Process: 647/2017-T

Date: September 5, 2018

Tax Type: IVA

Source: Original CAAD Decision

Summary

This CAAD arbitral decision (Process 647/2017-T) addresses critical VAT deduction issues for a Portuguese closed real estate investment fund that transitioned from a tax exemption regime to normal quarterly VAT reporting. The case involves a dispute over €164,969.82 in additional VAT assessments issued by the Tax Authority (AT) following a reimbursement request of €272,188.87. The central legal questions concern whether VAT incurred during the exemption period (until November 2015) can be deducted when later allocated to taxable operations, and whether construction services provided by third parties trigger reverse charge obligations under Article 2(1)(j) of the Portuguese VAT Code. The claimant operated two real estate development projects, primarily the C... subdivision project with 46 residential plots and 7 commercial/service plots. The fund applied a 29.179% objective allocation criterion based on commercial construction area to calculate deductible VAT. The AT challenged this approach, asserting €314,829.31 in unassessed reverse charge VAT and €215,278.57 in improperly deducted VAT, including €131,422.79 incurred during the exemption period. The tribunal must determine the temporal scope of deduction rights when taxpayers transition between VAT regimes, the proper application of reverse charge rules to construction services, and the validity of objective allocation methods for mixed-use real estate developments. This decision provides important guidance on VAT treatment for real estate investment funds and the exercise of deduction rights across different tax classification periods.

Full Decision

ARBITRAL DECISION

The Arbitrators José Pedro Carvalho (Arbitrator President), Nina Aguiar and José Joaquim Monteiro Sampaio e Nora, appointed by the Deontological Council of the Centre for Administrative Arbitration to form an Arbitral Tribunal, hereby decide as follows:

I – REPORT

On 11 December 2017, A... – CLOSED REAL ESTATE INVESTMENT FUND, Tax Identification Number ..., with registered office at ..., No. ..., ..., ...-... Lisbon, 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 Framework for Arbitration in Tax Matters, as amended by Article 228 of Law No. 66-B/2012, of 31 December (hereinafter, abbreviated as RJAT), seeking the declaration of illegality of the additional VAT assessment act No. 2017..., the assessment of compensatory interest No. 2017... and the corresponding account adjustment statements No. 2017... and 2017..., in the total amount of €164,969.82.

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

  • VAT incurred while operating under the exemption scheme is deductible, with the acquisition of resources for carrying out taxed operations;

  • The services provided by B... do not correspond to civil construction services and therefore are not subject to the reverse charge rule provided for in Article 2, No. 1, point (j) of the VAT Code.

On 12-12-2017, the request for constitution of the arbitral tribunal was accepted and automatically notified to the Tax Authority (AT).

The Claimant failed to appoint an arbitrator, and therefore, pursuant to Article 6, No. 2, point (a) and Article 11, No. 1, point (a) of the RJAT, the President of the CAAD Deontological Council appointed as arbitrators of the collective arbitral tribunal Her Excellency Counselor Fernanda Maçãs (arbitrator-president), and Professor Doctor Nina Aguiar and Doctor José Joaquim Monteiro Sampaio e Nora (arbitrators-members) who communicated acceptance of the appointment within the applicable period.

On 01-02-2018, the parties were notified of these appointments and did not express a wish to challenge any of them.

In accordance with Article 11, No. 1, point (c) of the RJAT, the collective Arbitral Tribunal was constituted on 21-02-2018.

On 26-03-2018, the present reporter was appointed arbitrator-president, in replacement of Her Excellency Counselor Fernanda Maçãs, who resigned from arbitral functions citing reasons deemed to be justified.

On 06-04-2018, the Respondent, duly notified to that effect, submitted its response, defending itself solely by way of challenge.

Pursuant to Article 16, points (c) and (e), and Article 29, No. 2, both of the RJAT, the meeting referred to in Article 18 of the RJAT was dispensed with, as well as the presentation of pleadings by the parties.

A period of 30 days was set for the delivery of a final decision, following the submission of pleadings by the Respondent, which period was extended until the expiry of the period set in Article 21, No. 1 of the RJAT.

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with Articles 2, No. 1, point (a), 5 and 6, No. 1, of the RJAT.

The parties have legal capacity and standing, are legitimate and are legally represented, in accordance with Articles 4 and 10 of the RJAT and Article 1 of Order No. 112-A/2011, of 22 March.

The proceedings do not suffer from any nullities.

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

Having considered everything, it is necessary to deliver

II. DECISION

A. FACTUAL MATTERS

A.1. Facts Established as Proven

  • The Claimant is a closed real estate investment fund, constituted for an initial period of 10 years, whose activity was authorized by the Securities Market Commission on 9 November 2011.

  • The Claimant is intended to "promote and develop, in Portugal, prioritizing the Metropolitan Area of Porto, real estate projects of subdivision and construction on land of its own and clearly suitable for this purpose, in accordance with current legislation, whether for housing or for commerce or services, as well as to acquire real estate that may be intended for lease or subsequent sale, distributing these projects and real estate in accordance with the parameters provided for in the law".

  • Until 05-11-2015, the Claimant was classified, for VAT purposes, under the exemption scheme relating to the conduct of real estate operations.

  • From 06-11-2015, the Claimant became classified under the normal quarterly reporting scheme, for VAT purposes, whose deduction method is the actual allocation of all goods.

  • The Claimant carries out simultaneously operations that confer the right to deduction and exempt operations.

  • The Claimant acquires resources that are allocated simultaneously to operations that confer the right to deduction and to exempt operations.

  • During the period between 2013 and 2017, the Claimant's activity focused on two real estate development projects: C... and the project planned for ... street.

  • The C... project is a land subdivision with a building permit issued by the Municipal Chamber of ..., located in the place of ... in ....

  • The subdivision comprises 46 plots for housing and 7 plots for commerce and services intended for commercialization.

  • In 2016, the Claimant sold 4 housing plots with architectural plans included.

  • During the period between 2013 and 2017, the Claimant proceeded with the acquisition of goods and services, incurring VAT.

  • The vast majority of resources acquired by the Claimant were intended for the planning and construction of C....

  • For the part allocated to commerce and services, the installation of a hotel unit aimed at senior tourism was planned.

  • In order to proceed with the deduction of VAT incurred in the context of the C... project, the Claimant used the objective criterion of actual allocation, taking into account the area authorized for commercial or service construction and the total construction area of the development.

  • The criterion determined by the Claimant was 29.179% for the years in question.

  • The use of this percentage in VAT deduction resulted in the deduction of €276,025.78 in the periodic declaration for the fourth quarter of 2016 (201612T).

  • In the periodic VAT declaration for the first quarter of 2017 (201703T), the Claimant petitioned for reimbursement of €272,188.87 that had been reported as an excess from the previous period.

  • Following that VAT reimbursement request, the AT initiated an inspection procedure, regarding the 201703T period, through Inspection Order OI2017....

  • The deducted VAT that gave rise to the credit was incurred between 2012 and 2016, and therefore internal inspection procedures, of partial scope, were opened through Service Orders No. OI2017..., OI2017..., OI2017... and OI2017..., for the years 2013, 2014, 2015 and 2016, respectively.

  • In the context of the assessment of the VAT procedures adopted by the Claimant during the period between 2012 and 2017, the AT considered the following corrections to be appropriate:

    • VAT not assessed on the acquisition of civil construction services, in the total amount of €314,829.31;

    • VAT improperly deducted, in the total amount of €215,278.57, relating to:

      • Tax incurred by the Claimant, in the amount of €131,422.79, while classified under the exemption scheme;

      • VAT deduction in the amount of €4,538.44 not supported by a document issued in accordance with Article 36 of the VAT Code;

      • Tax deduction in the amount of €136.71 carried out without documentary support;

      • VAT deduction in the amount of €78,987.07 improperly assessed by civil construction service providers;

      • Improper tax deduction by virtue of the provision of Article 21, No. 1, point (d) of the VAT Code, in the amount of €119.62;

      • Improper tax adjustments in the amount of €73.94.

  • The corrections made by the AT totaled an amount of €530,107.88 in tax to be regularized by the Claimant.

  • The Claimant conformed to part of the corrections presented and regularized in favor of the State the following amounts of tax:

    • €290,734.71, by virtue of the applicability of the reverse charge rule to the assessment of VAT on the acquisition of civil construction services;

    • €77,501.73 relating to VAT considered improperly deducted;

  • The Claimant did not accept the following corrections made by the AT:

    • €130,616.22 relating to the improper deduction of VAT incurred while the Claimant was classified under the exemption scheme;

    • €24,094.60 relating to the failure to assess VAT on the acquisition of services from B...;

    • €7,160.62 relating to the improper deduction of VAT incurred on the acquisition of services from B....

  • Regarding the "non-assessment of civil construction services, notwithstanding the fact that the service providers improperly assessed VAT on the invoices", the Claimant chose to partially accept the correction proposed by the AT, regularizing the amount of €290,734.71.

  • The difference between the correction proposed and the amount regularized in favor of the State relates to the tax on the operation of acquisition of connection to the network and increase in power services from B..., documented by invoice No. ....

  • The services provided by B... relate to "(…) connection to the network/increase in power, the provision of which type of service may imply the construction of a power distribution transformation station and respective network elements".

  • Such services relate to the passing on to customers of the costs of connection to the network and increase in power, which constitute obligations of B..., regulated in the Regulations on Commercial Relations of the Energy Sector (RRCSE) issued by the Energy Services Regulatory Authority (ERSE).

  • In the context of the inspection action, with the purpose of clarifying the nature of the services provided by supplier B..., the Claimant presented an e-mail from B..., where, among other things, it states that the services provided are connection to the electrical network and as such does not constitute a civil construction service insofar as there is no transfer of ownership rights.

  • The invoice issued by B... contains the following mention in its description "(…) Constr B... of all elements".

  • During the inspection action, B... acknowledged that the description of the service provided, shown on the invoice, was not clear.

  • On 17-10-2017, the Claimant was notified of the final inspection report through office No. ...., which contained the following:

[Text continues with formal notification and payment information]

  • The Claimant was notified of the VAT assessment acts, the account adjustment statement and the compensatory interest assessment statement.

  • The Claimant paid the amounts of €24,094.60 and €3,098.38 relating to the account adjustment statements No. 2017... and 2017..., with the remainder of the liquidated debt paid by offsetting with Claimant credits in current account, relating to Stamp Duty.

A.2. Facts Established as Not Proven

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

A.3. Reasoning on Factual Matters Proven and Not Proven

With respect to the factual matters, the Tribunal does not have to pronounce upon everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and distinguish the proven matters from the not proven (cf. Article 123, No. 2, of the Code of Tax Procedure and Process (CPPT) and Article 607, No. 3 of the Code of Civil Procedure (CPC), applicable pursuant to Article 29, No. 1, points (a) and (e), of the RJAT).

Thus, the facts relevant for the judgment of the case are chosen and defined in function of their legal relevance, which is established in view of the various plausible solutions to the legal question(s) (cf. former Article 511, No. 1, of the CPC, corresponding to the current Article 596, applicable pursuant to Article 29, No. 1, point (e), of the RJAT).

Thus, having regard to the positions taken by the parties, in light of Article 110, No. 7 of the CPPT, the documentary evidence and the records attached to the file, the facts listed above were considered proven, with relevance to the decision, taking into account that, as stated in the Decision of the Administrative Court of Appeal-South of 26-06-2014, delivered in case 07148/13[1], "the probative value of the tax inspection report (...) may have probative force if the assertions contained therein are not challenged".

Allegations made by the parties and presented as facts were not established as proven or not proven, consisting of strictly conclusive statements, not susceptible of proof, whose truthfulness must be determined in relation to the concrete factual matters above established.

B. ON THE LAW

The questions to be decided in the present arbitral proceedings, as configured by the Claimant, are the following:

  • To determine whether VAT incurred while classified under the exemption scheme is deductible, with the acquisition of resources that were subsequently allocated to the conduct of taxed operations, following the waiver of that regime;

  • To determine whether the services provided by B... correspond or not to civil construction services, subject to the reverse charge rule provided for in Article 2, No. 1, point (j) of the VAT Code.

Let us examine.

i.

The Claimant begins by suggesting that the understanding reflected by the AT in the correction now in question would be contrary to the principle of neutrality, presenting various European and arbitral case law on such principle.

Subsequently, the Claimant lists the various subjective, objective and temporal requirements that condition the exercise of the right to VAT deduction, concluding that they are all fulfilled, and that, as such, the correction in question, in the amount of €130,616.22, should be annulled.

With all due respect, it is considered that the Claimant errs, in this matter, in interpretation, an error condensed in the understanding that, with regard to temporal order requirements, the right to deduction may, ad libitum, be exercised in any declaration subsequent to that in which the invoices were received, within the limit of 4 years.

Regarding the right to deduction, Article 22 of the VAT Code provides:

"1 - The right to deduction arises at the moment when the deductible tax becomes due, in accordance with the provisions of Articles 7 and 8, being effected by subtracting from the total amount of tax due on taxed operations of the taxable person, during a declaration period, the amount of deductible tax, due during the same period.

2 - Without prejudice to the provisions of Article 78, deduction must be effected in the declaration of the period or of a subsequent period to that in which receipt of the invoices or receipt of VAT payment that forms part of import declarations has occurred.

3 — If receipt of the documents referred to in the previous number takes place in a declaration period different from that of their issuance, deduction may be effected, if still possible, in the declaration period in which that issuance took place."

As stated in the Decision of the Supreme Administrative Court (STA) of 18-05-2011, delivered in case 0966/10[2]:

"I – As a rule, established in Article 22, No. 1, of the VAT Code, tax deduction should be effected in the declaration of the period in which receipt of the invoices, equivalent documents or receipt of VAT payment that forms part of import declarations has occurred, although the possibility of corrections provided for in Article 71 is admitted.

II – Thus, tax deduction cannot be effected at any moment, at the choice of the taxable person, and the useful scope of the aforementioned norms, which indicate the appropriate moments for deduction, is precisely to exclude that it may be done at different moments, when such is not specially provided.

III – No. 2 of Article 92 of the VAT Code, in establishing that the right to deduction may only be exercised within the limit of four years after the birth of the right to deduction, does not have the scope of attributing to the taxable person the freedom to choose any moment within that period to effect deduction, but rather to fix a maximum limit that cannot be exceeded, even in cases where deduction may be effected at moments different from those indicated in Article 22.

IV – Apart from Article 71, No. 6, of the VAT Code, there is no legal provision that can be interpreted as permitting the taxable person to exercise the right to deduction at a moment later than those resulting from Article 22 indicated, in cases where, due to an oversight in its accounting, it only later discovers that it had the right to deduction at a moment when it should have exercised it."

That is, as a rule, tax deduction should be effected, in accordance with Article 22 of the VAT Code, in the "declaration of the period in which receipt of the invoices has occurred. However, the right to deduction may be exercised at later moments", with Article 98, No. 2, of the VAT Code establishing a maximum limit of four years for the exercise of the right to deduction, a period which is configured as a general period, applicable only when a special period is not provided, as is the case with the provision in Article 78, No. 6 thereof. In this context, it is important to assess, in cases where, pursuant to provisions that specially provide for this, deduction is not effected in the declaration of the period in which receipt of the invoices has occurred, whether or not the conditions for application of the aforementioned periods are met, and in that case, one may accept as legitimate the exercise of the right to deduction.

With all due respect, it is not considered possible to subscribe to the thesis that the legislator intended, in any way, to attribute to the taxable person discretion as to the moment of VAT deduction incurred by it.

Indeed, and as stated in the aforementioned Decision:

"European law, which has primacy over domestic law provided that the fundamental principles of the democratic rule of law are not violated (As is, since the constitutional revision of 2004, expressly established in No. 4 Article 8 of the Constitution of the Portuguese Republic and was previously understood), points to this interpretation being correct. (...)

From this regulation, it is concluded that tax deduction can only be effected outside the moments considered appropriate in conditions that will be fixed, which rules out the viability of a thesis that amounts to attribution to the taxable person of the right to make the deduction when it sees fit, within the maximum period legally permissible."

The very provision of No. 2 of Article 22 in question, in its present wording, only makes sense to exist if, precisely, proscribing the existence of discretion on the part of the taxable person in the choice of the period for proceeding with deduction. Were it otherwise, as occurs in the interpretation sustained by the Claimant, the provision in question would lose any useful effect, since it would merely rule out the deductibility of tax incurred in a period preceding its relevance, which would make no sense whatsoever.

Thus, and in this manner, having regard to the hermeneutical criterion of the reasonable legislator, the interpretation to be made of the provision of Article 22, No. 2 of the VAT Code should be in the sense of imposing the deduction of tax incurred in the declaration of the period in which receipt of the invoices or payment receipt has occurred, licensing only deduction in a later period, in the circumstances in which the very Article specifically provides.

It is concluded, therefore, that the reference to "later period" made in No. 2 of Article 22 of the VAT Code relates to situations in which, specifically, the possibility of tax deduction in a later period is admitted, and this is the only interpretation consistent with the provision of Article 179 of Council Directive 2006/112/EC, of 28 November 2006, relating to the common system of value added tax (VAT Directive), which provides that: "The taxable person effects the deduction by subtracting from the total amount of tax due in respect of the taxation period the amount of the input tax in respect of which, during the same period, the right of deduction arose in accordance with Article 178." (emphasis added).

That is, in sum, the rule is that VAT deduction must be made in the periodic declaration corresponding to the period in which the VAT to be deducted was incurred, and not, freely, in any other subsequent periodic declaration, since such is the form appropriate to ensure that VAT is deducted in the same period in which it is incurred.

One must always, in all cases, take into account that the exercise of the right to VAT deduction is a fundamental right that ensures the neutrality of VAT, and should only be restricted in exceptional situations.

Indeed, as the Court of Justice of the European Union has repeatedly emphasized, and as results from the wording of Articles 167 and 179, No. 1, of the VAT Directive, the right to deduction is exercised, in principle, during the same period in which it arose, that is, at the moment when the tax becomes due. However, pursuant to Articles 180 and 182 thereof, the taxable person may be authorized to proceed with the deduction of VAT, even if it has not exercised its right during the period in which that right arose, without prejudice to compliance with certain conditions and rules fixed by national regulations (see, in this sense, Decision of 8 May 2008, Case C-95/07, Ecotrade, Reports, p. I-03457, Nos. 42 and 43).

That is, taxable persons may, in situations that justify it, be authorized to proceed with deduction, even if they have not exercised their right during the period in which that right arose. However, in that case, their right to deduction becomes dependent on certain conditions and procedures fixed by the Member States.

In this context, the CJEU has noted that the possibility of exercising the right to deduction without temporal limits contradicts the principle of legal certainty, which requires that the tax situation of the taxable person, having regard to its rights and obligations vis-à-vis the Tax Authority, not be indefinitely subject to challenge, and therefore does not accept the thesis according to which the right to deduction, like the right to assessment, cannot be associated with a period of limitation. For this purpose, the CJEU invokes the principles of effectiveness and equivalence. With regard to the former, it notes that the limitation period provided for cannot, by itself, make practically impossible or excessively difficult the exercise of the right to deduction, as to the latter, it has analyzed whether in the situations submitted for its consideration there is an equivalence between the period of limitation granted to taxable persons and the period granted to the Tax Authority to proceed with corrections, and has concluded, even, that this principle is not contravened by the fact that, in accordance with national regulation, the Tax Authority has, for demanding collection of VAT due, a longer period than that granted to taxable persons to request its deduction (see, Case Ecotrade, already cited, Nos. 43 to 49).

As it notes, although Member States have the discretion to adopt, pursuant to Article 273 of the VAT Directive, measures to ensure the correct collection of tax and prevent fraud, these must not, however, go beyond what is necessary to achieve such objectives and must not undermine the neutrality of VAT (see, in particular, Decision of 21 October 2010, Case Nidera, Case C-385/09, Reports, p. I-10385, No. 49).

This is the context in which, in national legislation, it is permitted that, namely, where a material error or calculation error has occurred to the detriment of the taxable person, it may be corrected within the period set in Article 78, No. 6 of the VAT Code.

Other types of errors may be corrected through the submission of a substitute declaration[3], if such is still, in accordance with legal terms, possible, or, if not, through a request for official review, pursuant to Article 78 of the General Tax Law (LGT), provided that the corresponding conditions are also met.

In this context, the national VAT regime, which, in accordance with the aforementioned Article 179 of the Directive, imposes that the right to deduction be exercised in the declaration of the period corresponding to the genesis of such right, or of the period in which the necessary elements for the effectuation of that right came into the possession of the taxable person, complemented by various mechanisms which, conditionally and with a limit of 4 years, permit the effectuation of such right in exception to the general regime, should be considered entirely compliant with European requirements, not entailing any violation of the fundamental principles thereof and, specifically, of the principle of neutrality.

In this sense, the Decision of the Central Administrative Court of Appeal-South, delivered in case No. 05447/12, of 21 May 2013, cited by the AT, is understood and accepted, where it states:

"Thus, as it is, one must follow the reasoning of the appealed decision, supported by what is stated in the Decision of the North Administrative Court of Appeal of 31-07-2008, Case No. 00052/02-Porto, www.dgsi.pt, when it points out that while the appellant was conducting the activity covered by the exemption stated in Article 9 of the VAT Code, it could not assess nor deduct tax relating to that activity that persists during the period when the exemption is in effect, and that from the moment when the taxpayer waives the exemption, it becomes, from that moment and never retroactively, a normal taxable person, capable of assessing and deducting tax, relating to tax generating events occurring after the date on which the waiver of exemption becomes effective, in the common manner for all persons not exempt (...), that is, after the waiver of exemption becomes effective, that person, as an exempt entity, cannot assess and deduct tax in, or relating to, the past temporal aspect. Thus, and with reference to the various elements to which the Appellant refers, - on 22/01/2008 it submitted the Declaration of Changes of Activity (cf. Doc. 22) and on 24/01/2008 it submitted the periodic declaration for 2007/12T (cf. Docs. 23 and 24) -, the same have no whatsoever validity as regards the assessments challenged, since they do not have an impact on the matter at hand, which means that there is no violation of the provisions of Articles 24, No. 6(c) and 25 of the VAT Code pursuant to Article 10 of Decree-Law 21/2007 of 29/01 and likewise of the right of free private initiative of the Appellant and other norms pointed out by it."

The case law invoked by the Claimant shall, on the other hand, not be pertinent, namely because none of the decisions cited by it relates to a situation analogous to the one sub iudice.

Thus, both in the Decision of the STA of 13-09-2017, delivered in case 01923/13, and in the Decision of the same High Court of 20-10-2010, delivered in case 0974/09, both cited by the Claimant, what is at issue is the tax situation of the entity issuing the invoices deducted, and not, as in the present case, of the entity proceeding with the deduction of invoices.

Also in the Decision of the CJEU of 3 March 2005, delivered in case C-32/0, what was not at issue, contrary to what the Claimant suggests, was an entity that, at the date of issuance of invoices for goods or services of which it was the purchaser, was subject to an exemption regime. Rather, what is at issue in this said decision is whether the right to deduction persists, even though the activity for which the expenditures incorporating the tax to be deducted were made, do not materialize, which has nothing to do with the present case.

Thus, and for all the foregoing, it must be concluded that the AT was correct when it considered that the Claimant did not have the right to deduct in the 201612T declaration VAT contained in invoices issued prior to 06-11-2013[4].

For all the foregoing, the arbitral request should fail in this part.

As regards the question of whether the services provided by B... correspond or not to civil construction services, subject to the reverse charge rule provided for in Article 2, No. 1, point (j) of the VAT Code, which underlie the corrections in the value of €24,094.60 relating to the failure to assess VAT on the acquisition of services and €7,160.62 relating to the improper deduction of VAT incurred on the acquisition of services, it is considered that what the AT decided lacks factual support.

Indeed, the content of the aforementioned norm is as follows:

"1 - The following are taxable persons of the tax: (...)

j) Natural or legal persons referred to in point (a) that have a seat, permanent establishment or residence in the national territory and that carry out operations which confer the right to total or partial deduction of tax, when they are purchasers of civil construction services, including remodeling, repair, maintenance, conservation and demolition of immovable property, on a principal contract or subcontract basis."

Now, as results from the factual matters, sufficient elements were established to the effect that the services performed by B..., to which invoice No. ... of 28-02-2014 and the corrections now in question refer, relate to "(…) connection to the network/increase in power, the provision of which type of service may imply the construction of a power distribution transformation station and respective network elements".

Although, as the Respondent states, the available documentation indicates that "construction works for the installation of electrical network infrastructure were carried out" and "that the works carried out amount to the provision of civil construction services", it is not discerned, in light of a judgment of normality, that the works in question were carried out on account of the Claimant, in the sense of becoming its property, but rather what is at issue, as proven, is that such services relate to the passing on to the Claimant of the costs of connection to the network and increase in power, which constitute obligations of B..., regulated in the Regulations on Commercial Relations of the Energy Sector (RRCSE) issued by the Energy Services Regulatory Authority (ERSE).

What is at issue, therefore, will be the provision of electrical network connection services, which involved the performance of civil construction services by the service provider, on its own installations (and not on those of the service purchaser), in order to provide the electrical energy supply service under the necessary conditions, with the cost of said works being included in the amount invoiced by the electrical network connection and energy supply service provider.

Thus, and for all the foregoing, it is considered that the conditions for application of the reverse charge rule (reverse charge), as applied by the AT, are not met, and the assessment object of the present arbitral action is defective in this part, suffering from error regarding the factual presuppositions, and consequently error of law, and should therefore be annulled in the amount of €31,255.22.

As to the request for indemnificatory interest formulated by the Claimant, Article 43, No. 1, of the General Tax Law (LGT) establishes that indemnificatory interest is due when it is determined that there was error imputable to the services resulting in payment of the tax debt in an amount higher than that legally due.

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

The Claimant therefore has the right to be reimbursed for the amount that it paid (pursuant to the provisions of Articles 100 of the LGT and 24, No. 1, of the RJAT) by virtue of the annulled acts and, further, to be indemnified for the wrongful payment through the payment of indemnificatory interest by the Respondent, from the date of payment of the amount, until reimbursement, at the legal suppletive rate, pursuant to Articles 43, Nos. 1 and 4, and 35, No. 10, of the LGT, Article 559 of the Civil Code and Order No. 291/2003, of 8 April.

C. DECISION

In view of the foregoing, this Arbitral Tribunal decides to find the arbitral request partially well-founded and, in consequence:

  • To partially annul the additional VAT assessment act No. 2017..., the compensatory interest assessment No. 2017... and the corresponding account adjustment statements No. 2017... and 2017..., in the total amount of €31,255.22;

  • To condemn the Respondent to pay indemnificatory interest, in the terms indicated above, on the amount referred to of €31,255.22;

  • To condemn the parties in the costs of the proceedings, in proportion to their respective loss, fixing the amount of €2,976.00 for the Claimant and €696.00 for the Respondent.

D. Value of the Proceedings

The value of the proceedings is fixed at €164,969.82, pursuant to Article 97-A, No. 1, (a), of the Code of Tax Procedure and Process, applicable by virtue of points (a) and (b) of No. 1 of Article 29 of the RJAT and No. 2 of Article 3 of the Regulations on Costs in Tax Arbitration Proceedings.

E. Costs

The value of the arbitration fee is fixed at €3,672.00, pursuant to Table I of the Regulations on Costs of Tax Arbitration Proceedings, to be paid by the parties in proportion to their respective loss, as fixed above, since the request was partially well-founded, pursuant to Articles 12, No. 2, and 22, No. 4, both of the RJAT, and Article 4, No. 4, of the said Regulations.

Let notice be given.

Lisbon, 5 September 2018

The Arbitrator President

(José Pedro Carvalho)

The Arbitrator Member

(Nina Aguiar)

The Arbitrator Member

(José Joaquim Monteiro Sampaio e Nora)

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

[2] Emphasis added.

[3] Cf. in this sense the Decision of the STA of 02-10-2010, delivered in case 0256/10.

[4] Possibly, but such does not form part of the object of the present proceedings, it could be discussed whether the Claimant could or could not deduct the tax in question in the first periodic declaration presented after the waiver of exemption, or if, having failed to do so, it could proceed with the submission of a substitute declaration thereof, or with the submission of a request for official review of the same.

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Can a real estate investment fund deduct VAT incurred during a tax exemption period for later taxable operations in Portugal?
Under Portuguese VAT law, the deductibility of VAT incurred during an exemption period for subsequent taxable operations depends on the principle of actual allocation established in Article 20 of the VAT Code. When a real estate investment fund transitions from an exemption regime to normal VAT taxation, VAT incurred before the regime change is generally not deductible, as the right to deduction arises when the tax becomes chargeable and the taxpayer is entitled to deduct. However, if resources acquired during the exemption period are demonstrably allocated to future taxable operations, and the fund can prove this allocation through objective criteria, partial deduction may be permitted. The Tax Authority typically challenges such deductions based on the temporal connection between tax incurrence and the applicable regime. CAAD arbitral tribunals analyze whether the acquired goods and services were genuinely intended for taxable activities and whether the allocation methodology meets legal requirements under Articles 20 and 23 of the VAT Code.
Does the reverse charge mechanism under Article 2(1)(j) of the Portuguese VAT Code apply to services provided by construction companies?
The reverse charge mechanism under Article 2(1)(j) of the Portuguese VAT Code applies to construction services provided by subcontractors to main contractors in the civil construction sector. This provision shifts the VAT payment obligation from the service provider to the recipient, who must self-assess the tax. The application depends on whether the services qualify as 'civil construction works' as defined in the legislation and whether both parties are taxable persons operating in the construction sector. Not all services provided by construction companies automatically trigger reverse charge; the services must constitute actual construction, modification, repair, maintenance, or demolition of immovable property. In real estate development contexts, services such as project management, consulting, or planning may fall outside the reverse charge scope. The classification requires analysis of the specific nature of services contracted, the parties' VAT registration status, and their economic activities. Disputes often arise when the Tax Authority reclassifies services as subject to reverse charge, resulting in additional assessments for failure to self-assess VAT.
What are the conditions for VAT deduction rights when transitioning from an exempt to a taxable regime in Portugal?
When transitioning from exempt to taxable VAT regimes in Portugal, taxpayers must observe several critical conditions for deduction rights. First, the right to deduction crystallizes only when the taxpayer is classified under a regime conferring deduction rights and the tax becomes chargeable on acquisitions. Second, under Article 20 of the VAT Code, deduction requires that acquired goods and services are effectively allocated to taxable operations; mixed-use assets require application of proportional deduction methods or objective allocation criteria based on actual use. Third, proper documentation is mandatory—invoices must comply with Article 36 requirements. Fourth, timing matters: VAT incurred before regime change is generally not deductible unless the assets remain in use for taxable activities and adjustment mechanisms under Article 24 apply. Fifth, when taxpayers simultaneously conduct taxable and exempt operations, they must establish defensible allocation methodologies, such as area-based calculations for real estate projects. The Tax Authority scrutinizes regime transitions intensively, particularly when significant reimbursement requests follow, requiring taxpayers to maintain comprehensive documentation proving the nexus between incurred VAT and subsequent taxable activities.