Process: 608/2017-T

Date: November 27, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitration decision (Process 608/2017-T) addresses whether a private elderly care home operator qualifies for VAT exemption under Article 9(7) of the Portuguese VAT Code. The taxpayer, a limited company operating two elderly care facilities (lares de idosos) under CAE 87301, challenged additional VAT assessments totaling €47,900.58 for the 2014 tax year. The core dispute centered on whether the company met the 'social utility' requirements for VAT exemption on services providing accommodation and support for elderly persons. The taxpayer argued that the Tax Authority's assessments violated EU VAT Directive principles, particularly neutrality and equality, and misinterpreted the social utility criteria under Portuguese law. The company contended it operated licensed facilities regulated by Social Security, providing essential social welfare services comparable to public or non-profit entities. The tribunal examined the licensing history of both facilities, including the acquisition of one home through financial leasing and communications with Social Security regarding operating permits. The decision required analyzing whether private commercial operators of elderly care homes can benefit from the same VAT treatment as institutions formally recognized for social utility purposes, considering both Portuguese domestic law requirements and EU VAT Directive Article 132(1)(g) concerning social welfare services. This case illustrates the complex intersection of tax law, social security regulation, and EU compliance in determining VAT exemptions for privatized social services.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (President Arbitrator), Nina Aguiar and António Carlos dos Santos, appointed by the Deontological Council of the Centre for Administrative Arbitration to constitute an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 21 November 2017, A..., Lda., NIPC..., with registered office at Rua ..., n.º..., ...-... ..., filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime for Arbitration in Tax Matters, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the acts of additional VAT assessment no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016... and no. 2016... and the corresponding assessments of compensatory interest, relating to the 2014 tax year, in the total amount of €47,900.58, as well as the decision rejecting the administrative complaint which had the said assessments as its object.

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

  • error in the factual and legal premises, reflected in non-conformity with European Union law and erroneous interpretation of no. 7 of article 9 of the VAT Code;

  • violation of the principle of equality, neutrality, prevalence of substance over form and good faith.

On 22-11-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant proceeded to appoint an arbitrator, having appointed His Excellency Professor Doctor António Carlos dos Santos, pursuant to article 11/2 of the RJAT. Pursuant to no. 3 of the same article, the Respondent appointed as arbitrator Her Excellency Professor Doctor Nina Aguiar.

The arbitrators appointed by the parties were appointed and accepted their respective responsibilities.

Following the request presented by the arbitrators appointed by the parties that the president-arbitrator be appointed by the Deontological Council, the present Reporter was appointed as president-arbitrator, pursuant to article 6, no. 2, paragraph b), of Decree-Law no. 10/2011, of 20 January, who, within the applicable period, also accepted the responsibility.

On 05-02-2018, the parties were notified of these appointments and did not manifest any intention to refuse any of them.

In accordance with the provisions of paragraph c) of no. 1 of article 11 of the RJAT, the collective Arbitral Tribunal was constituted on 27-02-2018.

On 13-04-2018, the Respondent, duly notified for such purpose, presented its response, defending itself solely by way of rebuttal.

On 23-05-2018, the meeting referred to in article 18 of the RJAT took place, at which the witnesses presented by the Claimant were questioned and at which it was determined that a request for information be made to the Social Security that was deemed pertinent.

By order dated 09-07-2018, the parties were given the opportunity to exercise the right to reply regarding the information provided by Social Security and the period referred to in article 21/1 of the RJAT was extended by two months.

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

It was indicated that the final decision would be delivered by the end of the period provided for in article 21/2 of the RJAT, duly extended.

The Arbitral Tribunal is materially competent and is regularly constituted, pursuant to articles 2, no. 1, paragraph a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, are legitimate and are legally represented, pursuant to articles 4 and 10 of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

Thus, there is no obstacle to the examination of the merits of the case.

In view of all the foregoing, it is necessary to deliver

II. DECISION

A. FACTUAL MATTERS

A.1. Facts found to be proven

The Claimant is a commercial company limited by quotas that exercises the principal activity of social support for elderly persons, with accommodation (CAE 87301) and the secondary activity of beauty institutes (CAE96022).

The Claimant effects the deduction of VAT according to the method of actual allocation of all goods and services, considering as exempt activity under no. 7 of article 9 of the VAT Code all the activity of social support for elderly persons with accommodation.

The Claimant exercises its elderly care home activity in two establishments:

  • one establishment located in the urban property ..., on Rua de..., parish of ... and municipality of ..., ...-... ..., with operating license no. .../2011, issued on 23-02-2011 by Social Security in the name of the Claimant for the exercise of the elderly care home activity at that location (hereinafter, "Home of ..."); and

  • one establishment located in the autonomous fraction designated by the letter "B" of the urban property matrix no..., corresponding to the Ground Floor left, of the property located on Rua ..., ..., parish of ..., municipality of ... (hereinafter "Home of...").

Before the Claimant exercised its activity in the Home of..., the same was already devoted to elderly care home activity by the previous owner, B... .

The previous owner had in her possession the respective permit for opening and operating the establishment, issued in her name (Permit no. ...- LR/2004).

The building had a use license, as evidenced by the License Permit no. .../04, of 7 April 2004.

In September 2008, the Claimant leased the autonomous fraction designated by the letter "B" of the urban property matrix no..., corresponding to the Ground Floor left, of the property located on Rua ..., ..., parish of ..., municipality of ..., to exercise the activity of support for elderly persons with accommodation.

On 23-09-2008, the Claimant submitted the Declaration of Change of Activity to the Tax Authority of ..., for the said CAE 87301, with VAT exemption, having for this purpose presented the Permit ...-LR/2004.

This declaration of change was accepted by the Tax Authority.

On 18-11-2008, the then owners of the home (B... and her husband, C...) executed a promise to sell and purchase contract with the Claimant, in which they promised to sell and the latter promised to buy the autonomous fraction designated by the letter "B", corresponding to the building of the Home ... .

The promised contract was executed on 19-05-2009.

The property was not acquired directly by the Claimant, but rather by D..., S.A. at the proposal of the Claimant.

The property was sold to the financial institution for the price of €400,000.00.

On 19-05-2009, for the execution of the deed, the originals of the Use Permit and the Opening and Operating License of the Home ... were presented to the notary.

D..., S.A. declared, in the deed, that the acquired property was intended to be leased to the Claimant under a financial lease.

On the same date, the respective financial lease contract was executed between the Claimant, as lessee, and D..., S.A., as lessor, having as its object the Home ... .

On 09-06-2009, the Claimant communicated the acquisition of the property of the Home ... to Social Security of ..., requesting the scheduling of a meeting in order to comply with legal formalities.

In May 2009, the Claimant executed a lease contract for the Home of ..., in which it appears as lessee, in order to exercise its activity of social support for elderly persons with accommodation also at this establishment.

On 30-06-2009, the Claimant communicated the lease of the Home of ... to Social Security of ... .

On 28-07-2009, Social Security of ... replied and sent an Official Communication with the form and necessary documentation for the replacement of the operating license/Permit.

On 24-08-2009, the Claimant submitted a request and documentation for the replacement of the Permit of the Home of ... to Social Security of ... .

On the same date, the Claimant submitted a request and documentation for the replacement of the Permit of the Home of ... to Social Security of ... .

On 09-09-2009, the Claimant further submitted remaining documentation for the replacement of the Permit of the Home of ... .

On the same date, the Claimant sent the remaining documentation for the replacement of the Permit of the Home of ... .

On 23-02-2011, Social Security of ... issued the operating license relating to the Home of ..., in the name of the Claimant.

Social Security did not issue, until the date of the submission of the arbitration request, any decision relating to the request for replacement of the operating license of the Home of ... .

When the Claimant was already exercising the activity in the Home of ..., the previous owners brought a precautionary measure in the Court of Pombal (case .../10...T...), in which they alleged that the kitchen attached to the home of fraction "B" belonged, previously, to fraction "A" where they resided and of their ownership, petitioning that the immediate delivery of that kitchen be ordered.

Prior to the existence of these two fractions, there existed a single property, it being that only in March 2018 did the owners opt to constitute the building under a horizontal property regime, and fractions "A" and "B" then came into existence.

In the context of the said precautionary measure, the Pombal Court ordered the Claimant to deliver the kitchen of the Home of ... to the previous owners.

On 30-04-2010, the Claimant proceeded to effectually deliver the kitchen of the home and proceeded to seal off the location, with the construction of a wall of cement and concrete blocks.

This construction also blocked access to other areas assigned to the home, such as a restroom, connecting hall to the dining room, access to the exterior, access to gas and access to water distribution.

The Judgment of the Court of Appeals of Coimbra, of 05-04-2011 ordered "the reconstitution of the previous situation with the delivery/restitution of the kitchen to the defendant/appellant".

The previous owners of the Home of ..., to whom the kitchen was delivered, while that part of the property was in their possession, transformed it.

On 23-03-2013, in order to restore the divisions and the area as it was when the precautionary measure was issued, the Claimant brought an action against the previous owners of the Home of ... (case .../13...T...) petitioning that they be condemned to restore all elements and divisions in the exact terms in which they were conceived in the approved project for the establishment of the home.

The Claimant found that the owners of the Home of ... at the time of sale omitted other divisions that were located near the kitchen and also in the part of fraction "B" that is below fraction "A".

These divisions were associated in all documents, plans and use licenses issued by the Municipality of ..., and Permit ...-LR/2004, issued by the District Centre of Social Security of ..., as belonging to the Elderly Care Home.

On 31-12-2010, the Claimant brought an action petitioning the return of the omitted divisions (case .../10...T...).

In 2011, a follow-up/evaluation action of Social Security of ... was carried out at the home by Technical Officer Dr. E... .

On 06-03-2012, the Home of ... was the subject of a new follow-up/evaluation action by Social Security.

In this follow-up/evaluation action, Social Security concluded that "Within the scope of the said action it was possible to verify that the social response develops adequate functioning".

Social Security considered there to be some irregularities within that action, among which it identifies the following: "the establishment A..., Lda. is not licensed".

On 03-05-2012, the Claimant responded to the notification of the result of the follow-up action referred to in the previous point and clarified that it acquired the Home of ... on 19-05-2009 and that it communicated such acquisition, on that date, to Social Security – District Centre of ..., having sent the respective documentation for license replacement through two registered letters with acknowledgment of receipt, dated 24-08-2009 and 09-09-2009.

The Claimant further alleged that, at the time of the follow-up visit, Social Security indicated to it that it should await the delivery of the said divisions and subsequently the operating license matter would be addressed.

In April and December 2012, the Home of ... was subject to further inspections by the Inspection Unit of the District Centre of Social Security of ... .

In the course of these inspections, all documentation and functional area of the Home of ... were inspected except the omitted divisions which were the subject of the action brought by the Claimant in 2010.

Following the April 2012 inspection, Social Security notified the Claimant to present documents.

The Claimant proceeded to send the requested documentation.

Following the December 2012 inspection, a notification was also made for the presentation of documents.

The Claimant requested, via email, a new inspection, which would include the areas subject to judicial disputes.

In response, the Claimant received an email from Social Security rendering the notification for the presentation of documents made following the December 2012 inspection without effect.

The Claimant received a letter from the Inspection Unit of the Social Security Centre, dated 07-08-2013, requesting that, when the judicial process terminated, a copy of the decision of the Judicial Court of Pombal be sent and also requesting the sending of the financial lease contract executed when acquiring the establishment.

In July 2012, the Claimant was notified that the previous owners of the home brought a new action in Court (case .../12...T...) petitioning the annulment of the purchase and sale transaction executed relating to the acquisition of the property of the Home of ..., invoking error, alleging that they had not sold the "omitted" divisions, "although planned, never went beyond paper", an action which subsequently became moot due to expiration and whose respective judgment established as proven, among other matters, that:

  • "The divisions claimed in the action [...] never formed part of the Home because although planned they never went beyond paper";

  • "Of the divisions planned for the Home, discussed in the two actions, in fact, only the kitchen was built, which resulted from the transformation of one of the rooms that already existed in the ground floor of the authors' dwelling";

  • "The remainder of the ground floor [...] even after the building of the Home, was always used by the authors as a dwelling".

In the context of this case, the Claimant, by letter of 22-03-2013, requested clarification from Social Security asking which and from when the said divisions were not being used for the benefit of the elderly care home.

Social Security elaborated, in this sequence, a report and subsequent clarifications, in which it stated, among other matters, that "although the current situation of the establishment is not regular, this residential structure for elderly persons has been evaluated by this service, which has concluded 'regarding the existence of adequate functioning'".

On 14-09-2014, the Claimant sent a new communication to Social Security, remitting to it the judgment delivered in case .../12... T... and requesting that it pronounce itself on whether the said divisions "went beyond paper or not and, in case they have been built, since there are also follow-up reports, from when have these ceased to be used for elderly care home activity and have been used for residential purposes", in order to instruct the other pending proceedings which had as their object those same divisions.

In the 2014 tax year, the Claimant considered the activity developed in the Home of ... as being exempt from VAT, under no. 7 of article 9 of the VAT Code, as it understood that the acquired fraction was already intended for an elderly care home, and that the process of replacing the permit had not yet been completed due to various legal impossibilities, all beyond its will, whereby the permit issued by Social Security under no. .../RL2004 would remain valid and effective, thus fulfilling the requirement for recognition of public utility for purposes of exemption.

The Claimant was subject to an external audit procedure authorized by Service Order OI2015..., relating to the 2014 tax year.

During the audit procedure, the Claimant was requested to provide proof of the social utility recognized by the competent authorities with respect to the establishment of the Home of ... .

The Claimant exhibited an official communication sent to it by Social Security, which informs that the process of replacing the permit no...-RL/2004, issued for the exercise of the elderly care home activity in that fraction, "was not completed due to various legal impossibilities, namely, due to the existence of judicial disputes regarding the building, between A... and the previous owner".

On 14-04-2016, the Claimant was notified by the Tax Authority to clarify doubts regarding the billing of 2014, more specifically, to identify in which of the establishments, that of ... or that of ..., the services were provided and when it concerns the "final consumer" to identify the user of the services.

The Tax Authority found, through analysis of the accounts, that the invoices for services of the "elderly care home" activity are all recorded in the same account "72114 – Service A – exempt", with no element distinguishing invoices for services provided in one establishment from invoices for services provided in the other establishment.

This official communication was sent to the Tax Authority in the context of the tax audit procedure.

The Claimant was notified of the draft audit report and, if it wished, to exercise the right to prior hearing.

The Claimant was notified of the tax audit report through Official Communication no..., of 08-07-2016 which made VAT corrections in the total amount of €45,606.16.

The final tax audit report contains the following:

[Document reference to audit report]

On 29-01-2016, Social Security of ... sent the Claimant a communication to have it make a new licensing request.

A meeting was held between the Claimant and the District Centre of Social Security of ..., where the situation was presented and explained by the Claimant that a licensing request dated 24-08-2009 was pending that had never received a response, and that the Claimant needed what was requested by the Tax Authority (recognition of social utility) which would have to be delivered within the deadline, to put an end to the VAT collection process.

On 03-02-2016, Social Security of ... sent the Claimant an official communication declaring that for the address of the establishment of the Home of ..., "the Permit No. ...-LR/2004 was issued, for the exercise of the elderly care home activity" and that "the facility was acquired in 2009, by the company A..., Lda., which submitted a request for replacement in this District Centre on 27-08-2009" and that "the said process of replacement of Permit, was not completed due to various legal impossibilities, namely due to the existence of judicial disputes regarding the building, between A... and the previous owner".

In November 2016, the Claimant filed an administrative complaint no. ...2016... against the additional VAT assessments and respective interest.

On 16-06-2017, the Claimant exercised its right to a hearing on the draft decision of the administrative complaint.

On 23-08-2017, the Claimant was notified of the decision rejecting the administrative complaint.

The Claimant filed a hierarchical appeal no. ...2017... which had as its object the decision rejecting the administrative complaint.

On 24-05-2018, this Arbitral Tribunal requested clarification from Social Security regarding the licensing of the Home of ... .

On 29-06-2018, Social Security issued the following information:

[Reference to Social Security communication]

On 17-08-2018, Social Security issued the following addendum to the information referred to in the previous point:

[Reference to addendum]

A.2. Facts found to be not proven

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

A.3. Grounds for the proven and not proven factual matters

With respect to the factual matters, the Tribunal does not have to pronounce on everything that was alleged by the parties; rather, it has the duty to select the facts that matter for the decision and to distinguish between proven and not proven matters (see article 123, no. 2, of the Tax Code of Procedure and Process and article 607, no. 3 of the Code of Civil Procedure, applicable by virtue of article 29, no. 1, paragraphs a) and e), of the RJAT).

Thus, the facts relevant to the judgment of the case are chosen and selected in light of their legal relevance, which is established in view of the various plausible solutions of the question(s) of law (see previous article 511, no. 1, of the Code of Civil Procedure, corresponding to current article 596, applicable by virtue of article 29, no. 1, paragraph e), of the RJAT).

Therefore, taking into account the positions assumed by the parties, in light of article 110/7 of the Tax Code of Procedure and Process, the documentary evidence and the procedural file attached to the case, and the testimonial evidence produced, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Judgment of the Administrative Court of the South of 26-06-2014, delivered in case 07148/13[1], "the evidentiary value of the tax audit report (...) may have probative force if the assertions contained therein are not contested".

No assertions made by the parties, and presented as facts, consisting of strictly conclusive statements, incapable of proof, and whose truth must be assessed in relation to the concrete factual matter consolidated above, were determined to be either proven or not proven.

B. ON THE LAW

As the Respondent itself formulates, the Claimant considered the activity developed in its establishment of ... "as being exempt from VAT, under no. 7 of article 9 of the VAT Code, as it understood that the acquired fraction was already intended for an elderly care home, and that the process of replacing the permit had not yet been completed due to various legal impossibilities, all beyond its will, whereby the permit issued by Social Security under no. .../RL 2004 would remain valid and fully effective, thus fulfilling the requirement for recognition of public utility for purposes of the disputed exemption."

For its part, and continuing with the formulation of the Respondent, "the Tax Authority, in turn, understands that the Claimant does not have an operating license for the activity it exercises at that establishment, from which it must be concluded that it did not prove, with respect to this activity, its social utility for purposes of being able to benefit from the exemption provided for in no. 7 of article 9 of the VAT Code."

This is, therefore, the dispute to be resolved in the present case, which must be examined.

Let us see then.

The question in dispute in these proceedings is, therefore, the classification under Value Added Tax of the activity of social support for elderly persons with accommodation (elderly care home), developed by the Claimant in the year 2014 in its establishment located in the locality of ..., in the parish of ..., municipality of ... .

The tax provision whose application to this specific case is disputed is paragraph 7) of article 9 of the VAT Code, which provides that:

"The provision of services and the transmission of goods closely connected thereto, carried out in the course of their habitual activity by nurseries, kindergartens, centres for leisure activities, establishments for children and young persons lacking normal family support, residential homes, workshops for the disabled, establishments for rehabilitation of invalids, elderly care homes, (...) or other social facilities belonging to public legal entities or private institutions of social solidarity or whose social utility is, in any case, recognized by the competent authorities, even if the services are provided outside their premises;"

Thus, and in summary, an entity will benefit from the exemption established in paragraph 7) of article 9 of the VAT Code if it:

a. Operates an establishment that may be qualified as an elderly care home; and

b. Holds the status of social utility recognized by the competent authorities.

As results from the factual matters, the Claimant operated, in 2014, an establishment that could be qualified as an "elderly care home" for purposes of article 9 of the VAT Code, which is, moreover, not disputed.

It is verified, therefore, that the first of the listed requirements was met.

On the status of "social utility", the provision that governed and governs is article 23 of Decree-Law no. 64/2007 of 14 March, which "defines the regime for licensing and inspection of the provision of services and establishments of social support, in which activities and services are exercised within the scope of social security relating to children, young persons, elderly persons or persons with disabilities, as well as those intended for prevention and remediation of situations of deprivation, dysfunction and social marginalization."

The said article 23 provides that:

"The establishments that are licensed under this chapter are considered to be of public utility."

Upon examination of the normative texts invoked, there is immediately apparent a minor discrepancy between paragraph 7) of article 9 of the VAT Code and article 23 of Decree-Law no. 64/2007, as the former speaks of "social utility" referred to the person who operates the elderly care home, while the latter provision speaks of "social utility" referred to the establishment.

Taking into account the systematic element of interpretation, and, specifically, the duty of interpretation in conformity with Community law, it is considered that the pointed discrepancy should be resolved in the sense that, if an establishment has social utility in the context of Decree-Law no. 64/2007, the entity that operates it should be able to benefit from the exemption of paragraph 7) of article 9 of the VAT Code, for otherwise it would have to be concluded that the Portuguese legislator would have made the application of paragraph 7) of article 9 of the VAT Code impossible in the part that is relevant here.

Thus, pursuant to article 23 of Decree-Law no. 64/2007, an establishment of "elderly care home" will have the status of social utility as long as it is licensed under the said Decree-Law no. 64/2007, this being the only condition for the acquisition of that status, which will be, therefore and in light of Portuguese law, automatic.

Furthermore, in the context of VAT, the exemptions provided for in article 9 of the VAT Code are not subjective exemptions. Rather, they are exemptions intended for the exercise of certain activities, in the case of these proceedings, a social nature activity, with the purpose, not of benefiting the service provider, but those to whom the service is provided (purposive exemption).

In the present case, it is an activity of provision of services to elderly persons crystallized in an establishment, a social organization, designated by elderly care home. These establishments may be publicly owned or managed or privately owned or managed with or without profit purpose. The latter hypothesis tends, moreover, to gain relevance, as EU Law, following Anglo-Saxon law, has extended the provision of public services to private entities, even now speaking of (economic) services of general interest.

The VAT Code, for reasons of assessing the suitability of the service provider and preventing risks in the exercise of the activity, requires that the establishment, in order to function, be recognized as of social utility by means of a permit issued by Social Security. A system of formal a priori control was thus opted for (by way of an operating license), permitted by the VAT Directive. This choice, which may be related to the creation of a licensing fee aimed at removing a legal obstacle to the exercise of an activity, is, however, accompanied by forms of a posteriori control, intended to verify whether the conditions for issuance of the permit have changed or not.

Thus, what must be determined is whether the establishment in question – the elderly care home operating, in the year 2014, in fraction B of the property located on Rua ..., ..., ... – operated by the Claimant in 2014, had the status of "social utility".

For this purpose, there will be only a need to ascertain whether the same was "licensed under Decree-Law no. 64/2007".

As results from the factual matters established as proven, the Claimant became the holder of the establishment in question through a "lease of establishment" contract executed in 2008 with the original holder thereof.

The establishment which was the object of such contract, as also results from the factual matters verified, was licensed, by Permit no. ...-LR/2004.

Since the operating permit of the establishment in question dates from 2004, it can only be concluded that the same was in effect on the date of entry into force of Decree-Law no. 64/2007, and nothing in the case file proves otherwise.

Article 42 of Decree-Law no. 64/2007 required that "Establishments operating on the date of entry into force of this decree-law, which are not licensed, must adapt themselves to the rules established in this decree-law and the regulatory diplomas referred to in article 5, with the necessary adaptations for each type of establishment, under the conditions and within the periods fixed therein."

In the same Decree-Law, no obligation of adaptation was imposed on establishments that were operating with licensing, from which it should be concluded that permits granted under the previous legislation remained valid.

In this context, it is necessary to determine whether, between the date when the Claimant became the holder of the operation of the establishment and the date of the tax fact under analysis – the year 2014 – any circumstance occurred that caused that permit no. ...-LR/2004 to cease being valid or producing effects.

To this end, it may be extracted from Decree-Law no. 64/2007 that the transfer of ownership or operation of the licensed establishment does not cause the lapse of the respective permit.

Indeed, from the combination of no. 1 of article 22 with paragraph c) of no. 2 of article 18 of the said statute, it is concluded that the change in the managing entity of the establishment determines, for the holder, the necessity or the burden of requesting not a new permit but a license replacement.

As also results from the factual matters established as proven, such a request was submitted by the Claimant on 24-08-2009.

The Ministry responsible for Social Security (Decree-Law no. 64/2007 does not specify who is the competent entity for the licensing or replacement of licenses of the establishments regulated therein), did not render a final decision until the end of the 2014 tax year on the request submitted by the Claimant, to the effect of replacing the holder of permit no. ...-LR/2004.

The question arises as to the consequence of this omission of decision by the competent authority.

The Tax Authority considered, as results from the factual matters, that the absence of a decision on this request is equivalent to the absence of a permit.

Nevertheless, it is the Ministry itself responsible for the oversight of Social Security that, through the Social Security Institute I.P., states, in a report dated 07-01-2013:

"The permit issued by Social Security for the establishment under analysis has not lapsed nor is it suspended. This establishment is not operating illegally".

It is considered, in this part, that the interpretation of the law conveyed by Social Security in the said communication is the only correct one.

Indeed, since the law provides for the mechanism of license replacement – a license replacement mechanism that is not the same as a request for a new license, and without which the possibility of transferring establishments would be seriously compromised – and given that the competent authorities have been provided with the elements required for decision making, i.e., given that the administered taxpayer has done what was required of it to make possible the license replacement, it will not be defensible that the consequence of the lack of decision by the competent authorities is such that it would impose on the same administered taxpayer the necessity of closing the establishment, when, from the outset, such consequence is not expressly provided for by law.

And since such consequence is not expressly provided for by law, the application of the law to the specific case would always have to take into account the principle of proportionality of the action of the public administration, enshrined in article 266, no. 2 of the Constitution.

As also results from the facts found, on 03-02-2016, responding to the Claimant's request regarding the decision on its request for license replacement, the Social Security Institute I.P. directed to it the following communication:

"For due effect, it is hereby informed that for the address Rua ... no..., ..., ...-... ..., ..., Permit no. ...-LR/2004 was issued, for the exercise of elderly care home activity.

It is further informed that the facility was acquired in 2009 by the company A... Lda., which submitted a request for replacement in this District Centre on 27/08/2009.

The said process of permit replacement was not completed due to various legal impossibilities, namely due to the existence of judicial disputes regarding the building, between A... and the previous owner."

This communication can have no other meaning, on the part of the Social Security Institute I.P., than the admission that it is not capable of applying the law to the Claimant's situation and therefore is not capable of rendering a decision on the request.

Indeed, there cannot, by definition, exist legal impossibilities that justify the absence of a decision on a request for licensing and, a fortiori, on a license replacement, when the entity has a power-duty to decide. Either the establishment meets the conditions to function or it does not meet them, and the verification of one or the other of these hypotheses will be all that is necessary for the decision. Legal impossibility would be if the law did not establish the conditions for license replacement, which, in this case, is not the situation.

It being clear that the Social Security Institute I.P. opted for not deciding, which constitutes a violation of the law, since it has a duty to decide, from its anomalous communication it is clearly deduced that the same entity considers that the permit remained in effect, which it had already affirmed in its 2013 communication/report.

In light of the foregoing, the assertion of the Social Security Institute, in communication addressed to this Tribunal, dated 04-07-2018, according to which "it is concluded that permit no. ...-LR/2004 was not in effect in the year 2014" appears to be inconsistent with everything previously affirmed by the same entity.

Indeed, not only is the conclusion of that communication to this Tribunal inconsistent with the communications made previously to other entities, but it is also inconsistent with the grounds described immediately before the conclusion.

In this matter, it is essential to pay attention to such grounds, since the said communication was made at the request of this Tribunal, and cannot but be examined and taken into account.

In the communication addressed to this Tribunal, the Social Security Institute I.P. enunciates the conclusion that the permit was not in effect in the year 2014, in the following terms:

"In light of the foregoing, it is concluded that permit no. ...-LR/2004 was not in effect in the year 2014."

The conclusion – that permit no. ...-LR/2004 was not in effect in the year 2014 – is a consequence of the grounds previously set forth, which are reduced to the fact that:

  • A... did indeed request the replacement of the operating license, but did not instruct the request with all the necessary elements;

  • There were missing, in particular, the purchase and sale contract of the building and its respective property registration;

  • The inspections by the health authority and updated safety conditions, as well as the use license issued by the Municipal Council, essential documents for the instruction of the license replacement process, since, after the acquisition of the establishment, there was a significant alteration in the facilities assigned to it;

  • In this context, there was a need to carry out the necessary works to adapt the space in accordance with current legislation;

  • On 27/11/2013, an inspection was carried out by the Municipality of ... for purposes of verifying the spaces making up the building. From the inspection report, note is made of the existence of several unlicensed extensions, in particular one intended for a kitchen. The said report also notes the existence of some compartments used for a purpose different from that approved;

  • In this framework, it is verified that, in addition to the change in managing entity, significant alterations to the building assigned to the social response occurred, whereby the conditions provided for in paragraph a) of article 12 of the cited decree-law for the granting/replacement of the permit are not met.

Now, the grounds set forth in no way validate, any of them, the conclusion that permit no. ...-LR/2004 was not in effect in 2014.

Indeed, the grounds set forth are of two kinds: on the one hand, a deficiency in the instruction of the request for license replacement; on the other, a lack of adequate physical space conditions.

Regarding the first, if elements of instruction were missing from the request, this lack had to be communicated and the possibility of its remedy had to be given. The consequence of such an instructional deficiency would never be the automatic lapse of the permit, because this is not legally provided for. And, much less, followed by the absence of any action by Social Security for nine years, with the permit having lapsed.

On the second ground – significant alteration of the physical space conditions – this is not even a reason for license replacement, so that ground should never prejudice the decision on the request for license replacement.

Furthermore, and from the outset, Decree-Law no. 64/2007 does not even provide for any procedure to be adopted by the managing entity in case of alteration of the physical space conditions used; rather, it provides, in chapter V – articles 31 and following – the procedure for evaluation and inspection of the altered facilities.

It is further added that article 31 of the same Decree-Law provides that the Social Security Institute, I.P. may evaluate the functioning of the establishment, in particular to "Evaluate the quality and verify the regularity of services provided to users, namely, with respect to installation and accommodation conditions, adequacy of equipment, food and hygiene and health conditions."

Such inspections, moreover, to evaluate the conditions of the establishment, occur necessarily, at a minimum, biennially.

Under article 34 of Decree-Law no. 64/2007, "The result of the evaluation and inspection actions referred to in articles 31 and 32 must be communicated to the managing entity of the establishment within 30 days after the conclusion of the actions."

Being that, in cases where the establishment presents serious deficiencies in installation, safety, functioning, health, hygiene and comfort conditions, which jeopardize the rights of users or their quality of life, "the immediate closure of the facilities may be ordered, under article 35", which did not happen until and including 2014.

Having nothing of what is provided by law occurred for the situation of inadequacy of the physical space conditions of the establishment, the Social Security Institute, I.P. cannot, certainly, now come and say that, by way of that inadequacy, the license lapsed, because it could not be renewed.

All things considered and in summary, the Claimant, as the managing entity of the establishment, had the right to an express decision on its request for license replacement, which was not rendered.

Having not occurred such communication, the consequence cannot be, in any case, the lapse of the license, without any express communication to that effect, moreover, because such consequence is not provided for in law, and further because the same could not be derived by way of interpretation of law, in view of the principle of proportionality of the action of administrative public entities.

In consequence of all the foregoing, it must be concluded that the operating permit that the establishment of the Claimant had when acquired by it remained in effect in 2014, whereby the activity exercised therein met the conditions to benefit from the exemption of paragraph 7) of article 9 of the VAT Code.

In summary: the establishment in question enjoyed an operating license, with a change in the person or entity managing the establishment having occurred, which requires that a replacement license be requested, a request that can only be denied if the alterations verified do not comply with the legally established installation and functioning conditions. While such a request is not examined, the existing operating license is considered valid, since, in the absence of legal provision to the contrary, it does not automatically lapse. The subsequent rejection of the request has only legal consequences ex tunc.

In light of the foregoing, the assessments in dispute are illegal due to error in the factual premises[2], and consequent error in law, and should, therefore, be annulled, with the legal consequences flowing therefrom.

C. DECISION

In this Tribunal's judgment, the arbitral petition filed is wholly granted, and, in consequence, the acts of additional VAT assessment no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016..., no. 2016 ... and no. 2016 ... and the corresponding assessments of compensatory interest, relating to the 2014 tax year, in the total amount of €47,900.58, are hereby annulled, as well as the decision rejecting the administrative complaint that had the said assessments as its object.

D. Value of the Proceedings

The value of the proceedings is fixed at €47,900.58, pursuant to article 97-A, no. 1, paragraph a), of the Tax Code of Procedure and Process, applicable by virtue of paragraphs a) and b) of no. 1 of article 29 of the RJAT and no. 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.

Notice is hereby given.

Lisbon, 27 November 2018

The President Arbitrator

(José Pedro Carvalho)

The Arbitrator Member

(Nina Aguiar)

The Arbitrator Member

(António Carlos dos Santos)

[1] Available at www.dgsi.pt, as with the remaining case law cited without indication of source.

[2] Being that the fact in question is a legal fact, the existence or non-existence of a valid operating license.

Frequently Asked Questions

Automatically Created

Is a private elderly care home (lar de idosos) exempt from VAT under Portuguese tax law?
Private elderly care homes in Portugal may qualify for VAT exemption under Article 9(7) of the VAT Code if they meet specific social utility requirements. The exemption is not automatic for all private operators; it requires formal recognition or licensing by competent authorities (typically Social Security) and demonstration that services are provided under conditions comparable to public or non-profit entities. The facility must hold valid operating licenses (licenças de funcionamento) and provide accommodation with social support services for elderly persons (CAE 87301). However, commercial enterprises operating for profit face stricter scrutiny than charitable organizations, and tax authorities may challenge exemption claims if social utility criteria are not clearly established.
What are the social utility requirements for VAT exemption under Article 9(7) of the Portuguese VAT Code?
Article 9(7) of the Portuguese VAT Code implements EU VAT Directive Article 132(1)(g) regarding exemptions for social welfare services. Requirements include: (1) provision of services closely linked to welfare and social security work; (2) supply by bodies recognized as charitable or having social objectives by the Member State; (3) services not systematically aimed at profit, with profits not distributed but assigned to continuation of services; (4) prices approved by public authorities or not exceeding such approved prices; and (5) exemption not causing distortion of competition. For elderly care homes specifically, operators must demonstrate social utility through Social Security licensing, compliance with regulatory standards for care provision, and pricing structures that reflect social rather than purely commercial objectives. The principle of substance over form requires examining actual operational characteristics, not merely formal licensing status.
How does EU VAT Directive compliance affect VAT exemptions for social welfare services in Portugal?
EU VAT Directive compliance significantly impacts Portuguese VAT exemptions for social welfare services. The Court of Justice of the European Union (CJEU) has established that Member States must interpret exemptions consistently with Directive objectives while preventing tax avoidance and ensuring fiscal neutrality. Portuguese courts and arbitration tribunals must apply Article 9(7) in conformity with Article 132(1)(g) of the VAT Directive, considering CJEU jurisprudence on what constitutes 'recognized bodies' and 'social character' of services. The principle of fiscal neutrality prohibits treating similar services differently based solely on operator legal form; private entities providing equivalent social services under comparable conditions to public bodies should receive equivalent tax treatment. However, Member States retain discretion in defining recognition criteria for social utility purposes, provided such criteria are objective, non-discriminatory, and consistent with Directive objectives of ensuring exemptions benefit genuinely social services rather than commercial operations.
Can additional VAT assessments be challenged through tax arbitration at CAAD in Portugal?
Yes, additional VAT assessments can be challenged through tax arbitration at CAAD (Centro de Arbitragem Administrativa) under the Legal Regime for Arbitration in Tax Matters (RJAT - Decree-Law 10/2011). Taxpayers may request constitution of an arbitral tribunal to challenge the legality of VAT assessment acts, including liquidações adicionais (additional assessments) and corresponding compensatory interest. The arbitration request must be filed within 90 days from the final decision on administrative complaint (reclamação graciosa) or from expiry of the period for such decision. CAAD tribunals have jurisdiction to review both factual and legal grounds, including alleged errors in interpretation of Portuguese VAT Code provisions, violations of constitutional principles (equality, neutrality, good faith), and non-conformity with EU law. The process involves appointment of three arbitrators, evidentiary hearings including witness testimony, and issuance of binding decisions typically within six months (extendable). This alternative dispute resolution mechanism offers expertise in tax matters and faster resolution than judicial courts.
Does the principle of neutrality and equality apply to VAT exemptions for elderly care facilities in Portugal?
Yes, the principles of neutrality and equality apply fundamentally to VAT exemptions for elderly care facilities in Portugal. The principle of fiscal neutrality, derived from EU VAT Directive jurisprudence, requires that similar services should not be treated differently for tax purposes based solely on the legal form or profit/non-profit status of the operator. If private elderly care homes provide services identical or highly similar to those offered by public institutions or recognized charitable organizations, differential VAT treatment may violate neutrality unless objectively justified by differences in social utility character. The principle of equality (igualdade) under Portuguese constitutional law similarly prohibits arbitrary discrimination between taxpayers in comparable situations. However, these principles do not mandate identical treatment where substantive differences exist in service character, pricing structures, profit distribution, or degree of social objective. Tax authorities may legitimately distinguish between commercial operations primarily pursuing profit and entities genuinely providing social welfare services, provided such distinctions rest on objective, verifiable criteria related to social utility rather than mere organizational form.