it is important to note that the present Arbitral Decision is omissive as to facts not proven relevant for due purposes.

In this context, we cannot agree with the list of facts deemed proven in the present case, and in our view, the following determinative facts should also be deemed proven:

(i) "The amount owed by the (former) client of the Applicant in case of breach of the loyalty period does not necessarily correspond to the amount that the Applicant would have received if that loyalty period had been complied with, namely through the use of services not contemplated in the value of the base monthly fee contracted and/or the maintenance of the contract after the loyalty period";

(ii) "Early termination of the contract by the client or due to a reason attributable to the client alters the economic reality of the relationship that had been established between the Applicant and its (former) client."

Indeed, it is proven that the Applicant, upon initiating a commercial relationship with a given client, has the expectation of being able to provide, in addition to the services included in the base monthly fee, other contracted services (e.g. internet traffic volumes exceeding those contracted, international traffic, value-added calls, national traffic not included in the contracted service package, premium channels, etc.), subject to different prices previously communicated to the client and which exceed the value of the base monthly fee previously agreed (cf. fact alleged in article 28 of the petition and proven through the testimony of witnesses heard in Process no. 589/2017-T, whose proof was approved by this Arbitral Tribunal through the order dated 15.02.2019, C..., noted in the witness hearing minute of 05.04.2018, recorded in audio file, counter 0:02:52.4, 0:04:12.0, 0:30:15.2, 0:31:46.3, 0:32:48.8, 0:34:12.0, 0:37:40.9, 0:59:12.6, 1:02:35.0, 1:12:43.6, 1:13:29.4, and D..., noted in the witness hearing minute of 05.04.2018, recorded in audio file, counter 0:06:20.6, 0:14:14.2).

It was further proven that more than 80% of the Applicant's clients have extra consumptions implying payment of monthly invoices exceeding the amount corresponding to the base monthly fee (cf. testimony of witness C... heard in Process no. 107/2018-T, noted in the witness hearing minute of 16.01.2019, recorded in audio file, counter 0:06:09.5, 0:10:37.4 and 0:11:49.7, whose proof was approved by this Arbitral Tribunal through the order dated 15.02.2019).

It was also proven that the services not included in the base monthly fee are services included in the service provision contract that clients have the right to enjoy and that the Applicant is, within the scope of that contract, obliged to provide (cf. testimony of witness C... heard in Process no. 107/2018-T, noted in the witness hearing minute of 16.01.2019, recorded in audio file, counter 0:16:41.9, 0:17:40.2, 0:18:35.4 and 0:19:46.2, whose proof was approved by this Arbitral Tribunal through the order dated 15.02.2019).

It is especially important to emphasize that, in our view, it was proven that the amounts invoiced by the Applicant to its clients during the term of the contract are considerably higher than the values of the base monthly fees that are used as reference for calculation of the indemnification that is owed by termination of the contract at the client's initiative or due to a reason attributable to the client (cf. follows from the joint reading of the facts alleged in articles 28 and 34 of the petition and proven through the testimony of witnesses heard in Process no. 589/2017-T, whose proof was approved by this Arbitral Tribunal through the order dated 15.02.2019, C..., noted in the witness hearing minute of 05.04.2018, recorded in audio file, counter 0:30:15.2, 0:32:48.8, 0:34:12.0, and D..., noted in the witness hearing minute of 05.04.2018, recorded in audio file, counter 0:06:20.6, and also from the testimony of witness C..., heard in Process no. 107/2018-T, noted in the witness hearing minute of 16.01.2019, recorded in audio file, counter 0:08:20.5 and 0:19:19.5, whose proof was likewise approved by this Arbitral Tribunal through the order dated 15.02.2019).

And it was proven that the Applicant does not receive the same amounts in situations where the contract terminates early (during the term of the loyalty period) at the client's initiative (or due to fault attributable to the client), as opposed to situations where the contract remains in force (cf. testimony of witness C... heard in Process no. 107/2018-T, noted in the witness hearing minute of 16.01.2019, recorded in audio file, counter 0:08:55.9, whose proof was approved by this Arbitral Tribunal through the order dated 15.02.2019).

On the other hand, it is certain that, as is stated in point 27 of the present Decision, "The jurisprudence of the CJEU has binding character for national courts when it concerns issues of European Union Law, being that the corollary of the principle of supremacy of Union Law over National Law (article 8, no. 4, of the Constitution) and the obligation to request a preliminary ruling when such a question is raised in proceedings pending before a national court whose decisions are not subject to judicial review provided for in internal law (article 267 of the Treaty on the Functioning of the European Union)."

However, it should be emphasized that, as we shall emphasize below, a preliminary ruling is a very different reality from an appeal, a situation to which such a mechanism is often sought to be reduced.

2. Delimitation and Prerequisites of Taxation of the Factual Matter under Analysis

Let us see what is the core of the matter that now concerns us. It is especially important, in the case in question, to analyze whether the payments of the sums in question by early denunciation can now be qualified as a "counter-performance" relating to a service provision effected by A... to its clients. That is, whether or not there exists in the situation in question an act of consumption in order for the operation to be able, as such, to be subject to VAT taxation.

In the situation in question, the amounts involve payment of sums stipulated with reference to the values of the missing monthly fees within the loyalty period, a fact conducive to inducing confusion regarding the delimitation of an indemnification not taxable for VAT purposes.

The conclusions of the present Arbitral Decision are based on the said CJEU Judgment.

Now, it is important a priori to bear in mind that, as was foreseen and deemed proven by the Arbitral Tribunal in the case of Process no. 282/2016-T, at the time of the preliminary ruling and the CJEU mentions in its decision, "in case of deactivation of the products and services provided in it before the end of the minimum binding period to the contract conventionally provided, at the request of clients or due to a reason attributable to them, A..., S.A. is entitled to indemnification corresponding to the amount of the agreed monthly fee multiplied by the difference between the duration of the minimum binding period provided for in the contract and the number of months for which the service was provided."

On the other hand, it is especially important to emphasize that, as was likewise deemed proven and the CJEU referred to, "as a consequence of early termination by the client of the service provision contract, A..., S.A. deactivates the services provided for in that contract and sends to the client an invoice with the amount of indemnification previously determined in the contract…".

It is therefore important to analyze the situation in question in depth, namely taking into account the facts in question.

3. The CJEU and the Preliminary Ruling – Preliminary Considerations

In this context, it is necessary to consider from the outset what the role of the CJEU is in a situation of preliminary ruling. What is the scope that should correctly be given to a preliminary ruling?

In this respect, it is important to recall, on the one hand, that it is incumbent on the national judge to define the regulatory and factual framework of the dispute submitted to it (v., in this sense, Judgment of September 21, 2016, Radgen Case, Proc. C478/15, nos. 27, 32).

But it is particularly important to consider the RECOMMENDATIONS for the attention of national courts regarding the presentation of preliminary proceedings.

Let us then see the relevant parts.

As is clarified, "

1. The preliminary ruling is a fundamental mechanism of European Union Law, which is intended to provide national courts of the Member States with the means to ensure uniform interpretation and application of that law throughout the Union.

(…)

1. As mentioned previously, the role of the Court in the context of a preliminary proceeding is to interpret European Union Law or pronounce on its validity, not to apply this Law to the factual situation underlying the main proceedings. That role is the responsibility of the national judge, and therefore it is not incumbent on the Court to pronounce on questions of fact raised in the context of the dispute in the main proceedings nor on any disagreements of opinion regarding the interpretation or application of the rules of national law.

2. When pronouncing on the interpretation or validity of European Union Law, the Court further endeavors to give a useful answer for the resolution of the dispute in the main proceedings, but it is the responsibility of the referring court to draw the concrete consequences of that answer, possibly disregarding the application of the national rule in question."

4. Classification under Civil Law

4.1 Civil Law Concept of Indemnification

Although, as the CJEU referred to, the classification of the situation in question is not determinant for the purposes of national law, it is a relevant element to be taken into account. An important indication of the factuality in question which, as such, should not be disregarded.

In its civil law sense, the concept of indemnification is linked to the need to repair a certain harm. Indemnification embodies the repair of harm, by virtue of breach or deficient performance of an obligation, violation of an absolute right or a rule protecting private interests. Indemnification may further be defined as an obligation whose content amounts to the duty to perform an activity intended to cause harm to disappear.

The Civil Code provides that the duty to indemnify may result either from violation of contractual duties or from situations arising from extracontractual liability, with it being certain that both types of liability constitute modalities of what is one of the most relevant sources of obligations – civil liability.

Generally, one may understand by civil liability: (i) the set of facts that give rise to the obligation to indemnify the harm suffered by another or, (ii) the obligation of one person to repair harm suffered by another person, an obligation arising from the law itself (as opposed to obligations arising from the will of the parties), in which the responsible entity is the debtor and the harmed party is the creditor, or (iii) the situation in which someone, having committed an unlawful act, is obliged to indemnify the harmed party for the harm caused.

Contractual liability results from a breach of an obligation in the technical sense, by virtue of which one person is obliged to a certain performance before another. It presupposes, as the designation itself indicates, breach of obligations stipulated in contracts or in unilateral legal transactions.

The rules applicable to contractual civil liability are provided for in articles 798 and following of the Civil Code.

In turn, extracontractual liability arises from the breach of a general duty, in most cases corresponding to absolute rights and consequent universal duties of abstention for the community, in cases where such a breach causes harm to others.

It is, in general, liability for unlawful acts, although civil law also includes liability for lawful acts and for risk.

Whether in the case of contractual liability or extracontractual liability, regarding the obligation to indemnify, the provision of articles 562 et seq. of the Civil Code applies.

Among the modalities of obligations, the obligation of indemnification presents itself as an autonomous figure, with provision being made for the general principle enshrined in the said rule, according to which "whoever is obliged to repair harm must reconstitute the situation that would have existed if the event giving rise to the obligation to repair had not occurred".

The obligation to indemnify may arise from various situations, such as:

(i) definitive non-performance (cf. article 798 of the Civil Code);

(ii) delay (cf. article 804, no. 1, of the Civil Code);

(iii) defective performance (cf. articles 799, 898, 899, 908, 909, 913 and following and 1218 and following of the Civil Code);

(iv) impossibility of performance due to a cause attributable to the debtor (cf. article 801, no. 1, of the Civil Code);

(v) culpable unlawful extracontractual act (cf. article 483 of the Civil Code);

(vi) expropriation for public or private utility (cf. article 310 of the Civil Code);

(vii) obligation contractually assumed to repair harm.

In any of the cases, the common denominator of the obligation to indemnify is the removal or repair of harm or loss suffered by another.

That is, it is important to emphasize that the concept of indemnification assumes unequivocally in civil law terms a reparatory character.

One of the various classifications of harm distinguishes them between actual damages and lost profits. The former comprise the loss or decrease of values already existing in the patrimony of the harmed party, whereas the latter concern the benefits that the harmed party failed to obtain as a consequence of the harm, that is, the frustrated patrimonial increase. No. 1 of article 564 of the Civil Code, applicable to the calculation of indemnification, determines that the duty to indemnify comprises not only the harm caused but also the benefits that the harmed party failed to obtain as a consequence of the harm. In this sense, lost profit presupposes that the harmed party had, at the moment of the harm, a right to the gain that was frustrated or, in other words, the possession of a legal situation which, if maintained, would give the harmed party the right to that gain.

From the Civil Code it further appears the distinction between present and future harm, with it being certain that no. 2 of the said article 564 determines that "in fixing indemnification the court may take into account future harm, provided it is foreseeable; if it is not determinable, the fixing of corresponding indemnification shall be deferred for later decision". Future harm, as opposed to present harm, is not verified at the moment in which it is considered, namely at the date of fixing of indemnification. Future harm is indemnifiable provided the foreseeability thereof is verified, and may be classified as certain or contingent, depending on whether its occurrence is presented as inevitable or merely possible.

4.2 Characterization of the Contract and Minimum Term Clause

The service provision contract for telecommunications services concluded between A... and its clients is configured as a contract of continuous or lasting performance. These contracts, as they do not usually have a fixed duration period, generally permit their denunciation at any time. Now, in order to avoid that situation, it is normal to provide in such contracts a minimum term, usually called a loyalty period, which in the concrete case it is important to emphasize that is, likewise, the counter-performance for access to better contractual conditions in terms of tariff or equipment discounts. The minimum term of permanence is embodied, in general, in a clause appended to a contract of lasting performance that determines the obligation for the parties to maintain the contract unchanged for a certain period of time, without being able to denounce it until the end of that period. Consequently, the loyalty period generates an obligation of permanence in the contract, through a prohibition of its denunciation, which accordingly corresponds to a contractual obligation assumed by the parties. That contractual obligation could be protected in various ways: either by considering denunciation ineffective before the end of the loyalty period, with the consequence of the contract remaining fully valid, or by providing for indemnification in the event of breach of the loyalty period, a situation that occurs in the contracts in question.

That is, in this case, the loyalty clause is associated with a penalty clause, which is provided for in article 810 of the Civil Code, a provision which prescribes that "the parties may, however, fix by agreement the amount of indemnification enforceable: this is what is called a penalty clause."

In accordance with solutions adopted in Comparative Law, two types of penalty clauses are distinguished: one intended to establish a penalization for non-performance, aimed at encouraging the debtor to perform (the so-called "penalty clause"), another intended solely to liquidate anticipated the harm enforceable in case of non-performance (the so-called "liquidated damages clause").

The essential difference between the two is that the first seeks to establish an actual penalty for the debtor's conduct, which may have no relationship with the amount of harm suffered by the creditor.

The loyalty clause provided for in the contracts concluded by A... corresponds to a penalty clause in the version of the liquidated damages clause, thus providing for a fixing in advance of the indemnification corresponding to the harm to be compensated, in accordance with the provision of article 810 of the Civil Code.

In this type of contract concluded with telecommunications operators, as well as, for example, in contracts concluded with gyms or with energy sector operators, it is usual to have this type of clauses that impose a minimum permanence in order to be able to compensate the entities for the costs they incur.

As note Conceição Gamito, Frederico Antas and Joana Branco Pires, "…these loyalty periods, contractually established by electronic communications operators, energy sector operators or even by companies operating gyms, are justified (i) by the substantial initial investments that operators must make to provide their clients with the best and most sophisticated products and services at accessible, attractive and competitive prices; (ii) by the costs of customer acquisition and service activation; (iii) by the offer of more advantageous contractual conditions to its clients, namely promotional campaigns, discounts or other benefits."

With respect to electronic communications operators, the possibility of charging a certain amount as indemnification or compensation for termination of the contract during the loyalty period is specifically provided for in the Law of Electronic Communications, approved by Law no. 5/2004, of February 10 (LEC) and in Decree-Law no. 56/2010, of June 1.

In case of termination of the contract before the end of the loyalty period, there is a breach of contract by violation of the loyalty period, whose admissibility is provided for both in the general rules of Civil Law and in the Law of Electronic Communications, which has since been subject to various amendments.

It should be noted that, until the amendments introduced by Law 15/2016, of June 17, the legislator did not define specific limits, nor specific requirements, regarding the delimitation of the indemnificatory penalty clause, thus incumbent upon the parties, as a corollary of the principle of contractual freedom, to fix the amounts owed in case of breach. In article 48, no. 5, of the Law of Electronic Communications, it was only prohibited that such amounts be disproportionate or excessively burdensome and discouraging of a change of service provider by the subscriber.

As provided for in the LEC, without prejudice to the legislation applicable to consumer protection, the offer of public electronic communications networks or services of electronic communications accessible to the public is the subject of a contract that must necessarily specify various aspects.

As is determined in the respective article 48, "2. Information relating to the duration of contracts, including the conditions for their renewal and termination, must be clear, intelligible, provided in durable format and include the following indications:

a) Any loyalty period, the existence of which depends on the grant of any advantage to the consumer, identified and quantified, associated with the subsidy of terminal equipment, installation and activation of the service or other promotional conditions;

b) (…);

c) Any charges arising from early termination of the contract during the loyalty period, at the subscriber's initiative, namely as a consequence of the recovery of costs associated with the subsidy of terminal equipment, installation and activation of the service or other promotional conditions."

It should be noted that the National Regulatory Authority (ARN) may request from companies, in accordance with article 108, that they demonstrate the value conferred by the advantage justifying the loyalty period.

It is especially important to note that Law 15/2016 introduced nos. 11 and 12 to article 48 of the LEC, which determine the following:

"11 - During the loyalty period, the charges to the subscriber resulting from termination of the contract at his initiative cannot exceed the costs that the provider had with the installation of the operation, and it is prohibited to charge any counter-performance as indemnification or compensation.

12 - The charges for early termination of the contract with a loyalty period, at the subscriber's initiative, must be proportional to the advantage granted to him and as such identified and quantified in the contract concluded, and cannot in consequence automatically correspond to the sum of the value of the outstanding provisions at the date of termination."

That is, from the introduction of these two numbers to the LEC, it becomes absolutely clear, if there were any doubts, that the amounts paid by early termination of the contract during the loyalty period correspond to a purely compensatory intent for the costs that the operator had with the installation of the operation and not to a counter-performance of any services, whereby the charging of any other sum as indemnification or compensation is prohibited, stipulating that they must be proportional to the advantage granted.

It is thus important to bear in mind that, both before the said amendment and after such amendment, situations are in question related to compensation for harm.

Thus, we are of the view that we are always – whether before or after the amendment of the rule - faced with compensation for the special conditions attributed to the client, a true penalty clause and not before a counter-performance of a service provision, with no act of consumption to exist which would attribute to the operation nature taxable in VAT, as we shall understand more easily from the analysis of the jurisprudence in this context. On the other hand, it is important to bear in mind that the Decision of the CJEU regarding the preliminary ruling cannot be taken as a solution for the case, merely limiting itself to attempting to provide a solution by returning to the National Courts, as is correct, such a task.

As we have seen, the CJEU, in its Judgment of November 22, 2018, in Proc. C-295/17, came to conclude that "For the reasons set out, the Court of Justice (Fifth Chamber) declares: 1) Article 2, no. 1, letter c), of Council Directive 2006/112/EC, of November 28, 2006, on the common system of value added tax, must be interpreted in the sense that the predetermined amount received by an economic operator in case of early termination of the contract by its client, or due to a reason attributable to the client, of a service provision contract which provides for a minimum binding period, an amount that corresponds to the amount that this operator would have received during the remainder of that period if early termination had not occurred, is the remuneration of a service provision effected for consideration and, as such, subject to that tax.

1. It is not determinant for the qualification of the predetermined amount in the service provision contract, of which the client is liable in case of early termination of that contract, that the fixed amount is intended to dissuade clients from breaching the minimum binding period and to compensate the harm that the operator suffers with the breach of that period, the fact that the remuneration received by a commercial agent from entering into contracts providing for a minimum binding period is higher than that provided for within contracts not providing for such a period, and the fact that the said amount is qualifiable, under national law, as a penalty clause."

A hurried reading of the conclusions just cited would lead to the conclusion of the existence in the concrete case of a service provision taxable in VAT, but that is not what is verified, with it being important to analyze the factual matter in question in depth and with rigor, as well as to carry out an equally in-depth and rigorous analysis of the jurisprudence of the CJEU, namely of the KLM Case invoked by the CJEU as decisive in this context.

We are, in our view, faced with mere compensation not taxable in VAT, there is no act of consumption whatsoever, whereby we entirely agree with the Opinion of Professor Joachim Englisch, consultant to the European Commission for VAT Reform, as well as with the analysis of the A..., S.A. Judgment of the CJEU carried out by Juan Calvo Vérgez, Associate Professor (accredited for Full Professor) of Tax Law at the Universidad de Extremadura, as we shall refer below.

Let us then see what we have just stated, undertaking the task that the CJEU has entrusted to us as a national decision-making body which fully possesses the facts. We are going to subsume such facts to the law, as it is interpreted by the CJEU jurisprudence on the matter.

5. Taxable Operations under VAT

VAT, given its characteristics as a general consumption tax defined at the European Union level, falls, tendentially, on every act of consumption, falling on all phases of the economic circuit, only in the added value generated in each.

Its rules of incidence presuppose, as a general rule, the exercise of an economic activity as such, in the capacity of a taxable person.

In accordance with the VAT Directive, this tax covers two essential categories of facts capable of taxation: "supplies of goods" and "supplies of services".

These operations are subject to VAT when they are effected in the territory of a country by one who exercises in an independent manner activities of production, commercialization or supply of services and exercises liberal professions or equivalent.

The incidence of VAT is thus defined, as regards internal transactions, by the practice of "taxable operations", which are the "supplies of goods" and the "supplies of services", by taxable persons acting as such. Only the conjunction of the objective and subjective elements of incidence qualifies these operations as taxable.

The Value Added Tax Code (VATC), following the then Sixth Directive, delimited the concept of economic activity, distinguishing, for this purpose, activities of production, commerce or supplies of services, including extractive, agricultural activities and those of liberal professions (letter a) of no. 1 of the respective article 2). On the other hand, it considers as taxable persons all those who, in an independent manner and with a habitual character, pursue those activities, as well as those who, in the same independent manner, practice a single taxable operation, provided that operation is connected with the exercise of the said activities, wherever it