Process: 581/2018-T

Date: June 17, 2019

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 581/2018-T) addresses a fundamental VAT deduction dispute involving a banking institution operating as a mixed taxable person (sujeito passivo misto). The claimant, a financial institution engaged in both VAT-taxable financial leasing operations and VAT-exempt credit provision services, challenged its 2017 VAT self-assessments totaling €1,118,615.45. The core legal issue concerns the correct calculation of the pro rata deduction coefficient for mixed-use goods and services under Article 23 of the Portuguese VAT Code (CIVA). The dispute centers on whether the entire leasing rental payment—including both the interest component and the capital amortization component—should be included in the pro rata numerator when calculating VAT deduction rights. The Tax Authority's Circular Letter 30108/2009 permits only the interest component to be included, excluding financial amortization from the calculation base. The claimant argues this interpretation violates Article 23(2) and (4) CIVA, contending that since Article 16(2)(h) CIVA defines the entire rental (capital plus interest) as the taxable value for financial leasing, the same comprehensive approach should apply to deduction calculations. The claimant further argues that Portuguese law, unlike the Sixth VAT Directive Article 17(5), does not grant the Tax Authority discretionary power to impose alternative deduction methods beyond the statutory pro rata formula. The case raises critical questions about the transposition of EU VAT directives into Portuguese domestic law, the limits of administrative interpretation through circular letters, and the application of fundamental VAT principles including fiscal neutrality, legal certainty, and legitimate expectations. The tribunal must determine whether the Tax Authority exceeded its regulatory powers by effectively modifying the statutory pro rata calculation method through administrative guidance.

Full Decision

ARBITRAL DECISION

The arbitrators Maria Fernanda dos Santos Maçãs (arbitrator-president), Miguel Patrício and Nuno Cunha Rodrigues (arbitrators-members), appointed by the Deontological Council of the Centre for Administrative Arbitration (CAAD) to form the Arbitral Tribunal, agree as follows:

I. Report

  1. A..., S.A. (Tax ID/Corporate ID..., with registered office at Rua ..., ..., ...-... Lisbon ("CLAIMANT" or "A..."), pursuant to paragraph a) of article 2(1) and articles 10 et seq. of Decree-Law No. 10/2011 of 20 January, filed, on 21/11/2018, a request for arbitral determination on the legality of the tax acts embodied in the periodic VAT declarations relating to the periods 2017/01, 2017/02, 2017/03, 2017/04, 2017/05, 2017/06, 2017/07, 2017/08, 2017/09, 2017/10, 2017/11 and 2017/12, as well as on the legality of the decision to dismiss the administrative review ("Administrative Review Procedure No. ...2018...").

  2. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Respondent.

2.1. The Claimant did not proceed to appoint an arbitrator, therefore, pursuant to paragraph a) of article 6(2) and paragraph b) of article 11(1) of the RJAT, the President of the Deontological Council of CAAD appointed the signatories as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable period.

2.2. The parties were duly notified of such appointment and did not manifest intent to refuse the appointment of the arbitrators, in accordance with the combined provisions of article 11(1), paragraphs a) and b), of the RJAT, and articles 6 and 7 of the Deontological Code.

2.3. Thus, in accordance with the provisions of paragraph c) of article 11(1) of the RJAT, the Arbitral Tribunal was constituted on 4 February 2018.

  1. To support the request for arbitral determination, the Claimant, which attached an opinion from Professors B... and C... (see Document No. 20 attached to the case file), alleges, in summary, the following:

a) Its VAT self-assessments for the year 2017 (Periods 2017/01, 2017/02, 2017/03, 2017/04, 2017/05, 2017/06, 2017/07, 2017/08, 2017/09, 2017/10, 2017/11 and 2017/12) were based on the provisions of Circular Letter No. 30108 of 30/1/2009, which addresses the right to deduct VAT on goods and services of mixed use by taxpayers who simultaneously carry out activities subject to (financial leasing) and exempt from (credit provision) such tax. In said Circular Letter No. 30108, the Tax Authority considers that, in calculating the deduction percentage (pro rata) applicable to goods and services acquired for mixed use, only the interest component may be included and not the financial amortization that forms part of the total value of rental payments in financial leasing and ALD contracts entered into by the Claimant.

b) The aforementioned tax acts suffer from defects embodied in an incorrect application of the regime governing the right to deduct VAT for mixed taxpayers, established in article 23 of the VAT Code.

c) Contrary to what results from the decision to dismiss the Administrative Review and as follows from the Judgment of the CJEU rendered in the "Banco Mais Case", article 23(2) of the VAT Code does not constitute the transposition, into the domestic legal system, of article 17(5), third paragraph, of the Sixth Directive.

d) Pursuant to paragraph h) of article 16(2) of the VAT Code, it is the entire rental received (that is, capital and interest) that constitutes the taxable value of financial leasing, therefore it is not permissible to "distinguish where the law does not distinguish", when deducting VAT with respect to goods and services that are demonstrably of mixed use.

e) The Judgment of the CJEU rendered in the "Banco Mais Case" does not establish that the Tax Authority, in circumstances such as the present case and in accordance with Circular Letter No. 30108, is authorized to apply or impose application to the present Claimant of a deduction coefficient different from that which results from the application of the pro rata method, in accordance with the provisions of article 23(4) of the VAT Code. In the aforementioned CJEU Judgment it is only stated that article 17(5), third paragraph, paragraph c) of the Sixth Directive does not preclude a Member State from requiring a taxpayer to apply another deduction method deemed more appropriate, although it must be recognized that it was not correctly established that this standard does not have identical or similar correspondence in the VAT Code.

f) It is not true that the provision contained in article 23(2) of the VAT Code (combined with item 3) reproduces, in substance, the rule for determining the right to deduction stated in article 17(5), third paragraph, paragraph c), of the Sixth Directive, which is a derogatory provision from the rule provided in articles 17(5), first paragraph, and 19(1) of that Directive.

g) There is no discernible provision or consecration in article 23 of the VAT Code of the power of the Tax Authority, before a taxpayer that opts for the pro rata method, to impose conditions on the deduction percentage. That is, beyond the precise instructions provided by article 23(4) – which are objective in determining such percentage – the legislator did not authorize the Tax Authority to contradict the deduction percentage as results from item 4, so that, where it is not in issue that the Sixth Directive provides for the possibility of Member States being able to impose on a mixed taxpayer the deduction based on the use of all or part of the goods and services (i.e., that Tax Authorities can even shape the calculation of the pro rata) the truth is that this was not the option followed by the national legislator in the VAT Code.

h) It is true that the Sixth Directive in article 17(5), third paragraph, paragraph c), when referring to the pro rata opened the door to Member States to authorize or require the taxpayer to effect the deduction based on the use of all or part of the goods and services. However, the national legislator preferred not to open that door, establishing nothing in the sense of conferring on its Tax Authority powers with that scope.

i) Mere verification and comparison of what is literally stated in the articles in question in the Sixth VAT Directive and in the VAT Code allows one to establish that the option of the national legislator was not to grant the Tax Authority – as it could have done – the possibility of altering the components of the pro rata calculation in the specific case.

j) The tax acts under scrutiny should be revoked, and this because the Tax Authority would not be authorized to apply or impose application to the Claimant of a deduction coefficient different from the pro rata method, under penalty of violation of the provisions of articles 19, 20 and 23 of the VAT Code and of the principles that characterize VAT (the principle of fiscal neutrality, the principle of equal treatment of taxpayers, the principle of legal certainty and the principle of protection of the legitimate expectations of taxpayers), as well as of the constitutional principles of separation of powers (articles 2 and 111), legality (article 112(5)) and reservation of law (articles 103 and 165(1), paragraph i)), all of the Constitution of the Portuguese Republic.

3.1. The Claimant concludes by requesting the annulment of the tax assessment acts in question, with all legal consequences, namely the reimbursement to the claimant of the sum of € 1,118,615.45 referring to VAT not deducted, plus statutory interest accrued from the date of presentation of the respective periodic declarations relating to periods 2017/01, 2017/02, 2017/03, 2017/04, 2017/05, 2017/06, 2017/07, 2017/08, 2017/09, 2017/10, 2017/11 and 2017/12, respectively, until the date of actual reimbursement.

  1. The Tax and Customs Authority (hereinafter abbreviated as "Respondent" or "Tax Authority") presented a reply and attached, already within the time limit for submissions, the instructional record, invoking, in summary, the following:

a) With respect to financial leasing activities, various economic operators concluded that it was not possible to adopt the real allocation method in accordance with objective criteria given the nature of such activity. Under these circumstances, Circular Letter No. 30108/2009 was issued, extensively cited in the information contained in the instructional record supporting the dismissal decisions referred to in the present case file, in order to clarify the determination of the most precise method possible, in the absence of objective criteria imposed by the real allocation method, for all economic operators in such activity.

b) The wording of article 23(2) of the VAT Code does not prevent the objective criterion from being determined in accordance with the deduction percentage relating to all the resources of the present Respondent, but this criterion must reflect only the amount of income derived from its taxable activity (interest) under penalty of subverting the neutrality that governs the entire system that establishes the right to deduction. Thus, the procedure adopted by the Claimant when making tax self-assessments was the correct one. This methodology is not contrary to European law and is further supported by various jurisprudence of the CJEU.

c) Having regard to the decisions of the Court of Justice of the European Union of 10 July 2014 ("Banco Mais Judgment") and of the Supreme Administrative Court (Judgment of 29 October 2014, rendered in the course of case No. 01075/13, 2nd Section), the Claimant has no grounds whatsoever with respect to the considerations it makes in the petition for arbitral determination, concerning the determination of the pro rata for deduction in question herein, as well as to the concept of turnover that, for this purpose, it wishes to apply and to the considerations it does or does not make on the matter in question.

d) In light of fair competition among the various economic agents in the European Union and in defense of the principle of VAT neutrality regarding its tax burden, the dismissal of the request with respect to the imputed self-assessed tax does not suffer from any illegality, as the Claimant seeks to assert.

e) The Court of Justice of the European Union is the guarantor of the uniform interpretation and application of European Union law in the territory of all Member States, which is implemented through decisions rendered in the context of preliminary ruling proceedings, under article 267 of the TFEU, as is the case with the cited Judgment. Thus, this arbitral jurisdiction is also bound by the interpretation made by the Court with respect to article 17(5) of the Sixth VAT Directive (current article 173(2) of Directive No. 2006/112 EC), in question in the present case, given that article 23 of the VAT Code proceeded with its transposition into our internal law. Furthermore, that interpretation leaves no room for doubt, so that the pro rata calculation that the present Claimant applied in the periods in question was correctly calculated, and the self-assessments it seeks to correct do not suffer from any type of error.

f) The interpretation defended by the Respondent violates, without any room for doubt, the principle of tax neutrality and, more than that principle, the principle of fair competition in the European Union, the true driver of all indirect harmonization and the consequent obligation to introduce VAT by all Member States. Moreover, the principle of neutrality through which "the equality of enterprises before taxation of consumption" is materialized would, equally, be set aside if the thesis defended by the present Claimant were to prevail. For that reason, the interpretation of the Respondent is the one that best materializes the principle of neutrality and the principle of equal treatment to which the "Banco Mais Judgment" gives substance, in a situation similar to that of the present case. Therefore, the initial pro rata calculation performed by the Claimant, in accordance with the interpretation conveyed by the Respondent, merits no censure.

g) The act of dismissal of the administrative review does not suffer from any illegality because, with respect to the leasing and ALD activity, the portion of capital amortization included in the rental payments cannot be part of the terms of the fraction of the pro rata for deduction.

4.1. The Tax Authority concludes by requesting that this request for arbitral determination be judged unfounded, as not proven, and, consequently, the Respondent absolved of all claims with the legal consequences thereof.

  1. As no exceptions were invoked and there were no disputed matters of fact, as the questions to be decided were matters of law, the Arbitral Tribunal, through order of 12 May 2019, considered that witness testimony was not warranted and dispensed with the hearing provided for in article 18 of the RJAT, which it did pursuant to the principles of autonomy in case management and to promote the celerity, simplification and informality thereof. The date of 4 August 2019 was also set for rendering the arbitral decision.

II. Case Management

  1. The arbitral tribunal was regularly constituted and is materially competent, as provided in articles 2(1), paragraph a), and 4, both of the RJAT.

  2. The parties enjoy legal personality and capacity, are legitimate and are represented (see articles 4 and 10(2) of the same statute, and articles 1 to 3 of Ordinance No. 112-A/2011 of 22 March).

  3. On 12/3/2019, an arbitral order was rendered notifying the Claimant to respond, if it so wished, to the request for suspension of proceedings that had been raised by the Respondent in its Reply (see §§1 to 4).

  4. Through petition of 25/3/2019, the Claimant came to set forth and request, in summary, the following:

9.1. "Informing the Respondent that on the matter in question in the present case, and by reference to another arbitral decision (Case No. 335/2018-T), in which the Taxpayer had also been given favorable consideration, it was decided, after "more careful reflection", to appeal that decision to the Plenary of the Section of the Supreme Administrative Court on the grounds of conflict of judgments on the same legal issue and invoking "similitude of the situation in question with the factuality of the mentioned case", it now requests that the present case await the rendering of the uniformizing judgment to be rendered by the Plenary of the Section of the Supreme Administrative Court."

9.2. Considering "what is requested by the Tax Authority – suspension of the present proceedings – the Claimant considers, with due respect, that such request cannot be granted, for the following reasons:"

9.2.1. "First, for manifestly lacking legal basis, given that there is no provision that provides that while an Arbitral Proceeding is pending such proceedings shall be suspended only and solely because an appeal has been filed (even though to the Plenary of the Section of the Supreme Administrative Court) in another case and of which the present party is not even part. Especially since nothing assures us that such appeal even meets the requirements for it to be admitted/decided (recalling that since the Claimant is not a party to the same, it is unaware of what the real grounds invoked by the Tax Authority are); Second, because, with due respect, it understands that the request formulated by the Respondent goes precisely against one of the founding principles of tax arbitration: the celerity of its decisions, which, by force of what is established in article 21 of the RJAT, must be decided within 6 months, counting from the date of constitution of the arbitral tribunal, although with the possibility of that term being extended up to a limit of 6 months; and Third, because the Respondent, if the decision is not favorable to it and so deems, is not prevented from, under the legally provided terms, appealing from the decision that may be rendered by this Tribunal."

9.3. "In light of the foregoing – especially the manifest lack of legal basis – the Claimant considers that the present case should not await a possible decision to be rendered by the Plenary of the Section of the Supreme Administrative Court within the scope of Case .../19.4B..., concerning the appeal filed by the Tax Authority from the decision rendered in Arbitral Case No. 335/2018-T."

  1. Through arbitral order of 12/4/2019, the Tribunal decided to deny the aforesaid request for suspension of proceedings, and the case shall proceed on its course, for the reasons reproduced here:

10.1. "In its reply, the Tax Authority requested suspension of proceedings once, given the conflict of judgments on the rules for determining the right to deduct by credit institutions when they simultaneously carry out Leasing or ALD activities, and having appealed to the Plenary of the Section of the Supreme Administrative Court in case No. 335/2018-T of CAAD (proceeding under No. .../19.4B.., for rendering of a uniformizing judgment), such suspension would allow "better application of the law to the specific case.""

10.2. "The Claimant, exercising its right of response, came to oppose such suspension invoking, in essence, that i. It lacked legal basis, especially as it concerned a case in which the Claimant is not a party and is unaware of the grounds of the appeal, and because the invoked conflict of judgments was not even certified; ii. It went against the principle of procedural celerity of the arbitral jurisdiction; and iii. The Tax Authority could always appeal from the decision that may be rendered by this arbitral tribunal."

10.3. "The only issue on which it is important for the Tribunal to take a position at this time is whether proceedings should be suspended until the Supreme Administrative Court pronounces itself – first on the conflict of judgments (article 284 of the Code of Administrative Procedure and Tax Procedure) and, then (should it confirm that conflict) on the understanding that should prevail regarding such legal issue, as requested by the Tax Authority."

10.4. "This Tribunal considers that the answer is no, notwithstanding that, contrary to what the Claimant invoked, a legal basis for suspension can be invoked – that of article 272(1) of the Code of Civil Procedure (Suspension by order of the judge or by agreement of the parties), subsidiarily applicable."

10.5. The "possibility of there being a uniformizing intervention by the Plenary of the Supreme Administrative Court in a matter in which – it will be admitted – the jurisprudence of CAAD differs from that of the Supreme Administrative Court may constitute the other justified reason that the law admits."

10.6. "In any event, and also taking into account that such divergence is not even recognized, the Tribunal understands that the two other reasons invoked by the Claimant apply in this case: not only could suspension of the present proceedings impede its timely decision, but the decision it may render would not be prevented from being modified, should that prove justified, therefore always ensuring the "best application of the law to the specific case.""

10.7. "Suspending proceedings for that purpose would, therefore, be a "useless act", prohibited under article 130 of the Code of Civil Procedure, subsidiarily applicable."

  1. Only the Taxpayer submitted allegations.

Given the foregoing, and there being no defects, it is necessary to proceed, next, to the merits of the request.

III. Question to be decided

  1. In its petition for arbitration, the Claimant formulates the following essential question for which it requests the Tribunal's examination:

12.1. The criterion for determination of the pro rata (disregarding in the numerator the financial amortizations relating to financial leasing contracts and the alienation/disposal values for destruction of leased assets), by virtue of the position set forth in Circular Letter No. 30108, of 30/1/2009, of the Tax and Customs Authority, namely its point 9, suffers from illegality, by constituting a criterion not provided by law?

IV. Merits

IV.1. Factual Basis

  1. With relevance for the examination and decision of the merits question, the following facts are given as established and proven:

A. On 9/3/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of January 2017 – which was subsequently replaced by the declaration submitted on 29 March 2017 (see Document No. 1 attached to the case file).

B. On 4/4/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of February 2017 – which was subsequently replaced by the declaration submitted on 10/4/2017 (see Document No. 2).

C. On 10/4/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of March 2017 – which was subsequently replaced by the declaration submitted on 3/5/2017 (see Document No. 3).

D. On 26/5/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of April 2017 – which was subsequently replaced by the declaration submitted on 9/6/2017 (see Document No. 4).

E. On 10/7/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of May 2017 – which was subsequently replaced by the declaration submitted on 20/7/2017 (see Document No. 5).

F. On 20/7/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of June 2017 (see Document No. 6).

G. On 5/9/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of July 2017 – which was subsequently replaced by the declaration submitted on 7/9/2017 (see Document No. 7).

H. On 8/9/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of August 2017 – which was subsequently replaced by the declaration submitted on 26/9/2017 (see Document No. 8).

I. On 10/10/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of September 2017 – which was subsequently replaced by the declaration submitted on 19/10/2017 (see Document No. 9).

J. On 14/11/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of October 2017 (see Document No. 10).

L. On 18/12/2017, the Claimant submitted, via Internet, the periodic VAT declaration for the month of November 2017 (see Document No. 11).

M. On 25/1/2018, the Claimant submitted, via Internet, the periodic VAT declaration for the month of December 2017 – which was subsequently replaced by the declaration submitted on 7/2/2018 (see Document No. 12).

N. The Claimant is, for VAT purposes, a mixed taxpayer (it carries out operations that grant the right to deduction and operations that do not grant the right to deduction).

O. Throughout the fiscal year 2017, the Claimant was deducting, through the aforementioned periodic declarations, VAT based on the calculation of the provisional pro rata (in this case, 15%), corresponding to the definitive pro rata for fiscal year 2016.

P. However, in the last declaration of the year 2017 (declaration relating to period 2017/12), presented on 7/2/2018 (see Document No. 12), the Claimant, in compliance with the provisions of article 23(6) of the VAT Code, corrected the amounts deducted throughout the year by force of the pro rata determined for fiscal year 2017 (definitive pro rata for 2017).

Q. In determining the pro rata, the present Claimant should have considered, both in the numerator and in the denominator, namely: i) the financial amortizations relating to financial leasing contracts; and ii) the alienation/disposal values for destruction of leased assets. However, in those same declarations, the Claimant, in determining the pro rata calculation, excluded from both the numerator and the denominator of the fraction the financial amortizations relating to financial leasing contracts and the alienation/disposal values for destruction of leased assets.

R. Had the financial amortizations relating to financial leasing contracts and the alienation/disposal values for destruction of leased assets not been excluded from both the numerator and the denominator of the fraction, the provisional pro rata would have been fixed at 61% (definitive value for 2016 and provisional for 2017). The Claimant thus reduced its pro rata from the aforementioned 61% to 15% (definitive value for 2016 and provisional for 2017), adopting the criterion imposed by the Tax Authority – see calculation maps contained in Documents No. 14 and 15 attached to the case file.

S. Consequently, the Claimant saw the amount it could deduct decrease from € 2,132,360.69 to € 524,350.99 (see Document No. 16 attached).

T. In the periodic VAT declaration for December 2017, being the last declaration of that year, the Claimant corrected the amounts deducted throughout the year by force of the application of the definitive pro rata for 2017, which changed from 15% (definitive pro rata for 2016) to 11% (definitive pro rata for 2017), according to the criterion imposed by the Tax Authority, and from 61% (definitive pro rata for 2016) to 43% (definitive pro rata for 2017), according to the Claimant's criterion (see Documents No. 17 and 18 attached).

U. Thus, with reference to fiscal year 2017, the Claimant saw the amount of VAT it could deduct decrease from € 1,503,139.50 (corresponding to a definitive pro rata for 2017 of 43%) to € 384,524.06 (corresponding to a definitive pro rata for 2017 of 11%) – see Document No. 16 attached. The difference between these two amounts constitutes the value now claimed by the Claimant.

V. On 5/3/2018, the Claimant presented an Administrative Review (to which was assigned the number ...2018...), with reference to the VAT self-assessments relating to periods 2017/01, 2017/02, 2017/03, 2017/04, 2017/05, 2017/06, 2017/07, 2017/08, 2017/09, 2017/10, 2017/11 and 2017/12.

X. On 30/8/2018, the Tax Authority rendered a decision to dismiss the aforementioned Administrative Review, which was notified by registered mail, through Letter of 31/8/2018 – see Document 13 attached.

Z. The Claimant filed its request for constitution of an arbitral tribunal on 21/11/2018.

IV.2. Unproven Facts

  1. There are no other facts with relevance for examination of the merits of the case that have not been proven.

IV.3. Explanation for the Determination of Factual Basis

  1. The Tribunal need not pronounce on all details of the factual basis that was alleged by the parties, and it falls to it the duty to select the facts that are relevant to the decision and to distinguish the matter it considers proven from that which it considers not proven (see article 123(2) of the Code of Administrative Procedure and Tax Procedure, and article 607(3) of the Code of Civil Procedure, applicable by virtue of article 29(1), paragraphs a) and e), of the RJAT).

  2. In this manner, the facts pertinent to the judgment of the case are selected and shaped in function of their legal relevance, which is established in attention to the various solutions for the object of the dispute under applicable law (see article 596(1) of the Code of Civil Procedure, applicable by virtue of article 29(1), paragraph e), of the RJAT).

  3. The conviction of the Arbitral Tribunal was founded on the free examination of the positions assumed by the Parties (regarding factual matters) and on the content of the documents attached to the case file, which were not disputed by the Parties, as well as on the analysis of the administrative file attached by the Respondent.

IV.4. Matter of Law

IV.4.1. Briefly: The Positions of the Parties

  1. The Claimant, in the assessments impugned, applied the rule contained in point 9 of Circular Letter No. 30108, under the heading: "VAT - Right to Deduction Rules for determining the right to deduct by credit institutions when they simultaneously carry out Leasing or ALD activities." – having in calculating the deduction pro rata relating to goods of mixed use excluded from both the numerator and the denominator of the fraction the rental payments from financial leasing contracts the financial amortizations and alienation/destruction values of the leased assets, on the grounds that it understood itself not to be able to apply, pursuant to point 8 of Circular Letter, the real allocation method based on objective criteria that would allow determination of the degree of use of such goods and services, in order to determine the amount of VAT to be deducted with respect to the ensemble of activities.

  2. It did so, it alleges, compelled by the instructions contained in that Circular Letter, and considering the position of the Tax Authority in inspections carried out in previous fiscal years (later transposed into the aforesaid Circular Letter) and, also, in the well-founded fear that the Tax Authority would contest the criterion adopted for determining the pro rata in the VAT declarations.

  3. The Claimant impugned the assessments by way of administrative review and, thereafter, by way of submission of administrative appeal, both dismissed, defending, in summary, the following:

  • since financial leasing operations are subject to VAT for the full value of rental payments, pursuant to paragraph h) of article 16(2) of the VAT Code, there is no grounds for the amount of financial amortizations and compensations not to be included in turnover for purposes of determining the pro rata (see articles 75 and 76 of the initial petition);

  • considering the national provisions that transposed the VAT Directive into the national legal system (namely the VAT Code), the Tax Authority is not conferred, by administrative means, any prerogative intended for altering the method of calculation of the percentage of VAT deduction authorized for goods of mixed use, as the national legislator did not make use of the faculty that the CJEU understands is available to Member States of limiting the values to be inserted in the numerator and denominator of the fraction and articles 23(2) and (3) of the VAT Code only authorize the Tax Authority to impose special conditions in the context of deduction according to real allocation (see articles 78 to 80 of the initial petition);

  • the Judgment of the CJEU rendered in the case - Banco Mais - does not establish whether Portuguese law (article 23 of the VAT Code) provides or not mechanisms that allow the Tax Authority to impose other methods of VAT deduction for goods and services of mixed use and that the VAT Code does not contain any provision (including article 23(2)) that corresponds to article 17(5), third paragraph, paragraph c) of the Sixth Directive (see article 93 of the initial petition);

  • thus, being true that the Sixth Directive allows the national legislator to authorize or require the taxpayer to effect deduction based on the use of all or part of the goods and services, the truth is that the national legislator preferred, however, not to make use of that possibility (see articles 111 to 114 of the initial petition);

  • as there is no provision in article 23 of the VAT Code the legal possibility, in light of the text of the standard, for the Tax Authority, before a taxpayer that opts for the pro rata method, to impose conditions on the deduction percentage, therefore the jurisprudence contained in the CJEU Judgment in the Banco Mais case has no practical application with respect to the tax acts in issue in the present case (see articles 115 and 121 of the initial petition);

  1. The Tax Authority, in its reply, came to sustain, in summary, the following:

  • it considers that, in this case, there is no error in the tax self-assessment that the Claimant seeks to attribute to it;

  • it says that with respect to financial leasing activities it is concluded that it is not possible to adopt the real allocation method in accordance with objective criteria given the nature of such activity, which is why the aforesaid Circular Letter was issued, in order to clarify the determination of the most precise method possible (in its words), considering the absence of objective criteria imposed by the real allocation method (see article 25 of the reply). And that, although article 23(2) of the VAT Code does not prevent the objective criterion from being determined in accordance with the deduction percentage relating to all the resources of the Claimant, it is nonetheless certain, it says, that this criterion had to reflect only the amount of income derived from its taxable activity (interest) under penalty of subverting the neutrality that governs the entire system that establishes the right to deduction (see article 26 of the reply);

  • so the procedure adopted by the Claimant when making tax self-assessments was the correct one;

  • what happened is that at a moment subsequent to the submission of the tax declarations, the Claimant sought to abandon that criterion that it had used with respect to the exercise of the right to deduct the tax supported in resources of mixed use, coming to recalculate a deduction percentage of 59%, using the same pro rata deduction method, but including the full value of the rental, without expunging the portion referring to capital amortization (see article 29 of the reply);

  • and that called upon to decide in last instance a dispute that opposed Banco Mais to the Treasury, the Supreme Administrative Court submitted to the CJEU the following preliminary question: "In a financial leasing contract, in which the customer pays the rental, which is composed of financial amortization, interest and other charges, should that paid rental enter, in its full meaning, into the denominator of the pro rata, or, instead, should only the interest be considered, as these are the remuneration, the profit that the banking activity obtains from the leasing contract?"

  • as a consequence of which that Court decided that "under these circumstances, the calculation of the right to deduct in application of the method based on turnover, which takes into account the amounts relating to the portion of rental payments that customers pay and which serve to offset the provision of vehicles, leads to determining a pro rata for VAT deduction less precise than that resulting from the method applied by the Treasury, based only on the portion of rental payments corresponding to interest which constitute the counterpart for the financing and management costs of contracts borne by the financial lessor, since these two activities constitute the essential use of goods and services of mixed use intended for carrying out financial leasing operations for the automobile sector."

  • And that on the same subject the Supreme Administrative Court has also already pronounced, by Judgment of 29/10/2014, rendered in the course of case No. 01075/13, 2nd Section, where it was expressly decided: "Banks, whose type of business also comprises the conclusion of Leasing and ALD contracts, e.g. of motor vehicles, must include in the numerator and denominator of the fraction used to establish a single and same pro rata of deduction for all goods and services of mixed use, only the portion of the rental payments made by customers in the context of those contracts, which corresponds to interest."

  • it concludes, saying that the arbitral jurisdiction is bound by the interpretation made by the CJEU, which is the guarantor of the uniform interpretation and application of EU law in the territory of all Member States, regarding article 17(5) of the Sixth VAT Directive (current article 173(2) of Directive No. 2006/112 EC), in issue in the present case, given that article 23 of the VAT Code, it says, proceeded with its transposition into our internal law (see article 43 of the reply).

  1. Let us then examine this.
IV.4.2. Analysis of the Controversial Question

  1. The controversial question in the present case was the subject of diverse jurisprudence rendered both by CAAD and by administrative courts.

  2. Thus, we will take into consideration the decisions rendered by CAAD No. 309/2017-T, 311/2017-T, 312/2017-T, 335/2018-T and 339/2018-T, as well as the Judgment of the Supreme Administrative Court rendered on 29 October 2014, in the course of case No. 01075/13, 2nd Section.

  3. Let us then examine this.

  4. Directive No. 2006/112/EC of 28 November 2006, relating to the common system of value added tax, provided, for the matter of interest for these proceedings, in chapter 2 the following:

"CHAPTER 2
Pro rata deduction
Article 173

  1. With respect to goods and services used by a taxable person to carry out both transactions with the right to deduction, referred to in articles 168, 169 and 170, and transactions without the right to deduction, deduction is permitted only with respect to the portion of VAT proportional to the amount relating to the first category of transactions.

The pro rata deduction is determined, in accordance with articles 174 and 175, for the ensemble of transactions carried out by the taxable person.

  1. Member States may take the following measures:

a) Authorize the taxable person to determine a pro rata for each sector of its activity, if it maintains separate accounting records for each of those sectors;

b) Require the taxable person to determine a pro rata for each sector of its activity and to maintain separate accounting records for each of those sectors;

c) Authorize or require the taxable person to effect deduction based on the allocation of all or part of the goods and services;

d) Authorize or require the taxable person to effect deduction, in accordance with the rule established in the first paragraph of article 1(2), with respect to all goods and services used in the transactions referred to therein;

e) Establish that VAT that cannot be deducted by the taxable person not be taken into consideration, when the respective amount is insignificant."

  1. Given that, pursuant to its article 174:

"Article 174

  1. The pro rata deduction results from a fraction that includes the following amounts:

a) In the numerator, the total amount of annual turnover, net of VAT, relating to transactions that grant the right to deduction in accordance with articles 168 and 169;

b) In the denominator, the total amount of annual turnover, net of VAT, relating to the transactions included in the numerator and to transactions that do not grant the right to deduction.

Member States may include in the denominator the amount of subsidies that are not directly linked to the price of deliveries of goods or provisions of services referred to in article 73."

  1. For its part, the VAT Code, in its article 23, under the heading "Methods of deduction relating to goods of mixed use", provides:

1 - When the taxable person, in the exercise of its activity, carries out transactions that grant the right to deduction and transactions that do not grant that right, pursuant to article 20, the deduction of the tax supported in the acquisition of goods and services that are used in the carrying out of both types of transactions is determined as follows:

a) In the case of a good or service partially used in the carrying out of transactions not arising from the exercise of an economic activity provided in paragraph a) of article 2(1), the non-deductible tax resulting from that partial use is determined pursuant to item 2;

b) Without prejudice to the provision of the preceding paragraph, in the case of a good or service used in the carrying out of transactions arising from the exercise of an economic activity provided in paragraph a) of article 2(1), part of which does not grant the right to deduction, the tax is deductible in the percentage corresponding to the amount of annual transactions that give rise to deduction.

2 - Notwithstanding the provision of paragraph b) of the preceding number, the taxable person may effect deduction according to the real allocation of all or part of the goods and services used, based on objective criteria that allow determination of the degree of use of such goods and services in transactions that grant the right to deduction and in transactions that do not grant that right, without prejudice to the Director-General of Taxes being able to impose special conditions on it or to cease such procedure in the event that it is verified that they cause or that they may cause significant distortions in taxation.

3 - The tax administration may require the taxable person to proceed in accordance with the provision of the preceding number:

a) When the taxable person carries out distinct economic activities;

b) When the application of the procedure referred to in item 1 leads to significant distortions in taxation.

4 - The deduction percentage referred to in paragraph b) of item 1 results from a fraction that comprises, in the numerator, the annual amount, tax excluded, of transactions that give rise to deduction pursuant to article 20(1), and, in the denominator, the annual amount, tax excluded, of all transactions carried out by the taxable person arising from the exercise of an economic activity provided in paragraph a) of article 2(1), as well as untaxed subsidies that are not equipment subsidies.

  1. The Claimant is a credit institution covered by the General Regime of Credit Institutions and Financial Companies that carries out financing and credit provision operations, which are exempt from VAT and do not allow the right to deduct tax, and financial leasing operations, which are subject to and not exempt from VAT and grant the right to deduction, thus being characterized for that purpose as a mixed taxpayer.

  2. In the case of financial leasing operations the consideration is realized in the rental payments which the lessee obligates itself to pay for the provision of the leased assets and which include a portion corresponding to interest and another referring to financial or capital amortization.

  3. In this context the Claimant proceeded in accordance with what is provided for in Circular Letter No. 30108.

  4. In points 8 and 9 of that administrative instruction one can read:

"8. In that sense, considering that the determination of the VAT deductible according to the application of the general pro rata established in article 23(4) of the VAT Code is likely to cause unjustified advantages or prejudices from the lack of coherence of the variables used in it, that is, it may lead to 'significant distortions in taxation', the taxable persons who, within the scope of financial activities, carry out Leasing or ALD operations, must use, pursuant to article 23(2) of the VAT Code, real allocation based on objective criteria that allow determination of the degree of use of such goods and services, in order to determine the amount of VAT to be deducted with respect to the ensemble of activities.

  1. In the application of the real allocation method, pursuant to the preceding number and whenever it is not possible to apply objective criteria for allocating common costs, a specific allocation coefficient must be used, taking into account the amounts involved, and only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity should be considered in calculating the deduction percentage. In this case, the aforementioned percentage does not result from the application of article 23(4) of the VAT Code."

  2. That is, in accordance with this administrative instruction, the method elected for the deduction of VAT in this type of activity is the real allocation method, and not the pro rata deduction method, as would result from the application of article 23(4) of the VAT Code, based on "all transactions carried out by the taxable person arising from the exercise of an economic activity."

  3. In the case at issue the deduction of VAT with respect to goods used indifferently both in the taxed activity (as is financial leasing), as in the tax-exempt economic activity of the Claimant (as happens with credit provision) is in question.

  4. As we have seen above in the VAT Directive - Directive No. 2006/112/EC of the Council of 28-11-2006, the same postulates that, with respect to means of mixed use, used indifferently "to carry out both transactions with the right to deduction (...) and transactions without the right to deduction, deduction is permitted only with respect to the portion of VAT proportional to the amount relating to the first category of transactions" (article 173(1) of this Directive).

  5. In the case of a good or service used in the carrying out of transactions arising from the exercise of an economic activity provided in paragraph a) of article 2(1) of the VAT Code "the tax is deductible in the percentage corresponding to the amount of annual transactions that give rise to deduction," pursuant to paragraph b) of article 23(1) of the same Code.

  6. This percentage of deductible tax, also known as the "pro rata deduction" method, results, in general, from a fraction that includes in the numerator, the total amount of annual turnover, net of VAT, relating to transactions that grant the right to deduction and in the denominator, the total amount of annual turnover, net of VAT, relating to the transactions included in the numerator and to transactions that do not grant the right to deduction (article 174 of the VAT Directive and article 23(4) of the VAT Code).

  7. Notwithstanding this being the preferred method adopted by the Portuguese legislator, the taxable person may opt to "effect deduction according to the real allocation of all or part of the goods and services used, based on objective criteria that allow determination of the degree of use of such goods and services in transactions that grant the right to deduction and in transactions that do not grant that right, without prejudice to the Director-General of Taxes being able to impose special conditions on it or to cease such procedure in the event that it is verified that they cause or that they may cause significant distortions in taxation" (article 23(2) of the VAT Code).

  8. Here it is important to note that the real allocation method is distinct from the deduction percentage method.

  9. Paragraph c) of article 173(2) of the VAT Directive does not define what this method consists of, but upon reviewing this paragraph it clearly results its distinction from the pro rata method. To the latter method paragraphs a) and b) of article 173 of the VAT Directive refer, merely to permit Member States to authorize the taxable person to determine a pro rata for each sector of its activity, if it maintains separate accounting records for each of those sectors.

  10. One is therefore facing a method different from pro rata deduction, although the VAT Directive does not say in detail what this real allocation method consists of, it is clear that it separates it from the deduction percentage method or pro rata.

  11. In the case at issue, one is facing a situation in which there is no controversy between the Parties regarding the unfeasibility of using the real allocation method, based on objective criteria, the Claimant having used in the impugned assessments this "specific allocation coefficient" determined in the manner provided for in point 9 of the aforesaid Circular Letter, considering in calculating the deduction percentage only the annual amount corresponding to interest and other charges relating to Leasing or ALD activity, excluding from both the numerator and the denominator of the fraction the financial amortizations relating to financial leasing contracts and the alienation/destruction values of leased assets, but convinced that it suffers from the defect of illegality, because it emanates from an administrative instruction that imposes on it conditions not provided by law, since it elected the pro rata deduction method, pursuant to the provisions of article 23(4) of the VAT Code, and not the real allocation method, and ultimately it is that question that it is important to resolve in these arbitral proceedings.

  12. The Tax Authority, in its reply, grounds its position and the legality of the aforesaid administrative instruction in the jurisprudence of the CJEU - case No. C-183/13 (Banco Mais), rendered in the context of a preliminary ruling - which, in its understanding, has already pronounced on a situation of this type, concerning a banking institution that carried out financial leasing activities, which grant the right to deduction, and other financial activities, which do not grant such right, alleging that, based on this decision, the CJEU considered that Member States may authorize or require the taxable person to effect deduction based on the use of all or part of the goods and services and that for calculating such deduction only interest should be taken into account, when the use of goods and services is above all determined by financing and contract management, an aspect, it must be said, that the Tax Authority at no moment concretizes or proves as corresponding to the situation of the Claimant.

  13. Proceeding.

  14. The Claimant opted to elect the pro rata deduction method as being, in its understanding, the one that presented the highest degree of reliability, finding no valid legal reasons to justify the exclusion of the aforementioned components from its calculation, and moreover alleging, equally that the jurisprudence of the Judgment (Banco Mais) does not call into question this same conclusion, as in its understanding, supported with an Opinion attached to the case file, from the text of article 23 of the VAT Code, it can (and should) be established that (contrary to what the CJEU came to take as certain, only and solely based on what the Representative of the Portuguese State alleged in the case) it does not correspond to the mere transposition of the VAT Directive, there not being provided in national legislation the possibility – conferred by the Directive, as the CJEU came to clarify, and which naturally is no longer questioned – of Member States being able to mitigate the pro rata, since that option was not followed by the Portuguese State, and, on the other hand, the imposition of conditions on deduction is only provided for in national legislation in the context of the real allocation method, when the taxable person carries out distinct economic activities and when the application of the pro rata method leads to significant distortions in taxation.

  15. Indeed, the Tribunal understands that the Claimant is correct, insofar as article 23 of the VAT Code does not confer power on the Tax Authority to impose on a taxable person that opts for the pro rata method, added conditions to the determination of the deduction percentage, beyond the normative command imposed by article 23(4) of the VAT Code, a provision that contains objective requirements to be observed in determining that percentage, nor can one conclude from careful reading of the decision of the CJEU rendered in the case - Banco Mais - that Portugal will have transposed into national legislation the possibility of obligating a taxable person, of the type of financial institution, when it also carries out financial leasing activities, to establish a single pro rata of deduction for all its goods and services of mixed use, considering in the numerator and denominator of the fraction only the portion of the rental that corresponds to interest, as that was not the option of the Portuguese legislator.

  16. Therefore the Claimant is correct when it refers that, in this case, there is an error of interpretation of Portuguese internal law that affects the decision of the CJEU, it being verified, as it says, "a manifestly wrong factual premise."

  17. It must be said that the decision rendered by the learned Judgment of the Supreme Administrative Court in case No. 01075/13, 2nd Section, invoked by the Respondent in its Reply, which analyzed the aforesaid CJEU decision, does not allow one to conclude to its opposition to the present arbitral decision, since in the same one can read, citing:

"Certainly, not unaware to the CJEU of the provisions of article 23 of the VAT Code, because it cites it expressly, and that it was based on the interpretation that the National Court made of article 23(4), to judge the impugnation successful, it identified the question to be decided as that of knowing whether a Member State can require a bank that carries out, namely, financial leasing activities to include, in the numerator and denominator of the fraction used to establish a single and same pro rata of deduction for all its goods and services of mixed use, only the portion of rental payments made by customers, in the context of its leasing contracts, that corresponds to interest."

  1. There is no doubt that a Member State can require a mixed taxable person, of the type of a Bank or financial institution, to proceed as above stated by the CJEU, but a Member State (in this case Portuguese) can only do so by legislative means, as this is required by the primacy of the Rule of Law, and not by way of a unilateral administrative understanding imposed by the Tax Administration, and that analysis the aforesaid Judgment of the Supreme Administrative Court did not undertake, so one cannot even speak of the existence of contradiction between that learned decision and the present arbitral decision on the same fundamental legal issue under examination in the present arbitral proceedings.

  2. Without prejudice to the decisions rendered by the CJEU in preliminary ruling proceedings being binding on national courts, it is important to note that, pursuant to article 267 of the TFEU, the competence of the CJEU in preliminary ruling proceedings is limited to the "interpretation of the Treaties," and to "the validity and interpretation of acts adopted by the institutions, organs or bodies of the Union." Which means that such competence does not extend to the interpretation of article 23 of the VAT Code, in the part in which it embodies options of the national legislator in matters explicitly left to its discretionary criterion by Directive No. 2006/112/EC of the Council of 28-11-2006.

  3. Also cannot be omitted that paragraph c) of article 173(2) of that Directive is not a normative provision of direct application, as it is directed to "Member States," with a view to "authorizing or requiring the taxable person to effect allocation based on the use of all or part of the goods and services."

  4. Now, being such option directed to the legislator, in honor of the principles of legality and reservation of law the implementation of that optional provision of Directive No. 2006/112/EC of the Council of 28-11-2006 can only be legitimately effected by legislative means.

  5. In sum and concluding:

  6. The two only methods of deduction provided for goods of mixed use used in carrying out transactions arising from the exercise of an economic activity provided in article 23 of the VAT Code are:

  • the application of a "percentage corresponding to the amount of annual transactions that give rise to deduction" (article 23(1)(b) of the VAT Code with reference to item 4);

  • "the real allocation of all or part of the goods and services used, based on objective criteria that allow determination of the degree of use of such goods and services in transactions that grant the right to deduction and in transactions that do not grant that right" (article 23(2) of the VAT Code).

  1. Pursuant to article 23(3) of the same article 23, when the application of the method provided for in item 1 (which for those used in carrying out transactions arising from the exercise of an economic activity is the deduction percentage, as referred to in paragraph b) of item 1) "leads to significant distortions in taxation," the Tax Authority may require the taxable person to proceed in accordance with the provision of item 2.

  2. And examining this item 2, the same only provides for "the real allocation of all or part of the goods and services used, based on objective criteria that allow determination of the degree of use of such goods and services in transactions that grant the right to deduction and in transactions that do not grant that right."

  3. It is manifest that the application of a percentage, whatever it may be, as the Respondent does, in the case at issue, does not allow "determination of the degree of use of such goods and services in transactions that grant the right to deduction" and, therefore, cannot constitute an objective criterion for purposes of application of article 23(2) of the VAT Code.

  4. Therefore the Tax Authority's imposition of operating with a pro rata different from that defined in article 23(4) of the VAT Code appears to lack legal foundation in national law. It is not a Circular Letter, which is no more than an internal instruction that only binds the services, but which has no external effect, that can substitute itself for the law, imposing on taxable persons what the law does not provide.

  5. Whence, it is concluded that the deduction percentage method can only be used in situations in which it is directly provided for, in this case, in paragraph b) of article 23(1) of the VAT Code, and this method is that contained in article 23(4) of the same code and no other.

  6. The possibility conferred by article 173(2)(c) of Directive No. 2006/112/EC of the Council of 28-11-2006 on its Member States to "require the taxable person to effect deduction based on the allocation of all or part of the goods and services" is not ignored, but such possibility was not transposed into the national VAT Code, that is, the possibility of application of a deduction percentage different from that indicated in article 23(4) of the same code.

  7. And, that possibility not having been accepted by legislative means, the Tax Authority cannot apply it, as it is subordinate to the principle of legality in all its actions (articles 266(2) of the Constitution and 55 of the General Tax Law).

  8. It follows from all the foregoing that the imposition of use of the "specific allocation coefficient" indicated in point 9 of Circular Letter No. 30108 suffers from the defect of violation of law, by offense against the principle of legality, therefore proceeding with the request for arbitral determination.

  9. Consequently, the impugned assessments suffer from the defect of violation of law, due to incorrect application of the method for calculating the pro rata deduction, which justifies their annulment, and also of the decision to dismiss the administrative review.

  10. The Claimant comes to request the reimbursement of the amount paid under the act of assessment in issue in the proceedings, plus statutory interest.

  11. In the case of the proceedings, it is manifest that, as a consequence of the illegality of the assessment acts, for the reasons better set forth in this decision, there is grounds for reimbursement of the tax paid by the Claimant, by force of the provisions of the aforementioned articles 24(1)(b) of the RJAT and 100 of the General Tax Law, as such is essential to "reestablish the situation that would exist if the tax act subject of the arbitral decision had not been carried out."

  12. With respect to indemnificatory interest, it is also clear in the proceedings that the illegality of the tax assessment acts impugned is directly attributable to the Respondent.

  13. The substantive regime of the right to indemnificatory interest is regulated by article 43 of the General Tax Law, which establishes, in what is relevant here:

Article 43

Payment of undue tax liability

1 – Indemnificatory interest is due when it is determined, in administrative review or judicial impugnation, that there was error attributable to the services which resulted in payment of the tax liability in an amount greater than that legally owed.

2 – There is also considered to be error attributable to the services in cases in which, although the assessment is made based on the declaration of the taxpayer, the latter has followed, in its completion, the generic guidance of the tax administration, duly published. (underlining ours).

  1. The error in the assessments is attributable to the Tax Authority, pursuant to the provisions of item 2 of this article, as the Claimant followed the administrative guidance issued by the Respondent, contained in Circular Letter No. 30108, of 30.01.2009.

  2. Consequently the Claimant has the right to receive indemnificatory interest, pursuant to the provisions of articles 43(1) of the General Tax Law and 61 of the Code of Administrative Procedure and Tax Procedure.

  3. Indemnificatory interest must be paid to the Claimant from the date on which it made the respective payment of the tax in question in the proceedings until the full reimbursement of the amount paid, at the statutory rate.

V. DECISION

Therefore, this Arbitral Tribunal decides as follows:

a) To judge the request for arbitral determination as well-founded and, consequently, to annul the tax acts in question and the decision to dismiss the Administrative Review as to the amount of € 1,118,615.45, referring to VAT not deducted relating to the periodic declarations relating to periods 2017/01, 2017/02, 2017/03, 2017/04, 2017/05, 2017/06, 2017/07, 2017/08, 2017/09, 2017/10, 2017/11 and 2017/12;

b) To condemn the Respondent Tax Authority to reimburse the Claimant the amount of € 1,118,615.45, plus indemnificatory interest calculated on each undue payment from the date on which it was made until the respective reimbursement.

VI. Value of the Proceedings

In accordance with the provisions of articles 306(2) and 297(2) of the Code of Civil Procedure, article 97-A(1)(a) of the Code of Administrative Procedure and Tax Procedure, and article 3(2) of the Regulation of Costs in Tax Arbitration Proceedings, the value of the proceedings is fixed at € 1,118,615.45 (one million one hundred eighteen thousand six hundred fifteen euros and forty-five cents).

VII. Costs

Pursuant to article 22(4) of the RJAT, the amount of costs is fixed at € 15,300 (fifteen thousand three hundred euros), in accordance with Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, at the charge of the Respondent.

Let notification be made.

Lisbon, 17 June 2019.

The Arbitrator-President
(Fernanda Maçãs)

The Arbitrator-Member
(Nuno Cunha Rodrigues)

The Arbitrator-Member
(Miguel Patrício)

Frequently Asked Questions

Automatically Created

How is the VAT pro rata deduction calculated for mixed-use goods and services acquired by banking institutions in Portugal?
The VAT pro rata deduction for mixed-use goods and services acquired by banking institutions in Portugal is calculated under Article 23(4) of the VAT Code (CIVA). The pro rata fraction consists of a numerator representing the annual amount of transactions giving rise to VAT deduction rights, and a denominator comprising the total annual amount of all transactions performed by the taxable person. For banking institutions engaged in both taxable operations (such as financial leasing subject to VAT) and exempt operations (such as credit provision), this calculation determines what percentage of input VAT can be deducted. The controversy in this case concerns whether the entire leasing rental—including both interest and capital amortization components—should be included in the numerator, or only the interest portion as stipulated in Tax Authority Circular Letter 30108/2009. The claimant argues that since Article 16(2)(h) CIVA defines the complete rental payment as the taxable base for financial leasing, the same comprehensive value should be used for pro rata calculations to ensure consistency and respect the principle of fiscal neutrality.
Should the financial amortization component of leasing rents be included in the VAT pro rata calculation under Portuguese tax law?
According to the claimant's position, the financial amortization component of leasing rents should be included in the VAT pro rata calculation under Portuguese tax law. This argument rests on Article 16(2)(h) of the VAT Code, which establishes that the taxable value of financial leasing operations comprises the entire rental payment received, encompassing both the interest (remuneration) component and the capital amortization component. The claimant contends that the legal principle 'one should not distinguish where the law does not distinguish' applies, meaning that if the complete rental constitutes the taxable base for output VAT purposes, the same comprehensive amount should be considered when calculating the deduction pro rata for input VAT on mixed-use acquisitions. However, the Tax Authority's position, as expressed in Circular Letter 30108/2009, restricts the pro rata numerator to only the interest component, excluding capital amortization. This divergence creates the central legal dispute: whether administrative guidance can effectively modify the statutory calculation method by segmenting components that the VAT Code treats as a unified taxable value. The resolution of this question has significant implications for banking institutions' VAT recovery rights and the broader interpretation of mixed taxable person rules in Portugal.
What is the impact of Ofício-Circulado 30108 on VAT deduction rights for entities engaged in both financial leasing and credit operations?
Ofício-Circulado 30108 of January 30, 2009, significantly impacts VAT deduction rights for entities engaged in both financial leasing (taxable) and credit operations (exempt) by restricting how the pro rata deduction coefficient is calculated. This administrative circular interprets Article 23 of the VAT Code to require that only the interest component of financial leasing rental payments be included in the pro rata numerator, explicitly excluding the capital amortization portion. This interpretation effectively reduces the deduction percentage for mixed-use goods and services, thereby limiting the amount of input VAT that banking institutions can recover on their general overhead expenses and shared resources. The practical effect is substantial: by narrowing the numerator while maintaining the same denominator (total turnover), the circular reduces the pro rata fraction, resulting in less VAT being deductible and more tax being definitively borne by the financial institution. The claimant challenges this circular as an ultra vires administrative act, arguing that it contradicts the statutory framework of Article 23 CIVA and imposes restrictions not contemplated by the legislator. Furthermore, the claimant contends that the circular unlawfully grants the Tax Authority discretionary power to modify the pro rata calculation methodology—a power allegedly not conferred by Portuguese law, unlike the broader flexibility provided to Member States under the EU Sixth VAT Directive Article 17(5). This case thus questions the legal validity and binding effect of administrative circulars that substantively alter taxpayers' statutory rights.
Can a mixed taxable person (sujeito passivo misto) challenge VAT self-assessments based on the pro rata methodology through CAAD arbitration?
Yes, a mixed taxable person (sujeito passivo misto) can challenge VAT self-assessments based on the pro rata methodology through CAAD (Centro de Arbitragem Administrativa) arbitration, as demonstrated in this case. Under Article 2(1)(a) and Articles 10 et seq. of Decree-Law No. 10/2011 of January 20, the claimant successfully initiated arbitral proceedings to contest both the legality of its periodic VAT declarations for all twelve periods of 2017 and the Tax Authority's decision dismissing its administrative review request (Procedure No. ...2018...). The arbitration jurisdiction extends to reviewing the substantive legality of self-assessed tax acts, not merely formally assessed taxes. This procedural avenue is particularly important for mixed taxable persons because VAT self-assessment under the pro rata method involves complex calculations and interpretations of Article 23 CIVA that may be disputed. The claimant's challenge addresses fundamental questions about the correct application of the pro rata deduction rules, the legal effect of administrative guidance (Circular Letter 30108), and whether the Tax Authority possesses the power to impose calculation methodologies different from the statutory formula. The CAAD arbitration mechanism provides an efficient alternative to judicial courts for resolving such technical tax disputes, with the arbitral tribunal having full jurisdiction to review the legality of the contested tax acts and order appropriate remedies, including VAT refunds with statutory interest from the date of the original declarations until actual reimbursement.
What are the legal grounds for contesting the exclusion of capital amortization from the VAT pro rata numerator in financial leasing contracts?
The legal grounds for contesting the exclusion of capital amortization from the VAT pro rata numerator in financial leasing contracts include several substantive and constitutional arguments. First, the claimant invokes Article 16(2)(h) of the VAT Code, which defines the taxable value of financial leasing as the entire rental payment, without distinguishing between interest and capital components. Applying the interpretative principle that 'one should not distinguish where the law does not distinguish,' the claimant argues that the comprehensive rental value must be consistently applied in both output VAT calculations (taxable base) and input VAT calculations (pro rata numerator). Second, the claimant contends that Article 23 CIVA does not grant the Tax Authority discretionary power to impose alternative deduction methods or to modify the statutory pro rata formula specified in Article 23(4). Unlike the EU Sixth Directive Article 17(5), which explicitly allows Member States to authorize or require alternative allocation methods, the Portuguese legislator allegedly chose not to transpose this flexibility, instead establishing an objective, mathematical pro rata calculation. Third, the challenge invokes fundamental VAT principles protected under EU law: fiscal neutrality (ensuring similar businesses bear similar tax burdens), equal treatment of taxpayers, legal certainty, and protection of legitimate expectations. Fourth, constitutional grounds are asserted, including violations of the separation of powers (Articles 2 and 111 CRP), the legality principle requiring that tax obligations derive from statutes rather than administrative acts (Article 112(5) CRP), and the parliamentary reservation of legislative power over taxation (Articles 103 and 165(1)(i) CRP). The claimant also references the CJEU 'Banco Mais' judgment, arguing it does not support the Tax Authority's position regarding Portuguese domestic law interpretation.