CAAD Process 586/2018-T: VAT Exemption for Medical Services - Supervening Uselessness of Proceedings

ARBITRAL DECISION

The arbitrators Dr. Alexandra Coelho Martins (president arbitrator), Dr. Ricardo Rodrigues Pereira and Dr. João Menezes Leitão (arbitrator members), appointed by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Tribunal, agree as follows:

I. REPORT

1. On November 22, 2018, the company A..., S.A., Tax ID Number ...with registered office at Street ..., ..., ..., Porto (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, under the combined provisions of articles 2, paragraph 1, subparagraph a), and 10, paragraph 2, of Decree-Law no. 10/2011, of January 20, which approved the Legal Regime for Arbitration in Tax Matters, with the wording introduced by article 228 of Law no. 66-B/2012, of December 31 (hereinafter, abbreviated as LRAT), and article 11, paragraph 1, of Decree-Law no. 81/2018, of October 15, with a view to the pronouncement of this tribunal regarding:

(i) Declaration of illegality and annulment of additional VAT assessments and compensatory interest, in the total amount of €995,623.92, relating to the years 2007, 2008, 2009 and 2010.

(ii) Indemnity for costs incurred with the provision of a bank guarantee to stay the fiscal execution proceedings instituted for compulsory collection of the aforementioned amount.

The Claimant attached 14 (fourteen) documents – having not requested the production of any other evidence – and a certificate issued pursuant to the provisions of article 11 of Decree-Law no. 81/2018, of October 15.

The Respondent is the Tax and Customs Authority (hereinafter, Respondent or AT).

The Claimant alleges, in substance, that the contested tax acts suffer from a defect of violation of law, due to erroneous interpretation and application of the provisions of articles 9, paragraphs 1 and 2, and 12, paragraph 1, subparagraph b), of the VAT Code and article 132, paragraph 1, subparagraphs b) and c), of the VAT Directive, substantiating its position in the argument that it summarizes in the following conclusions:

"FIRST – the assessments result from an erroneous interpretation of the case law of the CJEU, in particular, the Kügler judgment (Case C-141/00), which led the Porto Tax Authority to state that paragraph 2 of article 9 of the VAT Code exempts medical and paramedical services provided solely in the hospital environment, including closely related operations, while paragraph 1 of article 9 of the VAT Code is intended to exempt medical and paramedical services provided outside such places, whether in the private residence of the provider, in the patient's home, or in any other place, based on article 132, paragraph 1, subparagraphs b) and c) of the VAT Directive, respectively.

SECOND – the subjective scope of application of subparagraphs b) and c) of paragraph 1 of article 132 of the VAT Directive is distinct and does not overlap, lest it render meaningless the requirement established in subparagraph b) that it be a public body or a private body operating under social conditions analogous to those of public bodies.

THIRD – the distinction in the scope of application of subparagraphs b) and c) of paragraph 1 of article 132 of the Directive, is based on the concept of body or establishment which, according to CJEU case law, suggests the existence of an individualized (autonomous) entity that performs a special function distinguishing itself from the natural persons that comprise it. Consequently, subparagraph b) applies to bodies or establishments, while subparagraph c) applies to other entities that do not constitute bodies or establishments.

Thus, on the one hand, it is clear that subparagraph b) does not contemplate only situations occurring within the hospital setting stricto sensu, but in all bodies normatively provided for, as follows, in particular, from the L.u.P case law (Case C-106/05), and which include medical assistance and diagnostic centers. On the other hand, it is not sufficient that medical services be provided in a hospital setting for the possibility of applying the exemption provided for in subparagraph c) to be excluded, as follows from the Klinikum Dortmund judgment (Case C-366/12).

It is, therefore, false that subparagraph c) is intended to exempt medical services provided outside the hospital environment, being necessary, instead, that such services occur within the framework of a trust relationship between the patient and the service provider in such a way that they are attributable to the concrete health professional and not ensured by a body (cf. judgments Commission/United Kingdom (Case 353/85), §33; Dornier (Case C-45/01) §47 and Kügler (Case C-141/00), § 36; Klinikum Dortmund (Case C-366/12) §33.

FOURTH – from a reading of article 132, paragraph 1, subparagraphs b) and c), of the VAT Directive, and taking into account the CJEU case law, it must be concluded that:

[1] subparagraph b) applies to medical services provided by public law bodies or private law bodies operating under social conditions analogous to those of public law bodies (i.e., as a rule carried out without profit-making intent), when they carry out medical services occurring in hospital establishments, medical and diagnostic assistance centers and other establishments of the same nature, in such a way that the activity is attributed to an institutional and organized entity, independent of the natural persons that comprise it.

[2] subparagraph c) applies to medical services, provided within the framework of a trust relationship between patient and service provider, in such a way that the service is attributed to the natural person who actually performs the service.

FIFTH – taking into account the subjective scope of application of subparagraphs b) and c), of paragraph 1, of article 132 of the VAT Directive, it is concluded that, in light of the VAT Directive, the Claimant could not be exempt because:

[1] it did not fall within subparagraph c), since, on the one hand, it had its own structure distinct from that of its shareholders and the natural persons that comprised it, being a body in the meaning of the VAT Directive. On the other hand, the manner in which it developed its activity did not fit within a trust relationship between patient and service provider, in the sense of CJEU case law.

[2] it did not fall within subparagraph b), since, although it was one of the bodies expressly contemplated in the provision of the rule (i.e. "diagnostic center") – cf. judgments L.u.P (Case C-106/05) and Nathalie De Fruytier (Case C-334/14) –, it was not a public body or a private body operating under analogous social conditions.

In fact, the Claimant was a private entity aimed at profit-making, with full economic and legal independence from the Public Administration. Moreover, the need to ensure competition in the market for the provision of clinical analysis services would always mean that the Claimant could not be exempt, by application of the provisions of article 134, subparagraph b) of the VAT Directive.

SIXTH – given the impossibility of, in light of the VAT Directive, the Claimant's Clinical Analyses activity being exempt, the Assessments should be annulled on the basis that they are based on an interpretation of the internal rule contrary to the VAT Directive (vertical direct effect).

SEVENTH – interpreting article 9, paragraphs 1 and 2, of the VAT Code, taking into account the VAT Directive as well as CJEU case law, we conclude that, even in an interpretation that ignores the formal criterion of distinction envisaged by the legislator (i.e., application of paragraph 1 to natural persons and paragraph 2 to legal persons), the fact is that article 9, paragraph 2, of the VAT Code should always apply to situations in which there is an institutionalized and organized organization of means to which the service is attributable. In any of the situations, it is evident that the Claimant fell within that regulatory provision and, consequently, should have been able to waive the VAT exemption, in accordance with article 12, paragraph 1, subparagraph b), of the VAT Code.

EIGHTH – in light of the principle of interpretation in conformity, imposed by Union Law, internal legislation should be interpreted in a way that respects the commands of the Union, so that, also by this means, one would reach the conclusion that article 9, paragraph 2, of the VAT Code should be applied, as only in this way would the waiver of the exemption be allowed, ensuring that the Claimant would be subject to and not exempt from VAT, as determined by the VAT Directive.

NINTH – both from information from the Tax and Customs Authority, directly provided to the Claimant (then parent company of the Laboratory of Clinical Pathology C..., S.A.), and from consultation of administrative doctrine on the matter, the position of the Tax Authority regarding the possibility of waiver of the exemption by the Claimant was always unequivocal in the sense that it could waive the VAT exemption. Consequently, without prejudice to the legitimacy of a change of understanding by the Tax and Customs Authority (this, independent of the discussion as to the legality of the new position), it will be illegitimate and illegal, as it is contrary to the principles of good faith and legal certainty, for the Tax and Customs Authority to alter its position with retroactive effects, seriously harming the Claimant.

TENTH – there is no legal basis for the Tax and Customs Authority to assess deductible tax during the period in which the taxable person was classified under the optional taxation regime, and during which it assessed tax on its active operations.

This is all the more evident in that the Porto Tax Authority only gives partial effect to the Claimant's reclassification, insofar as it disregards the amounts it assessed, and in the end, constitutes an illegitimate unjust enrichment of the State, particularly striking when the institute of waiver of exemption does not represent any tax benefit, but rather forms part of the logic of the operation of the tax (which, incidentally, is distorted when incomplete exemptions are applied)."

1. The request for constitution of the arbitral tribunal was accepted and automatically notified to the AT on November 28, 2018.

2. On January 11, 2019, the AT came forward, in accordance with and for the purposes of the provisions of article 13, paragraph 1, of the LRAT, to present a request, communicating the revocation of the contested tax acts, in the following terms:

"The AT – Tax and Customs Authority, respondent entity in the above-referenced proceedings, where Claimant is A..., S.A., hereby informs, for the purposes of the provision of art. 13 of the LRAT, that it has proceeded to revoke the acts challenged by the Claimant."

1. On January 14, 2019, the Claimant was duly notified of both that request from the AT and the order of the President of CAAD, with the following content:

"With reference to Case no. 586/2018-T and in the sequence of the communication from the Tax and Customs Authority provided for in article 13, paragraph 1 of Decree-Law no. 10/2011, of January 20 (LRAT), you are requested to inform the CAAD, if you wish, on the continuation of the procedure, in light of the circumstances provided for in article 13, paragraph 2 of the LRAT."

1. The Claimant did not proceed with the appointment of an arbitrator, so that, under the provisions of article 6, paragraph 2, subparagraph a) and article 11, paragraph 1, subparagraph a), of the LRAT, on January 14, 2019, the President of the Deontological Council of CAAD appointed the undersigned as arbitrators of the collective arbitral tribunal, who communicated acceptance of the appointment within the applicable time limit.

On that same day, the Parties were notified of that appointment, having not expressed a willingness to refuse the appointment of arbitrators, in accordance with the combined provisions of article 11, paragraph 1, subparagraph b), of the LRAT and articles 6 and 7 of the CAAD Code of Ethics.

1. On January 18, 2019, in the sequence of the aforementioned notification directed to it, the Claimant came forward to pronounce itself in the following terms:

"1. In the present proceedings, the Claimant seeks (i) the annulment of the assessments in question on the ground of violation of law, as well as (ii) indemnity for all costs and expenses arising from the suspension of the fiscal execution proceedings instituted, pursuant to articles 53 of the LGT and 171 and 183 of the CPPT.

However,

1. The Claimant was not, until this date, notified of the said "revocation" of the assessments in question, so that, if such an act exists – which, naturally, is not contested – its full production of legal effects enforceable against the Claimant has not yet taken place.

2. Therefore, it is not clear the full extent of the effects of such "revocation", in particular, because the corresponding statement demonstrating the annulment of the assessments and assumption of the corresponding duties of indemnity is unknown, in particular, pursuant to article 53 of the LGT.

3. It should be noted, in this context, that the Claimant considers it necessary to annul in the proper sense the acts of assessment and not their "revocation", since there is a defect of violation of law.

4. Furthermore, the Respondent still has the obligation to proceed with the refund to the Claimant of all amounts paid and any amounts that may come to be borne to stay the fiscal execution, increased by legal interest from the date of payment to actual refund, all with the appropriate legal consequences, pursuant to paragraphs 1 and 2 of article 53 of the LGT and articles 171 and 183 of the CPPT.

5. In this context, the Claimant demanded the refund, in particular, of costs incurred with the provision and maintenance of unwarranted guarantee which, on the present date, exceed the sum of 236,421.82 Euros (cf. supporting documentation already attached with the request for arbitral pronouncement as doc. 14).

6. However, regarding this matter, the Respondent said nothing.

Thus,

1. The Claimant considers that the action should continue as long as (i) the Claimant is not notified of the annulment of the assessments accompanied by the corresponding statements and (ii) the Claimant is not compensated for the amounts borne with the stay of execution proceedings, increased by the competent interest.

2. In this sense, the Claimant considers it necessary for the Respondent to take a clear position on all issues that are the subject of the proceedings, failing which the Claimant will maintain an interest in the complete continuation of the action, with all legal consequences, in particular, regarding responsibility for payment of arbitral fees."

3. In conformity with the provisions of article 11, paragraph 1, subparagraph c), of the LRAT, the Collective Arbitral Tribunal was constituted on February 4, 2019.

4. On February 5, 2019, the AT came forward to present the following request, to which it attached the order of revocation of the contested tax acts, issued on 01.11.2019 by the Deputy Director-General of the AT:

"1. The AT proceeded to revoke the challenged act and communicated that revocation to the CAAD within the 30-day period expressly provided for this purpose in art. 13 of the LRAT.

1. Although the Claimant was not notified within that 30-day period, it is nevertheless verified that the AT exercised the faculty conferred on it by art. 13 of the LRAT within the legal time limit for this purpose, as evidenced by the revocation order of 11/01/2018, appended in information no. 1009 of the VAT Services Directorate, a copy of which is attached.

2. Meanwhile, the Claimant also submitted a request to the AT requesting indemnity for unwarranted provision of guarantee in fiscal execution proceedings, with the services proceeding in accordance.

3. Thus, it is imperative to conclude that the AT timely exercised the faculty conferred on it by art. 13 of the LRAT, which is further compounded by the fact that there is no procedural object that justifies the maintenance of the dispute with the constitution of the arbitral tribunal."

4. Notified of that request, the Claimant came forward to pronounce itself in the following terms:

"1. The Respondent came forward, through a request dated February 5, to argue that there is no procedural object that justifies the maintenance of the present proceedings.

1. It justifies its position, reporting that it proceeded to revoke the challenged act and, for the purpose of article 13 of the LRAT, communicated this fact within 30 days, despite acknowledging that the Claimant was not notified within such period.

2. Now, the Claimant seeks, in the present proceedings, (i) the annulment of the assessments in question on the ground of violation of law, as well as (ii) indemnity for all costs and expenses arising from the suspension of the fiscal execution proceedings instituted, pursuant to articles 53 of the LGT and 171 and 183 of the CPPT.

3. However, the Claimant was not, until this date, notified of the said "revocation" of the assessments in question, so that its full production of legal effects enforceable against the Claimant has not yet taken place.

4. Indeed, it is not clear the full extent of the effects of such "revocation", in particular, because the corresponding statement demonstrating the annulment of the assessments and the assumption of the corresponding duties of indemnity is unknown, in particular, pursuant to article 53 of the LGT.

5. The Claimant therefore considers it necessary to annul in the proper sense the acts of assessment, since there is a defect of violation of law.

6. Furthermore, the Respondent still has the obligation to proceed with the refund to the Claimant of all amounts paid and any amounts that may come to be borne to stay the fiscal execution, increased by legal interest from the date of payment to actual refund, all with the appropriate legal consequences, pursuant to paragraphs 1 and 2 of article 53 of the LGT and articles 171 and 183 of the CPPT.

7. In this context, part of the object of the present proceedings is the request for indemnity relating to costs incurred with the provision and maintenance of unwarranted guarantee which, on the present date, amount to EUR 251,126.03.

8. However, regarding this matter, the Respondent only states, in the request presented, that the Claimant in the meantime requested indemnity from the AT, when in fact this forms part of the request in the present proceedings.

9. Furthermore, the Respondent states, regarding the request for indemnity, that the services are proceeding in accordance, with no assumption of responsibility thus resulting.

Thus,

1. The Claimant considers that the action should continue as long as (i) the Claimant is not notified of the annulment of the assessments accompanied by the corresponding statements and (ii) the Claimant is not compensated for the amounts borne with the stay of execution proceedings, increased by the competent interest.

2. In this sense, the Claimant completely disagrees with the Respondent's position that 'there is no procedural object that justifies the maintenance of the dispute'."

3. Subsequently, an order was issued ordering the continuation of the proceedings.

4. The AT filed a Reply in which it argues for the merits of the exception of original futility of the case due to lack of procedural object at the date of constitution of this Arbitral Tribunal, invoking, essentially, the following:

"10. The AT understands that once the faculty provided for in art. 13 of the LRAT is exercised, within the 30-day period expressly provided for this purpose, as is the case in the present proceedings, there ceases to exist a procedural object that justifies the constitution of the Arbitral Tribunal.

1. Although the Claimant was not notified within that 30-day period, it is nevertheless verified that the AT exercised the faculty conferred on it by art. 13 of the LRAT within the legal time limit for this purpose, (...).

2. Notification of the revocation to the Claimant constitutes a mere formality that does not call into question the materiality of the situation, substantiated in the effective revocation/annulment of the contested tax acts, which, by that means, ceased to exist in the legal order. (...).

3. Since the Arbitral Tribunal lacks the tax acts on which the annulment claim is based, given that they were eliminated from the legal order, it is imperative to conclude that any pronouncement by the Arbitral Tribunal appears to be an improper pronouncement for the purposes of art. 28, paragraph 1, subparagraph c) of the LRAT.

4. The same applies to the request for indemnity for unwarranted provision of guarantee, merely accessory to the main claim, on which the Arbitral Tribunal can no longer pronounce. (...).

5. As for the accessory claim for indemnity for unwarranted provision of guarantee, it results directly and immediately from the law, as an effect of the administrative annulment of those tax acts, similar to what would happen if the tax acts were annulled by judicial/arbitral decision.

6. Not existing, also in this respect, any interest in obtaining a pronouncement from the Arbitral Tribunal. (...).

7. Similarly to what occurs with the execution of an arbitral decision annulling tax acts (execution of res judicata), also in the execution of an administrative act (execution of the decided case) the AT is obliged to reconstitute the situation that would have existed if the annulled tax act had not been practiced."

8. The Tribunal dispensed with the holding of the meeting referred to in article 18 of the LRAT, granted a period for the presentation of optional and successive written submissions, and set August 4, 2019 as the deadline for the issuance of the arbitral decision.

9. Both Parties filed written submissions, in which they reiterated the positions previously assumed regarding the question of futility of the case, with the AT further raising the question of the value of the case, suggesting that it "cannot already include the value of tax assessed and subsequently revoked."

II. PRELIMINARY RULING

1. The Arbitral Tribunal was regularly constituted and is competent ratione materiae, given the configuration of the object of the proceedings (cf. articles 2, paragraph 1, subparagraph a) and 5 of the LRAT).

The request for arbitral pronouncement is timely.

The parties enjoy legal personality and legal capacity, have standing and are regularly represented (cf. articles 4 and 10, paragraph 2, of the LRAT and article 1 of Ordinance no. 112-A/2011, of March 22).

The proceedings do not suffer from any defects.

The AT, as has been stated, invokes the exception of original futility of the case for lack of procedural object at the date of constitution of this Arbitral Tribunal and raises the question of the value of the case; for the assessment and decision of these questions, it is necessary to first determine the factual basis.

No other exceptions or preliminary questions have been invoked that prevent consideration of the merits and that must be assessed.

III. REASONING

III.1. ON THE FACTS

§1. FINDINGS OF FACT

1. With relevance for the decision, the following facts are considered proven:

a) The Claimant is a commercial company whose activity is the provision of clinical analysis services, being registered, for tax purposes, in the activity "Clinical Analysis Laboratories", with CAE 086901. [cf. document no. 4 attached to the arbitral petition]

b) Despite the classification of its activity under the VAT exemption regime, provided for in paragraph 2 of article 9 of the VAT Code, the Claimant opted for the normal taxation regime, waiving the VAT exemption, pursuant to subparagraph b) of paragraph 1 of article 12 of the VAT Code, by submission of a declaration of changes, effective July 1, 2006. [cf. document no. 4 attached to the arbitral petition]

c) The Claimant, since the aforementioned date, has proceeded to assess VAT on the clinical analysis services it provides, deducting the VAT borne, in the terms legally provided. [cf. document no. 4 attached to the arbitral petition]

d) The Claimant was subject to an external tax inspection, of partial scope, authorized by Service Orders nos. OI2010..., OI2010...and OI2010..., relating to VAT for the financial years of, respectively, 2006, 2007 and 2008, 2009 and 2010, with the respective Tax Inspection Report being hereby fully reproduced, from which the following purely arithmetical corrections resulted in the context of VAT: year 2006 - €212,829.64; year 2007 - €272,140.82; year 2008 - €262,815.63; year 2009 - €287,840.39; and, year 2010 - €96,747.28. [cf. document no. 4 attached to the arbitral petition]

e) In the sequence of those purely arithmetical corrections – which underlie, in summary, the following reasoning: "In no case do the services provided involve hospitalization or admission of patients, and (...), it is verified that they are not carried out in the hospital environment, so that they cannot be considered exempt under the classification in paragraph 2 of art. 9 of the VAT Code, but rather under paragraph 1 of the same article. In this way, being classified under paragraph 1 of art. 9 of the VAT Code, the taxable person could not waive the exemption, due to the absence of a legal rule allowing it to do so. (...) Not being able to the taxable person to effect the waiver of the exemption, it would continue to be classified under the exemption regime provided for in art. 9 of the VAT Code, which implies the non-acceptance of all the VAT deducted from 01-07-2006, as provided for in paragraph 1 of art. 20 of the VAT Code, this comprising the regularization that the taxable person benefited from, pursuant to art. 25 of the VAT Code, in the amount of €85,705.22." [cf. document no. 4 attached to the arbitral petition] – the AT issued the following additional VAT assessments and compensatory interest, in the total amount of €995,623.92:

Period Nature Assessment No. Payment Deadline Amount Due

Mar-07Q VAT ... 03.31.2011 €57,809.26

Mar-07Q CI ... 03.31.2011 €8,299.19

Jun-07Q VAT ... 03.31.2011 €88,867.74

Jun-07Q CI ... 03.31.2011 €11,852.28

Sep-07Q VAT ... 03.31.2011 €53,325.17

Sep-07Q CI ... 03.31.2011 €6,580.18

Dec-07Q VAT ... 03.31.2011 €72,138.65

Dec-07Q CI ... 03.31.2011 €8,174.40

Jan-08 VAT ... 03.31.2011 €20,391.71

Jan-08 CI ... 03.31.2011 €2,257.06

Feb-08 VAT ... 03.31.2011 €25,972.52

Feb-08 CI ... 03.31.2011 €2,786.53

Mar-08 VAT ... 03.31.2011 €18,448.43

Mar-08 CI ... 03.31.2011 €1,914.59

Apr-08 VAT ... 03.31.2011 €19,214.98

Apr-08 CI ... 03.31.2011 €1,930.97

May-08 VAT ... 03.31.2011 €20,607.01

May-08 CI ... 03.31.2011 €2,005.37

Jun-08 VAT ... 03.31.2011 €21,121.38

Jun-08 CI ... 03.31.2011 €1,981.36

Jul-08 VAT ... 03.31.2011 €20,526.97

Jul-08 CI ... 03.31.2011 €1,858.11

Aug-08 VAT ... 03.31.2011 €12,951.21

Aug-08 CI ... 03.31.2011 €1,129.77

Sep-08 VAT ... 03.31.2011 €20,714.63

Sep-08 CI ... 03.31.2011 €1,736.62

Oct-08 VAT ... 03.31.2011 €19,819.06

Oct-08 CI ... 03.31.2011 €1,596.38

Nov-08 VAT ... 03.31.2011 €26,961.16

Nov-08 CI ... 03.31.2011 €2,074.16

Dec-08 VAT ... 03.31.2011 €36,086.57

Dec-08 CI ... 03.31.2011 €2,661.51

Jan-09 VAT ... 03.31.2011 €24,266.47

Jan-09 CI ... 03.31.2011 €1,715.27

Feb-09 VAT ... 03.31.2011 €23,637.06

Feb-09 CI ... 03.31.2011 €1,582.71

Mar-09 VAT ... 03.31.2011 €21,047.93

Mar-09 CI ... 03.31.2011 €1,344.76

Apr-09 VAT ... 03.31.2011 €27,963.69

Apr-09 CI ... 03.31.2011 €1,688.55

May-09 VAT ... 03.31.2011 €25,713.20

May-09 CI ... 03.31.2011 €1,473.75

Jun-09 VAT ... 03.31.2011 €17,667.24

Jun-09 CI ... 03.31.2011 €952.58

Jul-09 VAT ... 03.31.2011 €28,432.14

Jul-09 CI ... 03.31.2011 €1,436.41

Aug-09 VAT ... 03.31.2011 €20,538.17

Aug-09 CI ... 03.31.2011 €965.58

Sep-09 VAT ... 03.31.2011 €25,590.90

Sep-09 CI ... 03.31.2011 €121.79

Oct-09 VAT ... 03.31.2011 €19,784.02

Oct-09 CI ... 03.31.2011 €802.20

Nov-09 VAT ... 03.31.2011 €20,479.88

Nov-09 CI ... 03.31.2011 €758.60

Dec-09 VAT ... 03.31.2011 €32,719.69

Dec-09 CI ... 03.31.2011 €1,104.40

Jan-10 VAT ... 03.31.2011 €19,130.56

Jan-10 CI ... 03.31.2011 €582.83

Feb-10 VAT ... 03.31.2011 €17,090.38

Feb-10 CI ... 03.31.2011 €462.61

Mar-10 VAT ... 03.31.2011 €21,456.13

Mar-10 CI ... 03.31.2011 €514.95

Apr-10 VAT ... 03.31.2011 €19,543.73

Apr-10 CI ... 03.31.2011 €400.51

May-10 VAT ... 03.31.2011 €19,526.48

May-10 CI ... 03.31.2011 €333.82

f) In disagreement with the aforementioned assessments, on May 3, 2011, the Claimant filed a Judicial Challenge with the Administrative and Tax Court of Porto, which proceeded in Organizational Unit 5, under case no. .../11...BEPRT. [cf. document no. 2 attached to the arbitral petition]

g) The Claimant did not voluntarily pay the aforementioned assessments, for which reason fiscal execution proceedings were instituted in the competent Finance Service, with the Claimant, on June 17, 2011, providing a bank guarantee in the amount of €1,556,074.78 (Bank Guarantee No..., issued by Bank B..., S.A. on June 16, 2011), aimed at suspending those execution proceedings. [cf. document no. 13 attached to the arbitral petition]

h) The costs (commissions and taxes) borne by the Claimant with the provision and maintenance of that bank guarantee amounted to a total of €261,232.81. [cf. document submitted by the Claimant with its request dated 27.03.2019]

i) On November 22, 2018, the Claimant filed the request for constitution of an arbitral tribunal that gave rise to the present proceedings, pursuant to the provisions of article 11 of Decree-Law no. 81/2018, of October 15. [cf. CAAD Case Management System]

j) On January 11, 2019, by order of the Deputy Director-General of the AT, issued on information no. 1009, of that same date, which is hereby fully reproduced, the contested tax acts were revoked, essentially with the following reasoning: "The DSCJC submitted information with the following content: 'Doctrine and case law unanimously conclude that the CJEU has clarified the topic under discussion by deciding that the activity of providing clinical analysis services by clinical analysis laboratories is covered, in view of its therapeutic purpose, by the concept of medical assistance with classification under paragraph 2 of art. 9 of the VAT Code, which, in turn, benefits from the possibility of waiver of the exemption provided for in subparagraph b) of paragraph 1 of art. 12 of the VAT Code. In view of decisions already issued on this topic, it does not appear that the AT can obtain a winning judgment of the case, with no case law from the superior courts existing which, in the event of non-merits of the request for arbitral pronouncement, would enable the appeal provided for in art. 25 of the LRAT.'" [cf. document submitted by the AT with its request dated 05.02.2019]

k) The present Collective Arbitral Tribunal was constituted on February 4, 2019. [cf. CAAD Case Management System]

l) The revocation of the assessment acts challenged in this proceeding was not notified by the AT to the Claimant until the date of constitution of this Arbitral Tribunal. [fact acknowledged by the AT]

§2. UNPROVEN FACTS

1. With relevance for the decision, there are no facts that were not proven.

§3. REASONING ON THE FACTUAL MATTERS

1. The Tribunal's conviction was based on the facts alleged by the Parties, whose adherence to reality was not called into question, and on the critical analysis of the documentary evidence in the file, all as referred to in connection with each item of the findings.

III.2. ON THE LAW

1. Considering the events and procedural developments described above in the Report and taking into account the stated requests formulated by the Claimant, the following are the questions currently submitted to the assessment of this Tribunal:

a) The futility of the case;

b) Indemnity for unwarranted provision of guarantee;

c) The value of the case;

d) Responsibility for procedural costs.

§1. THE FUTILITY OF THE CASE

1. As we have already noted above, the Claimant raised the following requests:

(i) Declaration of illegality and annulment of the additional VAT assessments and compensatory interest, in the total amount of €995,623.92, relating to the years 2007, 2008, 2009 and 2010.

(ii) Indemnity for costs incurred with the provision of a bank guarantee to stay the fiscal execution proceedings instituted for compulsory collection of the aforementioned amount.

Following notification of the request for constitution of the arbitral tribunal to the AT (cf. article 10, paragraph 3, of the LRAT), the contested tax acts were revoked by order of January 11, 2019, of the Deputy Director-General of the AT (cf. proven fact j)), with the AT thus making timely use of the faculty conferred on it by article 13, paragraph 1, of the LRAT; however, the AT did not pronounce on the request for indemnity for unwarranted provision of guarantee.

As was proven, this Arbitral Tribunal was constituted on February 4, 2019, without the AT having notified the Claimant of the act of revocation of the contested assessments up to that date (cf. proven facts k) and l)).

The AT argues that, given the revocation of the contested assessments, the present proceedings are without object, and that as for the sought-for indemnity for unwarranted guarantee, this results directly and immediately from the law, as an effect of the administrative annulment of those tax acts, and that therefore there is no interest for the Claimant in obtaining a pronouncement from the Arbitral Tribunal on this question. The AT further understands that notification of the revocation constitutes a mere formality that does not call into question the revocation/annulment of the contested tax acts.

For its part, the Claimant considers that, in addition to having revoked the assessments in question, the AT should also have taken a position on the sought-for indemnity for unwarranted provision of guarantee. The Claimant further states that the production of effects of the aforementioned revocation depends on its notification to the Claimant itself. Thus, the Claimant argued that the present proceedings should continue as long as it was neither notified of the annulment of the assessment acts nor compensated for the amounts borne with the stay of execution proceedings.

We state in advance that it is our understanding that the Claimant is correct, for the reasons that we shall explain below.

1. It is, indeed, incontestable that the AT proceeded to revoke the assessment acts in question without, at the same time, acknowledging the Claimant's right to indemnity for unwarranted provision of guarantee and, much less, proceeding to pay any amount to the Claimant.

As Jorge Lopes de Sousa states (in Nuno de Villa-Lobos and Tânia Carvalhais Pereira (Coord.), Guide to Tax Arbitration, Revised and Updated, 2nd Edition, Coimbra, Almedina, 2017, pp. 171 and 172), with total relevance to the concrete case:

"...if a revocatory act is practiced without new regulation of the legal situation, but effects produced by the revoked act subsist, it appears that the proceedings may continue in relation to those effects, if elimination of them was requested, as permitted by article 65, paragraph 1, of the CAPT, subsidiarily applicable, under article 29, paragraph 1, subparagraph c), of the LRAT.

This is what occurs, for example, when the act is revoked, but prejudices resulting from provision of guarantee subsist, the indemnity for which was requested in the judicial challenge proceedings, under paragraph 2 of article 171 of the CPPT.

In a situation of this type, one is faced with only a partial elimination of the object of the proceedings, which should not be an obstacle to its continuation for assessment of the requests formulated that were not satisfied by the revocatory act."

In another respect, article 77, paragraph 6, of the LGT provides that the effectiveness of the decision of the tax procedure depends on notification, with article 36, paragraph 1, of the CPPT determining that tax acts that affect the rights and legitimate interests of taxpayers only produce effects with respect to them when validly notified to them.

As Serena Cabrita Neto and Carla Castelo Trindade properly state (Tax Dispute, Procedure, Principles and Guarantees, Volume I, Coimbra, Almedina, 2017, p. 196), "[t]axable persons and other recipients of acts practiced by the Administration in the context of the tax procedure have the right to a valid notification, constituting this a guarantee of taxpayers, just as the right to information or participation in the procedure. In fact, the right to notification of administrative acts in general is enshrined in article 268, paragraph 3 of the CRP, imposing on the Administration, in the words of Gomes Canotilho and Vital Moreira, 'a duty to give notice to interested parties by means of official and formal communication, in the form provided by law'. Notification, according to these authors, should respect the administrative act 'considered as a whole', that is, should include its reasoning."

With respect to the compatibility between the two cited rules, Jorge Lopes de Sousa (Code of Tax Procedure and Process, Annotated and Commented, Volume I, 6th Edition, Lisbon, Áreas Publisher, 2011, p. 341) advocates that article 36, paragraph 1, of the CPPT, "in face of the supremacy of the LGT over the CPPT (art. 1 thereof) must be interpreted in harmony with the provision of paragraph 6 of art. 77 of the LGT, in which it is determined that the effectiveness of the decision of the tax procedure depends on notification, without any restriction being established to the decisions that affect rights and legitimate interests.

This requirement of notification as a condition of effectiveness of acts with external effect to the tax administration services is also formulated by art. 268, paragraph 3, of the CRP."

In this same sense, delimiting the acts that should be validly notified to their respective recipients, under penalty of ineffectiveness, Serena Cabrita Neto and Carla Castelo Trindade (op. cit., p. 197) state the following:

"From a reading of article 36 of the CPPT, one might understand that only the effectiveness of tax acts that affect the rights and legitimate interests of taxpayers is dependent on their valid notification. However, article 77, paragraph 6 of the LGT already seems to provide for a general requirement that all tax or tax-related acts be notified, under penalty of their ineffectiveness. Thus, we understand that the requirement of notification as a condition of effectiveness will apply to all tax or tax-related acts with external effectiveness, not being restricted to those that affect the rights and legitimate interests of taxpayers. That is, the effectiveness of all decisions of the Tax Administration, taken at the level of the tax procedure depends on their valid notification, when another more solemn form of externalization is not provided, such as, for example, publication of the act."

It should further be stated that "notification, in order to produce its effects, must be made in the forms provided by law, and communication of the existence of an administrative act made in judicial proceedings does not count as such" (Diogo Leite de Campos, Benjamim Silva Rodrigues and Jorge Lopes de Sousa, General Tax Law, Annotated and Commented, 4th Edition, Lisbon, Encontro da Escrita, 2012, p. 682). Tax acts must therefore be validly notified to their recipients, by which is meant that "there are requirements that notifications – themselves, and not the acts to which they relate – must meet in order to be valid, it being necessary to distinguish (i) formal requirements [relating to the form that notification must take] and (ii) material or substantive requirements [relating to the content of notifications]" (Joaquim Freitas da Rocha, Lessons in Tax Procedure and Process, 3rd Edition, Coimbra, Coimbra Publisher, 2009, pp. 117 and 118).

1. That said, returning to the concrete case, since the AT revoked the contested tax acts without having pronounced on the sought-for indemnity for unwarranted provision of guarantee, we are confronted with only a partial elimination of the object of this proceeding, which justifies continuation of the proceedings for assessment of the request that was not satisfied by the aforementioned revocatory act, that is, indemnity for unwarranted provision of guarantee.

It is further evident that the constitution of this Arbitral Tribunal is all the more justified if one takes into account both that the aforementioned act of revocation was not notified to the Claimant either within the period provided for in article 13, paragraph 1, of the LRAT, or up to the date of constitution of the Arbitral Tribunal, and what we have said above regarding notification to the respective recipients as a condition of effectiveness of tax acts.

1. It thus unequivocally appears to be demonstrated that the AT is not correct regarding the alleged non-existence of procedural object that justifies the constitution of the Arbitral Tribunal and the ensuing continuation of these proceedings, whereby the invoked exception of original futility of the case is judged to be without merit.

2. That being so, in view of the requests formulated by the Claimant, it is now important for us to pronounce on the utility of assessment of the request for declaration of illegality and annulment of the additional VAT assessments and compensatory interest challenged in this proceeding.

Article 277, subparagraph e), of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LRAT, provides that the instance is terminated with the impossibility or supervening futility of the case.

Impossibility of the case occurs in the event of death or extinction of one of the parties, by disappearance or destruction of the object of the proceedings, or by extinction of one of the interests in dispute.

Supervening futility of the case takes place when, by virtue of new facts occurring during the pendency of the proceedings, the decision to be issued no longer has any useful effect, either because it is not possible to satisfy the claim that the plaintiff wishes to assert in the proceedings, or because the goal sought with the action was achieved by other means.

Impossibility or supervening futility of the case is thus translated into an impossibility or legal futility, whose determination has as its reference what is provided in the law.

According to José Lebre de Freitas, Rui Pinto and João Redinha (Code of Civil Procedure Annotated, Volume 1, 2nd edition, Coimbra Publisher, Coimbra, 2008, p. 555), "impossibility or supervening futility of the case occurs when, by fact occurring during the pendency of the instance, the plaintiff's claim cannot be maintained, by virtue of the disappearance of the subjects or the object of the proceedings, or finds satisfaction outside the scheme of the remedy sought. In both cases, settlement of the dispute ceases to be of interest – in the former, by impossibility of achieving the intended result; in the latter, by it having already been achieved by other means."

Returning to the concrete case, we have that the contested tax acts were subject to revocation (annulling in nature, pursuant to the provisions of article 165, paragraph 2, of the CPA), with the reasoning which, in substance, appears in the proven fact j), and which comes down to the verification of error of law regarding the interpretation and application of articles 9, paragraphs 1 and 2, and 12, paragraph 1, subparagraph b), of the VAT Code.

To that extent, the claim formulated by the Claimant, regarding the declaration of illegality and annulment of the assessment acts in question, was frustrated by that administrative action, such annulation and the respective effects in the legal order being verified after the initiation of the present arbitral instance. In fact, although the practice of the act of revocation of the contested assessments (cf. article 79, paragraph 1, of the LGT) occurred before the constitution of this Arbitral Tribunal, its notification to the Claimant occurred only after that moment, that is, that revocatory act only became effective after the beginning of this instance, which means that the instance relating to the assessment of the legality of those assessments is terminated by supervening futility of the case, given that, by having had their effects eliminated by the annulling revocation, assessment loses utility, as regards such assessments, of the alleged defects leading to their invalidity, with the annulment claim raised against them being without object.

1. In these terms, supervening futility of the case is judged to be verified with respect to the request for declaration of illegality and annulment of the additional VAT assessments and compensatory interest that are the subject of the present proceedings, which entails termination of the respective instance (cf. article 277, subparagraph e), of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LRAT).

§2. INDEMNITY FOR UNWARRANTED PROVISION OF GUARANTEE

1. The Claimant requested payment of indemnity for unwarranted provision of guarantee, since it provided a bank guarantee to suspend the fiscal execution proceedings instituted for compulsory collection of the amounts of VAT and compensatory interest assessed (cf. proven fact g)).

Article 171 of the CPPT provides that indemnity in case of a bank guarantee or equivalent improperly provided will be requested in the proceeding in which the legality of the debt to be executed is disputed (paragraph 1) and that indemnity should be requested in the gracious petition, challenge or appeal or in case its basis is supervening within 30 days after its occurrence (paragraph 2).

Thus, it is unequivocal that the judicial challenge proceeding covers the possibility of condemnation in the payment of unwarranted guarantee and it is, in principle, the appropriate procedural means for formulating such a request, which is justified by obvious reasons of procedural economy, as the right to indemnity for unwarranted guarantee depends on what is decided regarding the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal and the request for arbitral pronouncement have as their corollary that the legality of the debt to be executed will be discussed in the arbitral proceedings, whereby, as results from the express tenor of paragraph 1 of article 171 of the CPPT, it is also the arbitral proceeding that is appropriate for assessing the request for indemnity for unwarranted guarantee.

It is, in fact, settled case law of the arbitral tribunals constituted under the CAAD that, with respect to tax acts that are the subject thereof, the arbitral action is the proper means for knowing and assessing the request for indemnity for unwarranted guarantee (cf., by way of example, arbitral decisions issued on November 4, 2013, in case no. 66/2013-T, on May 18, 2016, in case no. 695/2015-T, on January 2, 2017, in case no. 220/2016-T and on June 28, 2017, in case no. 508/2016).

1. The regime of the right to indemnity for unwarranted provision of guarantee consists of article 53 of the LGT, which provides as follows:

Article 53

Guarantee in case of unwarranted provision

1. The debtor who, in order to suspend execution, offers a bank guarantee or equivalent will be indemnified wholly or partially for the prejudice resulting from its provision, if he maintained it for a period exceeding three years in proportion to the ruling in administrative appeal, challenge or opposition to execution that have as their object the debt guaranteed.

2. The time period referred to in the preceding paragraph does not apply when it is verified, in gracious petition or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The indemnity referred to in paragraph 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of indemnificatory interest provided for in this law and can be requested in the proper process of gracious petition or judicial challenge, or autonomously.

4. Indemnity for unwarranted provision of guarantee shall be paid by set-off against the tax revenue of the year in which payment is made.

With respect to this rule, the following was stated in the judgment of the Supreme Administrative Court, of November 21, 2007, issued in case no. 0633/07: "the basis of the right to indemnity lies in the complex fact comprised of the prejudice resulting from the provision of guarantee and the illegal action of the administration due to its error, in improperly assessing, forcing the taxpayer to incur expenses with the constitution of the guarantee which, had that action not taken place, would not have been necessary to provide."

Therefore, being demonstrated the existence of error attributable to the services leading to the illegality of the contested tax act and, consequently, to the unwarranted provision of guarantee for suspension of the fiscal execution resulting from non-payment of the tax debt illegally assessed by that tax act, the taxpayer has the right to be reimbursed for the costs incurred with the provision and maintenance of the guarantee.

1. Returning to the concrete case, the revocation of the contested assessments, effected on January 11, 2019, by order of the Deputy Director-General of the AT, is based on a defect of violation of law, substantiated in error regarding the legal prerequisites of such assessments, specifically in erroneous interpretation and application of articles 9, paragraphs 1 and 2, and 12, paragraph 1, subparagraph b), of the VAT Code (cf. proven fact j)), whereby it is shown to be established that there was error attributable to the services in those assessments that were subject to revocation.

It further appears that the aforementioned acts of additional VAT and compensatory interest assessments were solely at the initiative of the AT, with the Claimant having contributed nothing to them being practiced.

On the other hand, it was proven that the Claimant provided a bank guarantee to suspend the execution proceedings instituted and that, with respect to it, incurred costs (commissions and taxes) in the total amount of €261,232.81 (cf. proven facts g) and h)).

1. In these terms, the provision of the aforementioned bank guarantee by the Claimant is judged to be unwarranted and, consequently, the Claimant is recognized as having the right to indemnity provided for in article 53 of the LGT for the costs incurred with the bank guarantee provided until its respective cancellation, which amount to the total of €261,232.81, without prejudice to the limitation of the quantum of indemnity provided for in article 53, paragraph 3, of the LGT.

§3. THE VALUE OF THE CASE

1. The Respondent raised the question of the value of the case by considering that this "cannot already comprise the value of tax assessed and subsequently revoked."

In the concrete case, the amount of €995,623.22 was indicated in the request for arbitral pronouncement as being the value of the economic utility of the request, with the AT's understanding being that, given the revocation of the contested tax acts, such value is now lower than that amount.

1. In determining the value of the case, the moment when the action is initiated must be taken into account, except when there is a counterclaim or intervention on the main basis, as results from the provisions of article 299, paragraph 1, of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LRAT.

As flows from the provisions of article 259, paragraph 1, of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LRAT, the instance is initiated by the institution of the action and this is considered instituted, initiated or pending as soon as the respective initial petition is received in the secretariat, that is, in the case of the tax arbitral proceedings, as soon as the request for constitution of the Arbitral Tribunal is received in the secretariat of the CAAD.

As Jorge Lopes de Sousa states (Guide to Tax Arbitration, p. 153), "modifications of value that may result from the revocation, ratification, reform or conversion of the tax act whose illegality was raised or from abandonment or reduction of requests are irrelevant.

Similarly, eventual extensions of the original request that are considered admissible will not result in alteration to the value of the case, as they are development or consequence of the original request (article 265, paragraph 2, of the CPC), such as, for example, increase deriving from indemnificatory interest or indemnity for unwarranted guarantee."

1. In these terms, without need for further considerations, the value of the case is fixed at €995,623.22 and, therefore, the Respondent's request is denied.

§4. RESPONSIBILITY FOR PROCEDURAL COSTS

1. Pursuant to the provisions of article 536, paragraph 3, of the CPC, applicable ex vi article 29, paragraph 1, subparagraph e), of the LRAT, in cases of termination of the instance by impossibility or supervening futility of the case (except those provided for in the preceding paragraphs), responsibility for costs rests with the plaintiff or claimant, save if such impossibility or futility is attributable to the defendant or respondent, in which case it is the latter who is responsible for all costs; paragraph 4 of the same article provides, insofar as is relevant to note, that supervening futility of the case is considered to be, in particular, attributable to the defendant or respondent when it results from voluntary satisfaction, by the latter, of the claim of the plaintiff or claimant.

In the concrete case, as results from the foregoing, the revocation of the contested assessments that determined the supervening futility of the case with respect to the request for their declaration of illegality and annulment is attributable to the AT, with the latter having only notified that revocatory act to the Claimant after the constitution of this Arbitral Tribunal.

1. On the other hand, the request for payment of indemnity for unwarranted provision of guarantee was judged to be meritorious.

2. In these terms, the AT is responsible for the costs of the present proceedings, remaining entirely at its charge.

IV. DECISION

In the terms stated above, this Arbitral Tribunal decides:

a) To judge the invoked exception of original futility of the case to be without merit;

b) To judge the instance terminated, by supervening futility of the case, with respect to the request for declaration of illegality and annulment of the additional VAT assessments and compensatory interest challenged in this proceeding;

c) To judge meritorious the request for condemnation of the Tax and Customs Authority to pay indemnity to the Claimant for the costs incurred with the unwarranted provision of the aforementioned bank guarantee until its respective cancellation, which amount to the total of €261,232.81, without prejudice to the limitation of the quantum of indemnity provided for in article 53, paragraph 3, of the LGT;

d) To condemn the Tax and Customs Authority to pay the costs of the proceedings.

VALUE OF THE CASE

In conformity with the above decision, the case is assigned a value of €995,623.92 (nine hundred ninety-five thousand six hundred twenty-three euros and ninety-two cents).

COSTS

In conformity with the above decision and pursuant to the provisions of articles 12, paragraph 2, and 22, paragraph 4, of the LRAT and article 4, paragraph 4, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at €13,770.00 (thirteen thousand seven hundred seventy euros), at the charge of the Tax and Customs Authority.

Notify.

Lisbon, May 15, 2019.

The Arbitrators,

(Alexandra Coelho Martins)

(Ricardo Rodrigues Pereira)

(João Menezes Leitão)