CAAD 585/2017-T: VAT Exemption for Non-Profit Organizations and Direct Competition Rules in Portugal

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Nina Aguiar and Vasco Valdez, appointed by the Deontological Council of the Administrative Arbitration Center to form an Arbitral Court, hereby agree as follows:

ARBITRAL DECISION (consult full version in PDF)

I – REPORT

On 06 November 2017, A..., NIPC..., with registered office at ..., n.º..., ...-... ..., filed a request for constitution of an arbitral court, under the combined provisions of articles 2º and 10º of Decree-Law n.º 10/2011, of 20 January, which approved the Legal Framework for Arbitration in Tax Matters, as amended by article 228º of Law n.º 66-B/2012, of 31 December (hereinafter, abbreviatedly referred to as RJAT), seeking the declaration of illegality of the tax acts concerning official VAT assessments relating to the years 2012, 2013, 2014, 2015 and 2016, in the total amount of € 170,139.67, namely VAT assessment n.º 2016... relating to period 201203T in the amount of € 44,989.64; VAT assessment n.º 2016... relating to period 201206T in the amount of € 35,155.96; VAT assessment n.º 2016... relating to period 201209T in the amount of € 31,332.68; VAT assessment n.º 2016... relating to period 201212T in the amount of € 29,976.50; VAT assessment n.º 2016... relating to period 201303T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201306T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201309T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201312T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201403T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201406T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201409T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201412T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201503T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201506T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201509T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201512T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201603T in the amount of € 363.75; VAT assessment n.º 2016... relating to period 201603T in the amount of € 363.75, and interest assessment n.º 2016... in the amount of € 8,011.55; interest assessment n.º 2016... in the amount of € 5,900.74; interest assessment n.º 2016... in the amount of € 4,945.36; interest assessment n.º 2016... in the amount of € 4,427.92; interest assessment n.º 2016... in the amount of € 51.28; interest assessment n.º 2016... in the amount of € 47.54; interest assessment n.º 2016... in the amount of € 43.89; interest assessment n.º 2016... in the amount of € 40.11; interest assessment n.º 2016... in the amount of € 36.57; interest assessment n.º 2016... in the amount of € 32.79; interest assessment n.º 2016... in the amount of € 29.15; interest assessment n.º 2016... in the amount of € 25.49, as well as the tacit rejection of the administrative complaint that had such acts as its subject matter.

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

• the violation of the provisions of articles 9º, no. 8, and 10º of the VAT Code, by subjecting to tax the provision of services provided by the Claimant, as a non-profit organization, to persons practising sport;

• the error in the application of the law resulting from the violation of the provisions of articles 9º, no. 19, and 10º of the VAT Code by subjecting to tax the fees paid by the members of the Claimant, a non-profit organization;

• the error in the application of the law resulting from the violation of the provisions of article 20º, no. 1, letter a), of the VAT Code, by subjecting to the general VAT taxation regime all provisions of services related to the practice of sport provided by the Claimant, without considering the corresponding right to deduct the tax supported upstream for the carrying out of such operations;

• the procedural defect in the tax procedure, grounded on the violation of the inquisitorial principle established in article 58º of the General Tax Code, resulting from the failure to conduct the necessary investigation for the instruction of the procedure.

On 07-11-2017, the request for constitution of the arbitral court was accepted and automatically notified to the Tax Authority.

The Claimant proceeded to appoint an arbitrator, having designated His Excellency Professor Doctor Vasco Valdez, under the terms of article 11º/2 of the RJAT. Under no. 3 of the same article, the Respondent indicated as arbitrator Her Excellency Professor Doctor Nina Aguiar.

The arbitrators appointed by the parties were appointed and accepted their respective duties and appointed the present Rapporteur to preside over this Arbitral Court, who, within the applicable period, also accepted the duty.

On 15-01-2018, the parties were notified of these appointments and did not manifest any intention to challenge any of them.

In accordance with the provision in letter c) of no. 1 of article 11º of the RJAT, the collective Arbitral Court was constituted on 06-02-2018.

On 09-03-2018, the Respondent, duly notified to that effect, filed its response defending itself solely by way of challenge.

Under the provisions of letters c) and e) of article 16º, and no. 2 of article 29º, both of the RJAT, the holding of the meeting referred to in article 18º of the RJAT was dispensed with.

Having been granted a period for the presentation of written submissions, these were presented by the parties, pronouncing themselves on the evidence produced and reiterating and developing their respective legal positions.

A period of 30 days was fixed for the rendering of the final decision, following the submission of submissions by the Respondent, which period was extended until the expiry of the period referred to in article 21º/1 of the RJAT.

Taking into account the processing of the case and the period of judicial recess, under the terms and for the purposes of article 21º/2 of the RJAT, the period referred to in no. 1 of the same article was extended by two months.

The Arbitral Court is materially competent and is regularly constituted, under the terms of articles 2º, no. 1, letter a), 5º and 6º, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, under the terms of articles 4º and 10º of the RJAT and article 1º of Ordinance n.º 112-A/2011, of 22 March.

The case is not affected by any nullities.

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

All having been considered, it must be decided as follows:

II. DECISION

A. MATTERS OF FACT

A.1. Facts Found to be Proved

• The Claimant is, and was in 2012, an association without profit-making purposes.

• The Claimant was constituted by public deed of "Constitution of Association" executed on 10 December 2004, at the ... Notarial Office of Specialized Competence in ... .

• The Claimant has as its purpose the "promotion and development of sports, cultural and recreational activities".

• The Claimant has been, since the beginning of its activity, exempt under article 9º of the VAT Code and, for corporate income tax purposes, under the general taxation regime – not subject.

• The Claimant is governed by the Bylaws contained in the document supplementary to the deed of its constitution, which suffered some amendments in August 2013, namely articles 3º, 4º, 6º, 8º, 9º, 5º, 14º, 15º, 21º and 27º.

• As a consequence of the amendments introduced, these articles came to have the following wording:

Article 3º

"... The Association has as its purpose the promotion and development of sports, cultural and recreational activities, ..."

Article 4º

"... In pursuit of its purpose the company shall:

• Conduct training actions for its Members and/or third parties for the guidance and administration of sports, cultural and recreational activities;

• Collaborate in the conduct of actions to disseminate its activity, as well as support actions to promote general physical well-being..."

Article 6º - Categories of members:

• Founding members – the founders of the Association...

• Effective members – members proposed by the Board...

• Members – natural persons who request their admission to the Board and whose admission is approved by it

• Collective members – legal persons who request their admission to the Board

• Proposing members – natural persons who have completed the proposal

• Honorary members – natural persons who have distinguished themselves in providing services for the benefit of the Association

Article 8º - Rights of Members

1. Exclusive rights of founding and effective members:

a) to vote in General Assemblies

b) to elect and be elected to associative positions

c) to request the convening of the General Assembly under the terms provided for in these Bylaws.

1. Exclusive rights of collective members to enter into agreements with the Association for the use of its facilities by workers, collaborators, students of the collective member, as applicable, and provided that the terms and conditions of such use are fixed and payment by the collective member is ensured...".

Article 9º

Duties of all members:

• To pay the entrance fee and the fees listed in the table presented annually by the General Assembly, as well as any other charges that may be set by this body"

Article 14º

The General Assembly is composed of all founding and effective members in full enjoyment of their rights.

Article 15º

Only founding and effective members have the right to vote.

Article 21º

The Board is composed of three directors, one of whom is the President, as decided by General Assembly..."

Article 27º

The receipts of the Association consist of:

• The product of entrance fees and fees paid by members;

• Subsidies that the State or other public law entities grant it for the achievement of the statutory purposes of the Association;

• Contributions or donations from any other entities or from natural persons;

• The amounts charged for the provision of services, in particular, the monthly payments for the use of sports facilities.

• In 2012, there were only first-degree members and second-degree members.

• The Bylaws in force in 2012 stipulated that all members had the right to participate in General Assemblies and in the work of the categories of members to which they belonged, as well as to elect and be elected to associative positions (article 8º of the Bylaws).

• The amendments to the Claimant's Bylaws took effect from 12 August 2013.

• The figure of effective member and collective member was introduced by the amendment of the Bylaws in 2013.

• The governing bodies in office during the year 2012 were the same that had been appointed since the date of the Claimant's constitution, with the composition of the Board being as follows:

• President – B...

• Member – C...

• Member – D...

In August 2013, a new Board was elected for the four-year term 2013-2016.

• The Claimant has its registered office at ..., n.º..., ..., the place where it carries out the activity of exploiting sports facilities.

• The Claimant's facilities were equipped for gymnasium, swimming, hydro-gymnastics and classes in various sports modalities, health and well-being activities.

• The Claimant had a large gymnasium space, with training monitors and staff specialized in physical exercise practice, as well as classrooms where its teachers taught classes to members in sports modality practices, such as functional and maintenance training, global and children's gymnastics, step, cycling, pilates, yoga and various dances.

• The Claimant had a swimming pool where swimming and hydro-gymnastics classes were provided.

• The Claimant exclusively promoted the practice of aquatic modalities in ... .

• At the time of the facts, the nearest swimming pools were located in the parish of ... .

• When the Claimant was constituted in 2004, there was no swimming pool in ... .

• In the city of ... there was not, and still is not to date, any swimming pool other than that of the Claimant.

• The Claimant held sports tournaments and other leisure, sports and well-being initiatives, free of charge, for its members.

• The Claimant carried out its activity in those facilities under an exploitation concession agreement, concluded with the entity holding the operation of the property, the company E..., S.A.

• The agreement for the exploitation of sports facilities was concluded on 03-01-2005, for the annual amount of €75,000.00, in the first year of validity and €207,000.00, in the following years, to which the applicable legal VAT rate was added.

• The concession agreement was signed by the then sole administrator of E..., S.A., F... and by B..., founding member of the Claimant and president of its Board.

• The exploitation concession had a limited duration of one year, beginning on 01-01-2005 and ending on 31-12-2005, renewable for equal periods.

• E..., S.A. is a joint-stock company, constituted on 27-01-2005.

• On 30-12-2005, the Claimant became a shareholder of E..., S.A. through the subscription of an increase in share capital in cash.

• On 30-12-2005, E..., S.A. carried out a capital increase of €50,000.00, through a cash contribution of €5,000.00, intended for the issuance of 5,000 new shares of €1 each to be subscribed by a new shareholder, plus a share premium of €27 per share, in a total amount of €135,000.00.

• In the 2nd half of 2006, the opportunity arose for the acquisition of fractions A and B, of n.º... of ..., in ..., contiguous to the space already used by the Claimant.

• The Claimant did not have the financial conditions to acquire and adapt such facilities to its purposes, nor did it have the possibility of resorting to bank financing.

• The Claimant made a capital investment in E..., S.A., so as to ensure that it would obtain the necessary funds for the said acquisition.

• The Claimant came to have a shareholding that gave it control over the investment made.

• On 22-12-2006, E..., S.A. carried out a new capital increase of €55,000.00, through a cash contribution of €16,000.00, intended for the issuance of 16,000 new shares of €1 each, to be subscribed by a shareholder, plus a share premium of €49 per share, in a total of €748,000.00.

• That capital increase was subscribed by the Claimant.

• The Claimant came to hold 30% of the shareholding in E..., S.A.

• The Claimant did not derive capital income from the share held by it in 2012.

• On 30-03-2007, an amendment to the agreement for the exploitation of sports facilities was made, through which E..., S.A. ceded to the Claimant the exploitation of all sports areas, excluding all commercial areas, maintaining the annual amount of €207,000.00 + VAT.

• In this amendment, the Claimant was represented by B... and E..., S.A. was represented by G..., sole administrator at that date.

• On 09-04-2012, a second amendment to the agreement for the exploitation of sports facilities was made between the Claimant and E..., S.A., in which the latter, represented in that act by the Sole Administrator H... and the Claimant by its President B..., agreed to alter the amounts to be paid for the exploitation of such facilities, as follows:

• in the year 2012, it would pay €57,750.00 + VAT, until 30-04-2012, relating to the 1st quarter, with the remaining months in grace period;

• in the year 2013 and until 31-05-2014, it would pay the amount of €120,000.00 + VAT

• And during those two years (2012 and 2013), E..., S.A. would exceptionally assume the payment of electricity and gas expenses for the sports facilities.

• with respect to 2014 and until 31 May of the following year, it would pay the amount of €130,000.00 + VAT

• For the year 2015 and thereafter, this amount could be increased by 15% if the effective collection of fees from the Claimant's members reaches at least 80% of the fees collected in 2009.

• As a result of the integration works, the Claimant's facilities doubled their area, such that:

• the cardiovascular maintenance room practically tripled, which made it possible to have more diverse cardio and fitness equipment;

• the indoor cycle room doubled in capacity and acquired natural lighting;

• an additional studio with capacity for 30 people simultaneously was created;

• the changing rooms doubled, with a specific changing room for children being created;

• access to the swimming pool was improved and adapted for people with mobility difficulties;

• air conditioning was renovated.

• The Claimant's revenues consisted of the product of entrance fees and fees paid by members, subsidies, contributions or donations, as well as the amounts charged for the provision of services, in particular, the monthly payments for the use of sports facilities (article 27º of the Bylaws).

• Punctual payment of fees was a duty of all members (article 9º, no. 1, letter a) of the Bylaws)

• The amount of the entrance fee and the fee was fixed annually by the General Assembly (article 9º/1/a) Bylaws)

• Members paid an entrance fee at the time of registration which, for the year 2012, was at most €60.

• Members paid a minimum annual fee of €10, which corresponded to the amount of legally mandatory minimum insurance.

• Each member paid a monthly fee, set in accordance with the sports modalities practised.

• The fees relating to the year 2012 were set taking into account, among other things, the economic circumstances.

• Registration in the Association was done by filling out an "half-yearly membership" form, which is nothing other than a contract, with the registration number coinciding with the member number.

• In view of the acceptance of the conditions discriminated there, they came to be called members subject to the internal regulations.

• The membership form as well as the "terms and conditions of membership" and "club regulations" are in all respects identical to an "adhesion contract".

• All fees paid by members at the counter, by bank transfer or by direct debit, were reported to the Tax Authority.

• No specific discharge document was presented for revenues from entrance fees and fees.

• The member's name or number is not indicated, with only the payment number being the only correspondence with the respective discharge document, and in both documents, the "Code" is indicated which corresponds to the aforementioned "payment number" and the "description" which indicates the month.

• The receipts contain no identification either of the member or of the document issuer, and in the month of April, out of a total of 1,400 records, 99% of the discharge documents for the revenue corresponded to receipts, with the remaining 1% being invoices/receipts.

• Only 1% of the documents presented to the Tax Authority were invoices.

• Members did not request the issuance of an invoice as they had no tax incentives associated.

• In the discharge documents of the provision of services, the VAT tax field contained the indication of 0%, without any reference to the exemption, in the case of receipts, with the invoices bearing the mention "under article 9º of the VAT Code".

• The Claimant allowed non-members to attend the Association's sports facilities as guests of a member in full enjoyment of their rights under the following conditions:

• That they were expressly invited by a member in full enjoyment of their rights, and that member accompanied them at all times in the enjoyment of the sports modalities available in the Association's sports facilities;

• The guest could only be in the sports facilities while the member who had invited him was also present, with the member being responsible to the Association for the guest's behavior and for compliance with the regulations in force;

• The guest presented identification and completed the guest form;

• The guest had not on that basis attended the Association's sports facilities more than once per quarter.

• This access was completely free of charge.

• The Claimant had vouchers or gift checks/vouchers, which were pre-purchased/offered, with the holder of which enjoyed a service by presenting it, with the marketing of these vouchers being open, carried out by a company external to the Claimant, "I...".

• The coupons had various options for use through prior telephone registration and their availability, through the internet, where the Claimant's website was indicated, and amounted to a pre-payment that entitled the receipt of goods or services or a discount.

• The invoices issued by "I..." detailed the quantity and individual price of the coupon, and the respective commission value was calculated on each invoice amount, which in these invoices corresponded to 50% of the total coupons exchanged, to which the 23% VAT rate was added.

• These gift checks/vouchers had the objective of promoting and encouraging the practice of sport, through dissemination to a wider public through the use of websites.

• The Claimant had various members who are legal persons, who upon becoming members acquired as a benefit access for their collaborators to services provided by the Claimant.

• The Claimant had as members various educational establishments in ... .

• The Claimant acquired two light passenger vehicles, with the following license plates:

• "...", brand ..., model ..., acquired in 2008, for the price of €80,000.00

• "...", brand ..., model 221, acquired in 2012, for the price of €60,000.00 through a financial leasing agreement with Bank J... (J...)

• The vehicle with license plate "..." was a 6-seater vehicle, with good luggage capacity, classified as class 1 for toll purposes and was acquired in used condition.

• The vehicle with license plate "..." was sold on 12-02-2012, for the price of €37,500.00, to K... (member n.º ... and President of the Board), with the sale having been made on account of the reduction of the Claimant's debt to him, at that date.

• Accountably, this sale was not recorded, with the balance of account "2782193 – K..." remaining at €295,796.38, from the beginning to the end of the year.

• The vehicle with license plate "..." was acquired by virtue of the alienation of the vehicle with license plate "...".

• The Claimant alienated two light passenger vehicles, with license plates "..." and "..." without VAT being assessed, nor any reference to this tax in the respective discharge documents.

• No tax was assessed upon the acquisition of those vehicles.

• H... was an employee of the Claimant since 2006.

• Until the entry into force of the new bylaws in 2013, H... was a second-degree member.

• H... became administrator of E..., S.A. in 2011, and became Member of the Board of the Claimant on 23 August 2013.

• In 2012, H... was administrator of the cedent, and employee and member of the Claimant (cession recipient).

• Since 2011, E..., S.A. has as Sole Administrator H..., who has been employed by the Claimant since 2006.

• The expression "ballet course non-users" derives from the limitations of the management software and served to distinguish members who had access only to specific modalities (ballet, for example), from members whose fee allowed access to all sports modalities.

• The Claimant has bookkeeping that covers all its activities.

• The Claimant filed corporate income tax return forms (Form 22), as well as accounting and tax information declarations (IES), relating to the 2012 fiscal year.

• In the year 2012, the Claimant presented Annex A of the IES and in Form 22 calculated taxable profit of €146,250.96, breaking down this amount in table 09 – Calculation of taxable matter, as follows: €61.68 in the field corresponding to "General Regime" and €146,189.28 "with exemption"

• The Claimant was subject to an external inspection action, of partial scope, executed through Service Order n.º OI2015..., which focused on the 2012 fiscal year.

• The inspection action was carried out following another action carried out by the EIP (Intervention and Prospecting Team) for "Consultation, collection and storage of elements", for the purpose of "verification of exercise of activity in ..., n.º..., ..." conducted at the Claimant.

• In the context of the inspection action, the Claimant was notified through its representative H..., Member of the Board to present elements concerning the companies and the respective invested amounts, corresponding to the total balance of account 4141 "Capital Shareholdings" in the amount of €940,000.00, shown in the analytical trial balance of the 2012 fiscal year.

• In the course of the tax inspection procedure, the responsible representative of the Association was questioned about the purposes of the Association and the use of its resources in the acquisition of light passenger vehicles, to which he replied "... those were decisions of the president".

• The Claimant was notified of the Draft Inspection Report and, if it so wished, to exercise its right to be heard, under the terms of article 60º of the General Tax Code and article 60º of the Tax Inspection Procedure Code.

• On 01-08-2016, the Claimant requested an extension of the period for exercising the right to be heard in order to "properly prepare its right to be heard so as to fully safeguard its right to due process".

• Through Official Communication n.º..., of 02-08-2016, the Claimant was notified of the granting of the request for extension of the period for exercising the right to be heard.

• The Claimant exercised its right to be heard, which is recorded in the Inspection Report in the following terms:

[...]

And further,

[...]

• The Claimant was notified of the tax inspection report, which contains, in summary, the following:

[...]

• The Claimant was notified of the demonstrations of VAT assessments and compensatory and default interest assessments, relating to all quarterly periods of the years 2012, 2013, 2014 and 2015 and the first two quarters of 2016:

[...]

• The Claimant proceeded to pay the said assessments through the PERES program.

• The Claimant filed an administrative complaint (n.º ...2017...) with the Tax Services Office of ... .

• The legal period for the decision expired without the Claimant being notified of the decision on the administrative complaint.

A.2. Facts Found Not to be Proved

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

A.3. Substantiation of the Matters of Fact Proved and Not Proved

Regarding the matters of fact, the Court need not pronounce itself on everything that was alleged by the parties; rather, it is incumbent upon it to select the facts that are relevant to the decision and to distinguish between proved and unproved matter (see article 123º, no. 2, of the Tax Procedural Code and article 607º, no. 3 of the Civil Procedure Code, applicable by virtue of article 29º, no. 1, letters a) and e), of the RJAT).

In this way, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established with regard to the various plausible solutions of the question(s) of law (see former article 511º, no. 1, of the Civil Procedure Code, corresponding to current article 596º, applicable by virtue of article 29º, no. 1, letter e), of the RJAT).

Thus, taking into account the positions assumed by the parties, in light of article 110º/7 of the Tax Procedural Code, the documentary evidence and the case file attached to the proceedings, the facts listed above were considered proved, with relevance to the decision, taking into account that, as was written in the Decision of the Southern Administrative Court of 26-06-2014, delivered in case 07148/13, "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

Allegations made by the parties and presented as facts, consisting of purely conclusive affirmations, incapable of proof and whose truthfulness must be assessed in relation to the concrete matters of fact consolidated above, were neither given as proved nor as not proved.

B. ON THE LAW

As results from the Report of the present decision, the Claimant first argues the violation of the provisions of articles 9º, no. 8, and 10º of the VAT Code, on the grounds that the provision of services it carried out were subjected to tax, as a non-profit organization, to persons engaged in sports activities.

At issue first, therefore, is the application of the provision contained in the aforementioned article 9º/8 of the applicable VAT Code, which establishes the exemption of such tax regarding "provision of services provided by non-profit organizations that operate establishments or facilities intended for the practice of artistic, sports, recreational and physical education activities to persons practising such activities", in conjunction with the provision of letter d) of article 10º of the same Code, from which it follows that "For purposes of exemption, only those which, simultaneously: (...) Do not enter into direct competition with taxable persons" are considered as non-profit organizations.

The aforementioned provisions correspond to letter m) of article 132º of the VAT Directive, corresponding to former letter m), no. 1, of part A of article 13º of the Sixth Directive, which imposes on Member States the exemption of "Certain provisions of services closely related to the practice of sports or physical education, provided by non-profit organizations to persons who practice sports or physical education;" and to article 133º/d) thereof, corresponding to former letter a), no. 2, of part A of article 13º of the Sixth Directive, first to fourth indents, which provides that "Member States may make the granting of any of the exemptions provided for in letters b), g), h), i), l), m) and n) of no. 1 of article 132º conditional, on a case-by-case basis, on organisms that are not public law entities complying with one or more of the following conditions: (...) d) The exemptions cannot be such as to cause distortion of competition to the detriment of commercial undertakings subject to VAT.".

The first conclusion to be drawn, in the matter at hand, from the analysis of the provisions in question, is that the rule of EU law relating to the conditions for recognition of exemption as regards non-profit organizations of private law is not an imposition, but rather a permission to Member States. In other words, the common VAT regime allows Member States to exempt the provisions of services closely related to the practice of sports or physical education, provided by non-profit organizations of private law to persons who practice sports or physical education, and may make the granting of such exemption conditional, on a case-by-case basis, on the observance of one or more of the stated conditions (never extending to the selection of all of them, an option that was adopted by the Portuguese legislator). It is, therefore, a faculty, as noted by Rui Laires.

This means, first and foremost, that the exemption of the aforementioned organizations, even if they are not public law entities, as to those provisions of services, even if the conditions of article 133º of the Directive are not met, is not contrary to the rules and principles of European Union law relating to VAT.

Indeed, by conferring the possibility on Member States to make the exemption conditional on the conditions set out therein, the said article 133º results in the possibility of Member States not doing so, applying directly to non-profit organizations even if they are not public law entities, the exemption of letter m) of article 132º, with respect to the provisions of services provided therein. That is: even, insofar as the matter is relevant, the exemption may be capable of causing distortion of competition to the detriment of commercial undertakings subject to VAT, it will not be contrary to the common VAT regime to apply it to non-profit organizations that are not public law entities, with respect to the provisions of services closely related to the practice of sports or physical education to persons who practice sports or physical education, as is the case with respect to their application to non-profit organizations that are public law entities, as to which Member States are obliged to apply the exemption, even if the same is capable of causing distortion of competition to the detriment of commercial undertakings subject to VAT.

In this way, and in the absence in the proceedings of a situation in which it is debated whether Portugal exceeded the limits established in article 133º of the Directive, it should be in the framework of national law that the scope and extent of the conditions established in article 10º of the VAT Code should be ascertained, in particular, and insofar as the matter is relevant, of letter d) of such provision.

In fact, as it has been noted, given that it is not in question that the scope of article 133º of the Directive was exceeded, it is necessary to ascertain whether the national regime simply transposed such provisions, remaining within the maximum scope of the non-exemption faculty established in such provision, or whether, instead, it fell short, establishing a more restrictive regime, that is, not using, in its full extent, that same faculty.

Now, upon examination of the aforementioned article 10º of the applicable VAT Code, and in particular its letter d), it is verified that it excluded the application of the exemption in question, when "direct competition with taxable persons" occurs, and not, as stated in the text of the Directive, when there is susceptibility to "cause distortion of competition to the detriment of commercial undertakings subject to VAT.".

It is concluded, therefore, that the condition for exclusion of the exemption established, in the case, in article 9º/8 of the VAT Code, is more restrictive than that permitted by the Directive, not sufficing with mere susceptibility to cause distortions in competition, but requiring the verification of direct competition with taxable persons. In the specific case, as emphasized by Rui Laires, the condition provided for in letter d) of article 10º of the VAT Code must be interpreted "...in the sense that it aims to prevent the exemption of non-profit organizations in all cases in which these enter into direct competition - making available on the market the same types of goods or services marketed by companies subject to taxation and at lower prices -, but only when the eventual exemption that they could benefit from would be capable of generating competition distortions with commercial companies."

As the author recognizes, it proves difficult for tax administrations to assess whether distortions of competition occur or not, given that such assessment presupposes in-depth knowledge of each of the sectors of activity in question, including their respective market conditions.

The Court of Justice of the European Union has analysed the question of competition distortions mainly at the level of the negative delimitation of the scope of public entities incorporated in our law in article 2º/2 of the VAT Code, whose matrix is found in article 13º/1 of the VAT Directive. As the CJEU stresses, since the principle of neutrality is at stake, the taxation rule contained in this provision should not be interpreted in an overly restrictive manner, with one of the issues that has been analyzed in this context being whether distortions of competition should be assessed in relation to the activity as a whole or on a case-by-case basis in relation to local markets.

As regards exemptions, this requirement has been infrequently analyzed, highlighting for this purpose the Judgment of 20 November 2003, delivered in Case C-8/01, known as the Taksatorringen Case. In this context, although regarding the provision of letter f) of article 132º of the VAT Directive (relating to autonomous groupings of persons), the CJEU came to emphasize that it is the exemption itself that must not cause competition distortions, with it being necessary that the risk of competition distortions be real and not merely hypothetical. As Rui Laires emphasizes, this should equally be the understanding adopted with respect to the provision that now concerns us.

Having made these considerations and for purposes of the case under analysis, it should further be noted that the assessment of the existence or absence of competition can be made at various levels.

Thus, one might consider that the leisure offering of sports services competes with other services such as cinemas and entertainment, insofar as they are directed at the occupation of free time, but it is believed that one cannot, manifestly, speak of effective competition, in the terms that concern us.

Within the leisure offering of sports services, one can say that services linked, for example, to athletics, football, tennis, swimming, and golf, compete with each other, as an offering of sports services, but neither can one speak of effective competition, in the terms that concern us.

And even within the offering of services related to the same sports modality, there may be no direct competition. Thus, for example, a Football school in which training is given by Cristiano Ronaldo, or a Tennis school in which training is given by João Sousa, would not, in principle, compete directly with a school of the same modality, with training provided by a local enthusiast.

On the other hand, still at the level of densification of the concept of competition relevant for the purposes that concern us, it is necessary to keep in mind the regime of letter c) of article 10º of the VAT Code, which, following letter c) of article 133º of the VAT Directive, expressly admits the existence of similar activities, as well as the practice of prices (as long as approved by public authorities) that are equivalent to those practiced by commercial enterprises engaged in such activities, without this resulting in relevant competition.

Indeed, if article 10º of the VAT Code imposes that the requirements established in its various letters be cumulatively fulfilled, it necessarily follows from this that the cumulative fulfillment of letters c) and d) is possible, that is, that a non-profit entity can practice prices approved by a public authority, which are not "lower than those required for similar operations by commercial enterprises subject to tax", without there being "direct competition with taxable persons".

Thus, as was written in the Judgment of the Supreme Court of Justice of 09-10-2002, delivered in case 02S1905, in a different situation but directly transposable, "In order that a concrete situation may be confronted with the duty of non-competition with adequacy and legitimacy, it is therefore necessary to take into account, more than the identity or similarity of the goods or services produced by the enterprises considered, and far more than the fact that they belong to the same "branch", "type" or "sector" of economic activity, this elementary requirement of the hypothesis of competition: the factual possibility of the diversion of clientele."

And as referred to by Jorge Patrício Paúl:

"The act of competition is that which is suitable to attribute, in terms of clientele, advantageous positions in the market.

Competition is not susceptible to being defined in abstract and can only be appreciated in concrete, as what matters to know is whether the activity of one economic agent reaches or not that of another, through the dispute of the same clientele. (...)

The concept of competition is, therefore, a relative concept, which cannot be aprioristically defined but only assessed on a case-by-case basis, taking into account the concrete activities of the various economic agents and the reality of current economic life.".

Having, insofar as relevant, seen the essential features of the legal regime under discussion, it is now necessary to advance to verify the correctness, or lack thereof, of its application to the specific case.

As results from the reading of the Inspection Report, whose grounds the Court must adhere to, as was written in the Judgment of the Supreme Administrative Court of 23-09-2015, delivered in case 0134/11, "It is exclusively in light of the substantiation expressed by the Tax Authority when making the additional VAT assessment that the legality of that tax act should be assessed.", it is verified that such Report is based essentially on three circumstances, namely:

a) The Claimant provides services to both members and non-members;

b) The Claimant "generates surpluses which it then does not allocate to the execution of its services";

c) The Claimant enters into direct competition with other economic operators.

Regarding the foregoing, it is concluded in the Inspection Report (see p. II.3.5) that "none" of the requirements of nos. 8 and 19 of the VAT Code, of article 9º of the VAT Code, nor of article 10º of the same Code are met.

Let us examine, then.

As regards the first of the circumstances invoked, it should be considered that the same will not assume relevance for the assessment of the issue now under discussion, relating to the alleged violation of the provision of no. 8 of article 9º of the applicable VAT Code.

Indeed, the eventual circumstance that the Claimant provides services to non-members will not affect the legality of the application of that provision, insofar as it guarantees the exemption that the Claimant applied, without imposing any restriction on its application with respect to the recipients of the service, other than that these be persons who practice the activities that underlie the exemption in question.

With respect to this latter requirement, and without prejudice to it appearing that the Tax Authority did not base its position on the failure to verify the same, it could always be questioned whether the circumstance that the Claimant had legal persons as members, could not evidence that services were being provided to persons who were not engaged in sports activities, since, by nature, legal persons do not practice sports.

However, as the CJEU refers to in the Judgment delivered in case C-253/07:

"Article 13.°, A, no. 1, letter m), of Sixth Directive 77/388/CEE of the Council, of 17 May 1977, relating to the harmonization of the legislation of the Member States with respect to taxes on turnover – Common system of value added tax: uniform taxable basis, must be interpreted in the sense that it also covers, in the context of persons engaged in sports activities, provisions of services supplied to legal persons and unregistered associations, provided that – which falls to the national court to verify – these provisions have a close connection with the practice of sports and are indispensable to its realization, are provided by non-profit organizations and the actual beneficiaries of the said services are persons engaged in sports activities.".

The national Tax Authority also adopted the aforementioned understanding in the Doctrinal Statement resulting from case n.º 12791, by order of 07-03-2018, where the following can also be read:

"In light of this understanding, it is considered that the exemption provided for in letter 8) of article 9º of the VAT Code also covers the provision of services supplied to legal persons and unregistered associations, provided that the actual beneficiaries thereof are persons who practice the activities referred to therein.".

In this way, in view of the ground analyzed, the application of no. 8 of article 9º of the VAT Code now under analysis should not be regarded as ruled out.

With respect to the second line of substantiation of the Inspection Report listed above (the Claimant "generates surpluses which it then does not allocate to the execution of its services"), it appears that the same manifestly lacks factual support, in particular as to whether it can be affirmed that the Claimant does not present itself as a non-profit entity.

Indeed, the Claimant is formally and validly constituted as an association, and it is not demonstrated that it has distributed surpluses to some members or third parties, and the acquisition of shareholdings in E... cannot be considered, in the terms in which it is presented in the Inspection Report, as a "distribution of profits", first because the distribution of profits presupposes the absence of any consideration, and the operation referred to had as consideration, for the Claimant, the ownership of shareholdings in that company, with nothing in the proceedings permitting the assertion, beyond any reasonable doubt, that we are faced with a fraudulent operation.

The same shall be said, mutatis mutandis, with respect to the acquisition of vehicles reported in the matters of fact found to be proved.

As referred to by the CJEU in the Judgment delivered in Case C-174/00 (see point 26.), "the qualification of an organization as 'non-profit', within the meaning of this provision, must be made in light of the purpose it pursues, namely the organization in question must not have the objective of generating profits in favor of members, contrary to the purpose of a commercial enterprise", further noting (see point 27) that "It is for the competent national authorities to determine, in light of the statutory purpose of the organization in question and the circumstances of a specific case, whether an organization meets the requirements that allow it to be qualified as a 'non-profit' organization.".

Now, as was mentioned, there is no element in the proceedings that points, beyond any reasonable doubt, to the fact that the Claimant is oriented toward the generation of profits in favor of its members, or third parties, whereby the same should be regarded as a non-profit organization, for purposes of article 9º, no. 8 of the applicable VAT Code, without prejudice to such quality being able to be withdrawn under the terms of article 10º of the same instrument, an issue which will be analyzed below.

The third of the aforementioned grounds of the Inspection Report incorporates the main issue to be decided in the present arbitral proceedings, which is whether the non-profit character of the Claimant is ruled out, by virtue of the application of letter d) of article 10º of the VAT Code, in particular because the Claimant acts in direct competition with other economic operators.

This will be the touchstone for resolving the dispute sub iudice, in that if the existence of a situation of direct competition is demonstrated, the exemption will not be applicable (and it will be irrelevant whether the Claimant provided or did not provide services to third parties), and if such demonstration is not made, the exemption of no. 8 of article 9º of the VAT Code in question will be applicable (regardless of whether services have been provided to third parties or not).

Regarding this issue, and following what was previously set out, it is believed that:

• The VAT Directive imposes the exemption of this tax but does not impose the conditions to the same, from which it follows that, even if a situation of competition distortion is verified (article 133º/d) of the Directive), the exemption will not be contrary to the Directive, since Member States are not obliged to condition the exemption to the non-verification of that circumstance;

• In this framework, the interpretation of article 10º, and in particular of letter d), must be made in light of national law;

• The Directive mentions "distortion of competition", while the national provision refers to "direct competition", being therefore the term of national legislation more restrictive than that of the Directive, thus implying the demonstration of the real affecting of a concrete clientele by the activity of the exempt operator (direct competition);

• This interpretation is strengthened by the circumstance that letter d) of article 10º of the applicable VAT Code is preceded by letter c) where the requirement is provided that prices approved or "prices lower than those required for similar operations by commercial enterprises subject to tax" be practiced (note that, in the case, the Tax Authority itself recognizes that the Claimant practices prices lower than the "normal"; see p. 21 of the Inspection Report);

• Hence, if in order to benefit from the exemption the operator has to practice prices lower than those practiced for similar operations by commercial enterprises subject to tax (letter c)) and not be in direct competition with taxable persons (letter d)), it should necessarily be concluded that the existence of commercial enterprises subject to tax that practice similar operations, does not by itself constitute the existence of a situation of direct competition, for purposes of the norm of article 10º of the VAT Code, with no violation of Community law occurring, insofar as the national legislator contained itself within the freedom conferred by article 133º of the Directive.

In light of the foregoing, it is believed that, in order to conclude that such a situation of direct competition of the Claimant's activities with taxable persons exists, concrete demonstration of the dispute of their clientele by the former will be necessary.

Such understanding has, moreover, direct correspondence in the services of the Tax Authority itself, by way of the aforementioned Doctrinal Statement resulting from case n.º 12791, in which it can be read that "a non-profit organization must conduct its economic behavior with the concern of serving well the community in which it operates, distancing itself from competitive practices typical of companies which, as productive entities, primarily strive to obtain profit, by disputing suppliers, distributors, sellers, workers and, above all, clientele, by conquest of advantageous positions in certain market sectors."

The same Statement continues, stating that "It should be understood that non-profit organizations enter into direct competition with companies that operate activities aimed at profit, if such organizations offer the same services under similar conditions and at prices in which, although reduced, the difference is based essentially on the non-application of tax."

In these terms, and in summary, it is believed that, in order to legitimate the withdrawal of the quality of non-profit organizations from the Claimant, under the terms of article 10º, letter d) of the VAT Code, as applied in the Inspection Report, it was incumbent upon the Tax Authority to demonstrate that it disputes suppliers, distributors, sellers, workers and, above all, clientele, by conquest of advantageous positions in certain market sectors, offering the same services as other commercial companies, under similar conditions and at prices in which, although reduced, the difference is based essentially on the non-application of tax.

Now, the Inspection Report does not provide elements that allow concluding that there is any specific economic operator whose clientele is affected by the Claimant's activity, in the terms referred to.

Indeed, the Inspection Report merely alleges in a generic manner that the Claimant's activity is "susceptible" (which is already an eventual, or hypothetical term, not compatible with the demonstration of a situation of "direct competition") to causing competition distortions (reverting to the terminology of the Directive, and not to that of article 10º/d) of the VAT Code), to the detriment of commercial companies (not identified) subject to VAT and not exempt from it that carry out identical services.

Such allegation, of a generic and conclusive nature, is not deemed to be capable of containing the factual elements necessary to fulfill a situation of direct competition, as presumed by article 10º/d) of the VAT Code, interpreted in the terms indicated above, whereby the assessments are defective in regard to the grounds of fact.

Indeed, notwithstanding the fact that one might conceive that, in light of the understanding set out in the Inspection Report regarding the interpretation of letter d) of article 10º of the applicable VAT Code, the elements gathered on this matter could, moreover, support a judgment of susceptibility to cause competition distortions, the fact is that this was not the criterion adopted by the national legislator, as has been seen, but rather a more restrictive one, which presupposes the verification of actual competition affected by the tax exemption.

Now, in order for such a judgment to be possible, elements were necessary that would allow affirming that the clientele pursued was the same, and that the distribution of such clientele was actually or potentially affected by the Claimant's activity, by virtue of the latter assuming a privileged position in that dispute, by reason of the tax exemption.

As has been seen, the effectivity of competition implies a direct affecting of the clientele of VAT taxable persons, which cannot be concluded from the data gathered in the Inspection Report, with it not being established which entities engage in which allegedly competitive activities, and in what terms such activities are affected by the Claimant's exemption.

In light of the foregoing, here, as in the arbitral case n.º 274/2016-T, which dealt with identical subject matter, it is concluded that:

"In order to be able to conclude that there is competition distortion, it would be necessary to know the specific services provided and prices practiced by the entities that the Tax Authority and Customs Authority considers as competitors, as they may be distinct services with distinct prices, aimed at different types of public".

And, as in the arbitral case n.º 209/2015-T, which also dealt with identical subject matter, it is concluded that:

"In the case sub judicio, such competition distortion is not shown to exist insofar as it is not demonstrated, on the one hand, the concrete existence of entities with an offering of services comparable to those provided by the Claimant and, on the other, what prices are practiced by the entities (and identification thereof) that allegedly provide equipment suited to and identical to that of the Claimant and what the concrete conditions of use and characteristics (...) and the concrete equipment with characteristics or similarities when compared with (...) equipment operated by the Claimant".

As a final note, it is also pointed out that the elements on file, and on which the Tax Authority based the corrections made, may legitimize the suspicion that the Claimant's activities will be pursued in such a way as to favor some persons patrimonially, benefiting them with the product of its economic activity.

Should such suspicions be confirmed, one could conclude that a situation of abuse of form exists, in which the Claimant would be formally constituted as a non-profit entity to benefit from the tax framework particular to such entities, with a view to enhancing the generation of profits to be distributed to certain persons.

Notwithstanding this, and as was written in the Judgment of the Supreme Administrative Court of 27-01-2016, delivered in case 01720/13:

"suspecting the Tax Authority of the existence of an abusive practice, it was incumbent upon it to institute the prior and mandatory procedure provided for in article 63º of the Tax Procedural Code, which is characterized by hearing the person in question within a period of 30 days, by the right to present, by the interested party, of evidence that it deems relevant, by obtaining authorization from the highest-ranking official of the service or the official to whom the latter has delegated competence to apply anti-abuse provisions and by the duty to substantiate the respective decision. A procedure which it did not use (...).

In this way, and regardless of the question of whether or not there was an abusive use of anomalous legal figures and whether or not the Tax Authority was correct in the assumption that underlies and substantiates the correction it made (a question that [...] is not at issue in these proceedings), the fact is that, given the aforementioned substantiation, it was incumbent upon the Tax Authority to use the general anti-abuse clause contained in article 38º, no. 2, of the General Tax Code and the procedural mechanism provided for in article 63º of the Tax Procedural Code, which it did not do."

Thus, and for all that has been set out, it is considered that the corrections made by the Tax Authority in question in the present arbitral action are defective in regard to the grounds of fact, and consequent error of law, by violation of article 9º, no. 8 of the applicable VAT Code, and as such should be annulled, with the arbitral request consequently proceeding and knowledge of the remaining issues raised being foreclosed.

As regards the request for indemnification interest formulated by the Claimant, article 43º, no. 1, of the General Tax Code establishes that indemnification interest is due when it is determined that there was an error attributable to the services that results in payment of the tax debt in an amount higher than that legally due.

In the case, the error pointed out that affects the assessment in the annulled part is attributable to the Tax Authority and Customs Authority, which made the assessment act on its own initiative, without the necessary factual and legal support.

The Claimant thus has the right to be reimbursed of the amount it paid (under the terms of the provisions of articles 100º of the General Tax Code and 24º, no. 1, of the RJAT) by virtue of the annulled acts and, also, to be indemnified for the undue payment through indemnification interest, due from the date of payment of the amount improperly assessed, until its reimbursement, at the legal suppletory rate, under the terms of articles 43º, nos. 1 and 4, and 35º, no. 10, of the General Tax Code, article 559º of the Civil Code and Ordinance n.º 291/2003, of 8 April.

C. DECISION

In view of the foregoing, this Arbitral Court decides to deem the arbitral request filed to be wholly well-founded and, in consequence:

• Annuls the tax acts subject matter of the present arbitral action;

• Condemns the Tax Authority to pay indemnification interest, in the terms indicated above.

D. Value of the Case

The value of the case is fixed at € 170,139.67, under the terms of article 97º-A, no. 1, a), of the Code of Tax Procedure and Process, applicable by virtue of letters a) and b) of no. 1 of article 29º of the RJAT and of no. 2 of article 3º of the Regulation of Costs in Tax Arbitration Proceedings.

Notify.

Lisbon, 24 September 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Nina Aguiar – dissenting, as per dissenting opinion)

The Arbitrator Member

(Vasco Valdez)

DISSENTING OPINION

I voted against the Court's decision, as I consider the assessment acts challenged to be legal, for the reasons set out below.

• The fundamental question to be decided is whether the services provided by the Claimant – an association whose purpose is the promotion of sports activities – fall within the scope of application of the exemption established in letter 8) or the exemption established in letter 19) of article 9º of the VAT Code.

• Letter 8) of article 9º of the VAT Code exempts:

1. The provision of services provided by non-profit organizations that operate establishments or facilities intended for the practice of artistic, sports, recreational and physical education activities to persons practising such activities;

By contrast, according to letter 19) of the same provision, the following are exempt:

1. The provision of services and the transmission of goods connected with them provided in the collective interest of its members by non-profit organizations, provided that such organizations pursue objectives of a political, trade union, religious, humanitarian, charitable, recreational, sports, cultural, civic or economic interest representation nature and the only consideration be a fee fixed in accordance with the bylaws;

• The exemption in letter 19) presupposes that the taxable person receives as "only consideration", for the provision of services, "a fee fixed in accordance with the bylaws". The Tax Authority, in the Inspection Report, which serves as the foundation for the challenged acts, alleges and demonstrates sufficiently that the Claimant's accounting documentation does not make it possible to prove that it receives as "only consideration" for the provision of services "a fee fixed in accordance with the bylaws".

• The Tax Authority demonstrates statistically (through sampling) in the Inspection Report that 99% of the discharge documents issued for the payment of services provided do not contain any reference to the payment of a "fee" and equally do not identify the payer as a "member". The Claimant does not counter this fact. Which makes it possible to conclude that with respect to 99% of the services provided and remunerated, the Claimant does not prove that the only consideration received is "a fee fixed in accordance with the bylaws". The burden of proof regarding the facts on which the exemption depends falls on the Claimant, in accordance with article 74º of the General Tax Code and with specific case law on the matter of tax benefits.

• Furthermore, it is also proved in the proceedings that the Claimant commercializes its services through the company "I...". When selling the Claimant's services to its customers, I... does not require them to first become members of the Claimant. This means that consumers acquire the Claimant's services through "I...", without being members. This merely reinforces the previous conclusion, that nothing, in the accounts or in the supporting documents, makes it possible to conclude that gymnasium users are members.

• What remains, therefore, to substantiate the exemption of the Claimant, is letter 8) of article 9º, transcribed above, so that it is only on the assumptions of application of the exemption provided for therein that the analysis must henceforth focus.

• We have already seen that letter 8) applies only to entities without profit-making purposes.

• Article 10º of the VAT Code clarifies what, for purposes of this tax, should be understood as "non-profit organization, with the following wording:

Article 10º (Concept of non-profit organizations)

For purposes of exemption, only those which, simultaneously: are considered as non-profit organizations:

a) In no case distribute profits and their governing bodies have no, by themselves or through an intermediary, any direct or indirect interest in the results of the operation;

b) Have bookkeeping that covers all their activities and make it available to the tax services, in particular for proof of the aforementioned;

c) Practice prices approved by public authorities or, for operations not susceptible to approval, prices lower than those required for similar operations by commercial enterprises subject to tax;

d) Do not enter into direct competition with taxable persons.

• The Tax Authority expressly challenges (p. 22 of the Inspection Report) the verification of the latter condition: that the taxable person seeking exemption "does not enter into direct competition with taxable persons". The final question that is raised is thus whether the Claimant is in "direct competition with VAT taxable persons and not exempt from it." For this it becomes necessary to establish what should be understood as "entering into direct competition with taxable persons".

• Article 10º of the VAT Code carries out the transposition of article 133º of the VAT Directive, which states:

Article 133º

Member States may make the granting of any of the exemptions provided for in letters b), g), h), i), l), m) and n) of no. 1 of article 132º conditional, on a case-by-case basis, on organisms that are not public law entities complying with one or more of the following conditions:

a) The organisms in question must not have the objective of the systematic obtaining of profit, with any profits must in no case be distributed, but rather allocated to the maintenance or improvement of the services provided;

b) These organizations must be managed and administered essentially on a voluntary basis by persons who have no, by themselves or through an intermediary, any direct or indirect interest in the results of the operation;

c) These organizations must practice prices approved by public authorities or not exceeding such prices or, with respect to activities not susceptible to price approval, prices lower than those required for similar activities by commercial undertakings subject to VAT;

d) The exemptions cannot be such as to cause distortion of competition to the detriment of commercial undertakings subject to VAT.

• The provision states: "Member States may make conditional (...)". This is unequivocally a faculty. But it seems clear to me that Member States can only make the exemption conditional on the conditions enumerated and not on others. They cannot redefine the conditions, adding others that they find more convenient, or tightening or flexibilizing these conditions, as this would be contrary both to the principle of uniform application of European Union law and to the very letter of article 133.

• Furthermore, the Portuguese rule that carries out the transposition of the Directive, in this case article 10º, cannot fail to be interpreted in light of the fundamental principles of the common VAT system, which include, and above all others, the principle of neutrality of that tax and its exemptions. To this end, we cite the judgment of the CJEU in case C-89/81, Hong-Kong Trade (par. 5 and 6):

(...) It is advisable to identify the relevant characteristics of the common value added tax system in light of its purpose.

This purpose, which the Second Directive mentions in its preamble by referring to the First Directive (...) is made clear from the preamble of the latter, which refers to the need to achieve a harmonization of legislation on taxes on transactions that achieves the elimination of factors that can distort the conditions of competition, and thereby guarantee neutrality in competition, in the sense that, within each State, similar goods must be subject to the same tax, whatever the length of the chain of production and distribution.

• On the scope of the principle, English writes:

On numerous occasions, the CJEU has elaborated on the two main dimensions of fiscal neutrality in VAT and their implications for the concrete application of legal norms on VAT: first, it requires the immediate and full deduction of VAT supported insofar as the source acquisitions of that tax are used in transactions subject to tax. Second, the principle guarantees equal treatment of competing suppliers offering the same products and services. In both respects, the principle of neutrality is an idée directrice both for the CJEU and for national courts in the teleologically directed application of the VAT Directive and of domestic legislation on VAT.

• On the principle of VAT fiscal neutrality in its equal treatment dimension, let us cite the decision of the CJEU in the joined cases C-110/98 to C-147/98, Gabalfrisa SL and others v. State Tax Administration Agency, of 21-03-2000, 2000 I-01577, par. 44:

The common VAT system thus guarantees perfect neutrality as to the tax burden of all economic activities, whatever their purposes or results, provided that such activities are themselves subject to VAT (see in particular the judgments of 14 February 1985, Rompelmann, 268/83, Collection, p. 655, no. 19, and 15 January 1998, Ghent Coal Terminal, C-37/95, Collection, p. I-1, no. 15).

• The author cited above continues by saying:

Furthermore, as the Court recently stated in the Rusedespred case, the principle of neutrality also limits the discretion of Member States in areas in which they still have some options or even autonomy. Here, the principle may have direct effect, overriding national legislation in favor of taxable persons.

• That is, in the interpretation of national legislation, the law-applying authority (the judge) is obliged to be guided by the principle of VAT fiscal neutrality, in its dual aspect of the right to deduction and equal