VAT Deduction Rights on Research Project Participation - CAAD Arbitration 66/2018-T

ARBITRAL DECISION

I - Report

1. A... S.A.[1], legal entity no. ..., with registered office at Rua ... no. ..., ...-... ... (hereinafter referred to as the "Claimant"), submitted, on 21-02-2018, a request for arbitral pronouncement, pursuant to Article 2, no. 1, paragraph a) and Article 10, nos. 1 and 2 of the Legal Regime for Tax Arbitration, provided for in Decree-Law no. 10/2011, of 20 January, as amended by Article 228 of Law no. 66-B/2012, of 31 December (hereinafter abbreviated as "LRTA") and Articles 1 and 2 of Order no. 112-A/2011, of 22 March.

2. The Claimant seeks the pronouncement of the Arbitral Tribunal to declare the annulment of the additional Value Added Tax (VAT) assessments and the respective compensatory interest with reference numbers ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., relating to the year 2010, and consequently to determine the reimbursement of the amount unduly paid in the amount of € 51,971.77 (fifty-one thousand nine hundred and seventy-one euros and seventy-seven cents) plus indemnitory interest calculated at the legal rate.

3. The Tax and Customs Authority is the Respondent (hereinafter referred to as the "Respondent").

4. The request for constitution of the arbitral tribunal was accepted by the President of CAAD and automatically notified to the Tax and Customs Authority on 19-12-2017.

5. Pursuant to paragraph a) of no. 2 of Article 6 and paragraph b) of no. 1 of Article 11 of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Ethics Council of CAAD designated as arbitrator of the sole arbitral tribunal His Excellency Dr. Olívio Mota Amador who, within the applicable period, communicated acceptance of the assignment.

6. The Claimant was notified, on 11-04-2018, of the arbitrator's appointment and did not manifest a wish to refuse the designation, in accordance with the combined provisions of Article 11, no. 1, paragraphs a) and b), of the LRTA and Articles 6 and 7 of the CAAD Ethics Code.

7. In accordance with the provisions of Article 11, no. 1, paragraph c), of the LRTA, as amended by Article 228 of Law no. 66-B/2012, of 31 December, the Arbitral Tribunal was constituted on 03-05-2018.

8. The Respondent, duly notified by arbitral order of 03-05-2018, submitted its Response on 07-06-2018.

9. The Arbitral Tribunal, by order of 18-06-2018, determined: (i) to dispense with the holding of the meeting provided for in Article 18 of the LRTA, in accordance with the general principles of procedural economy and prohibition of useless acts and to promote swiftness, simplification and informality of the arbitral process, in accordance with the provisions of paragraphs c) and e) of Article 16 and no. 2 of Article 29 of the LRTA, given that no exception was raised nor questions raised that would prevent consideration of the merits of the request; (iii) should the parties wish to make written submissions, these must be produced within 15 days of notification of the present order, granting the Respondent the option to submit its written submissions successively to those produced by the Claimant; (iv) to indicate 14 September 2018 as the deadline for issuing the arbitral decision.

10. The Respondent submitted, on 20-06-2018, the Administrative File and, on the same day, the Arbitral Tribunal determined by order that the Claimant must, by the deadline for issuing the arbitral decision, proceed to pay the subsequent arbitration fee, in accordance with no. 3 of Article 4 of the Regulation of Costs in Tax Arbitration Proceedings, and communicate the respective payment to CAAD.

11. Submissions were presented by the Claimant on 03-07-2018 and by the Respondent on 05-09-2018.

12. The Arbitral Tribunal, through orders of 13 and 30 September 2018, amended the deadline for issuing the arbitral decision, with the latter of said orders fixing 15 October 2017 as the deadline for issuing the decision.

13. The position of the Claimant, in accordance with the provisions of the request for constitution of the Arbitral Tribunal, is, in summary, as follows:

13.1. The Claimant is a commercial company whose corporate purpose is the provision of consulting services in technological innovation, innovation training and innovation project implementation. Thus, the sole objective is profit, deriving from the totality of its activity.

13.2. The Claimant has essentially three sources of income: (i) Provision of consulting services, namely business plan preparation, research and development auditing, hosting and technical advice, SIDGI implementation consulting, market research studies, application preparation for national and community programs and initiatives, innovation diagnostic execution, internationalization support and commercial file preparation; (ii) Community Programs FP7 (Seventh Framework Programme); (iii) National research and development programs.

13.3. Regarding FP7 Community Programs, the payments made by the European Commission within the scope of such contracted programs consist precisely in the consideration or exchange value of such services. Payment is made as specific consideration for the Claimant to provide the determined service.

13.4. The activity exercised by the Claimant through fulfillment of the operational objectives defined in FP 7 community initiative programs constitutes an economic activity, having an underlying synallagmatic relationship. The contracted activities only exist because the subsidy is paid and the subsidy is only paid if the activities are carried out. This is the causal and synallagmatic nexus.

13.5. The subsidies obtained by the Claimant under FP7 Community Programs must be considered as subsidies subject to taxation, and consequently all VAT borne in expenses inherent to the provision of services corresponding to such programs is deductible.

13.6. As for the VAT borne on acquisitions attributable to participation in projects within the scope of National Research and Development Programs, said projects have a commercial objective, aiming at the provision of services, subject and not exempt from VAT.

13.7. Indeed, the Claimant also provides important research and development services, debiting the results of projects and research to other economic operators, with VAT charged.

13.8. The activity of the Claimant is configured as a provision of research services directly aimed at the performance of operations taxable under VAT and at obtaining benefits of a permanent nature through direct invoicing of the results of research projects.

13.9. Thus, the knowledge produced by the projects developed by the Claimant is invoiceable knowledge, and it is knowledge produced with the direct intention of being invoiced in operations subject to VAT.

13.10. According to the invoicing list, attached to the request for arbitral pronouncement, of non-exhaustive character, it is apparent that the Claimant exercises a systematic, permanent and synallagmatic activity of provision of services subject to VAT, resulting from the knowledge and innovative systems deriving from the projects it develops with the national subsidies it obtains from its participation in National R&D Programs.

13.11. The provision of research and development services exercised by the Claimant, financed by non-reimbursable funds, constitute an activity of economic nature having an underlying relationship of reciprocity and aimed at obtaining benefits of a permanent nature.

13.12. Research projects are intended to generate knowledge, products and services invoiceable to third entities in taxable transactions subject to tax. From which it is concluded that VAT borne on acquisitions made for the realization of these Projects confers the right to deduction.

13.13. What must count for purposes of the admissibility of deduction is not the fact that actual invoicing will occur, but rather the fact that the project is developed with a view to and with the intentionality of originating invoiceable product.

13.14. The sense set out is that which corresponds to the letter and spirit contained in the norm inherent in Article 20 of the VAT Code, being the dominant interpretation in community case law, notably in the decisions of the Court of Justice of the European Union "Inzo" (case C-110/94 of 29/02/1996) and "Gent Coal Terminal" (case no. C-37/95 of 15/01/1998).

13.15. In conclusion, deduction of VAT borne on goods and services acquired for purposes of investment work in research intended to be used within the scope of taxed operations should be permitted.

13.16. This right to deduction persists even if perhaps those goods and services were consumed in research projects that ultimately did not give rise to any taxed transaction, namely due to failure to achieve research objectives.

13.17. In these terms, the full deduction of VAT borne by the taxpayer should have been accepted and no VAT corrections/assessments should have been made, particularly the disputed additional assessments, which violate the provisions of Article 20 of the VAT Code.

1. The position of the Respondent, expressed in the response, can be summarized as follows:

14.1. Regarding participation in the FP7 program of the European Community, the Claimant did not assess any tax on the amounts it received as subsidy. Thus, knowing that no exemption would apply to such provision of services, it was the Claimant who in the first instance classified such subsidies as not being provision of services, as provided for in Article 4, no. 1, of the VAT Code, by not assessing tax on said active operations.

14.2. The Claimant's intention to deduct tax borne on inputs related to outputs on which it did not assess tax, where no exemptions are in question that grant the right to deduction, would constitute a manifest violation of the neutrality principle, by placing the Claimant in a position of advantage over competition, thus creating manifest market distortions.

14.3. Thus, for the Respondent, it is manifest that there is no right to deduction, because the Claimant did not even assess tax on the active operations.

14.4. In projects financed by FP7 Community Programs the basic principle is co-financing, in that the European Commission does not "purchase" research services through a contract in which a price is paid, but rather grants subsidies, depending on the financing plan, the legal status of the participant, as well as the type of activity, which may be research and technological development, demonstration, consortium management, networking, training, coordination, and dissemination.

14.5. Moreover, the case law invoked by the Claimant is relevant, but it happens that the subsidies in question are not established by reference to the price or quantities transmitted, nor to a determined third party, beneficiary of such services.

14.6. The programs referred to aim at pursuing the objectives set out therein and are part of a vast set of objectives, of promoting various interests, which are financed, directly or indirectly, by the European Commission.

14.7. Now, the operations carried out aiming at implementing the policies established by the EU, within the periods predetermined in the programs, are not capable of being attributed to the exercise of an economic activity of provision of services, because, given the nature of those operations, it cannot be said that the activity is carried out with the purpose of obtaining revenue with a character of permanence.

14.8. For VAT purposes, the exercise of an economic activity presupposes the existence of transactions between the parties with stipulation of a price or consideration, which does not occur in the cases at issue, this is because the operations carried out by the Claimant, which are materialized in web sites, online courses, technological platforms, surveys, newsletters, press-releases, case studies, show-cases, documents or guides to best practices, recommendations and final results, workshops, presentations, conferences, do not have a direct and identifiable beneficiary and the European Commission acts in the common interest of the EU as defined in each of the programs referred to, and not as a purchaser of the services deriving from that program for its own use.

14.9. It also follows that the Claimant receives no consideration from any eventual beneficiaries of the projects.

14.10. From the foregoing it follows that the activity exercised by the Claimant, through fulfillment of the operational objectives defined in the referred community initiative programs, does not constitute an activity of economic character, because it does not have underlying any relationship of reciprocity, characteristic of a commercial relationship, nor of obtaining gains with a character of permanence.

14.11. Regarding the VAT borne on acquisitions attributable to participation in projects within the scope of National Research and Development Programs, the active operations carried out by the Claimant within the scope of said programs have no associated direct monetary consideration other than the financial consideration or subsidy awarded, upon presentation of documents proving eligible expenses. And, those subsidies, not being established according to the volume of services provided but rather as a percentage of costs incurred, do not meet the requirements for their inclusion in the taxable amount, in accordance with paragraph c) of no. 5 of Article 16 of the VAT Code.

14.12. Thus, with respect to these active operations, it is not concluded that it is a transaction subject to tax insofar as it does not constitute an activity of economic character, because it does not have underlying any relationship of reciprocity, characteristic of a commercial relationship, with stipulation of a price or consideration and, therefore, is qualifiable as a subsidy outside the scope of the tax, giving rise to no tax assessment. Indeed, this was the classification given by the taxpayer, since it did not assess VAT upon accounting recognition of the subsidy.

14.13. From the foregoing it follows that the VAT borne attributable to participation in the projects does not confer the right to deduction, by virtue of the provisions of no. 1 of Article 20 of the VAT Code, because the "active operations directly related to such expenses are the subsidies received, which do not constitute the exercise of an economic activity for VAT purposes."

14.14. The invoices submitted by the Claimant, in an attempt to attribute to the Projects in question, are not capable of permitting such conclusion to be reached. Only the contracts on the basis of such invoices, in conjunction with the program of those projects, would eventually permit verification of such causal nexus.

14.15. It is verified that the Claimant did not assess VAT on the outputs with which the outputs are related, for the purpose of deductibility of the tax, now arguing that those operations (active) are subject to tax and confer the right to deduction. Therefore, the Claimant's claim amounts to benefiting from such omitted conduct, clearly incurring, subject to better opinion, in abuse of right in the form of venire contra factum proprium.

14.16. Indeed, allowing deduction when assessing tax on active operations creates a situation of manifest injustice, not only to the State coffers, but also to all other operators in competition with the Claimant, primarily by permitting deduction of tax borne with a view to performing operations, which, not being exempt with the right to deduction, were also not subject to assessment.

14.17. The assessments in question do not result from any error by the Services but result directly from the application of the law. Therefore, there should be no place for payment of indemnitory interest.

II - Procedural Clarifications

1. The parties have legal personality and capacity, show themselves to be legitimately interested and are regularly represented (Articles 4 and 10, no. 2, of the LRTA and Article 1 of Order no. 112-A/2011, of 22 March).

The tribunal is competent and is regularly constituted.

The process is not subject to any nullities.

No exceptions were raised.

There are no other circumstances that prevent consideration of the merits of the case.

In these terms, the Arbitral Tribunal is regularly constituted to appreciate and decide on the object of the process.

III - Merits

III.1. Matters of Fact

16. Proven Facts

16.1. With relevance for the appreciation and decision of the issues raised, the following facts are given as established and proven:

• The Claimant is a commercial company whose corporate purpose is the provision of consulting services in technological innovation, innovation training and innovation project implementation.

• According to the Tax Authority's Register and Management System of Contributors, the Claimant commenced activity on 12-12-1997, being included, from 01-01-2009, in the normal monthly VAT regime, with CAE 70220 - "Other Consulting Activities for Business and Management" and, for corporate income tax purposes, is included in the general scheme for determination of taxable profit.

• The Tax Inspection Services of the Finance Directorate of Porto, under Service Order no. OI2013..., carried out an external inspection procedure against the Claimant, which took place between 27-01-2014 and 19-06-2014, and was concluded on 16-07-2014, with notification of the Final Tax Inspection Report to the Claimant, by official letter no. .../..., of 22-07-2014.

• Within the scope of the Tax Inspection procedure identified in the preceding paragraph, several technical corrections were made in the VAT field, which gave rise to additional VAT assessments relating to the year 2010, in the amount of € 58,084.27 and the corresponding compensatory interest in the amount of € 8,427.90, in a total amount of € 66,512.17.

• The assessments referred to in the preceding paragraph are as follows (See documents at pages 15 to 36 of the Administrative File, which are given as fully reproduced for all legal purposes):

(*) Assessment partially disputed by the Claimant only – see paragraph H) below.

• The assessments identified in the preceding paragraph had a voluntary payment deadline until 31-10-2014 and the Claimant proceeded to payment, on 23-11-2016, of € 58,004.27, having obtained forgiveness of the compensatory interest through adherence to the PERES Program (See Document no. 1 attached to the Request for Arbitral Pronouncement and which is fully reproduced for all legal purposes).

• The Claimant accepts the partial validity of the assessments relating to periods 1007 and 1010 regarding the amount of € 6,112.50, for not having assessed VAT on the provision of consulting services referring to invoices issued to clients "C..." and "D..." (See no. 8 c) of the Request for Arbitral Pronouncement).

• The Claimant, in 2010, provided consulting services to various national and foreign entities, such as the preparation of studies, business plans, research and development auditing, hosting and technical advice, consulting on technology transfer, consulting on SIDGI implementation, market research studies, preparation of applications for national and community programs and initiatives, innovation diagnostic execution, internationalization support, commercial file preparation and market research studies, among others (See item II.3.6 of the Tax Inspection Report).

• The Claimant, in 2010, participated, in consortium, in various community projects financed by the Seventh Framework Program of the European Community for Activities in Research, Technological Development and Demonstration, designated as (Seventh Framework Programme), or abbreviated as "FP7" (see item II.3.7 of the Tax Inspection Report).

• The FP7, which was in force between 2007 and 2013, granted subsidies to researchers and research institutions intended to co-finance research projects, technological development and demonstration, in accordance with the provisions in the so-called "Grant Agreements" established with the European Commission.

• The FP7 financed the AgriFoodResults Project - European Initiative for a Better Use of Results of Agri-Food Research (Grant Agreement no. ...) which had the objective of promoting the dissemination of the results of food research, involving scientists and small and medium enterprises, through the creation of web sites and collection of the results of such research, preparation of guides to best practices and organization of workshops, presentations, and conferences (See pages 1 and 5 of Grant Agreement no. ..., at pages 38 et seq. of the Administrative File).

• The Claimant was included in the list of 16 beneficiary entities of the Project identified in the preceding paragraph, originating from France, Italy, Greece, Germany, Hungary, Sweden, Netherlands, Spain, Romania, Belgium and Portugal (See page 6 (A.3 List of beneficiaries) of Grant Agreement no. ..., at page 38 of the Administrative File).

• The participation of the Claimant in the Project identified in paragraph K) is described in point B2.3 (Consortium as a whole) of Grant Agreement no. ... as follows:

(See page 55 of Grant Agreement no. ..., at page 65 of the Administrative File).

• The costs borne by the participants in the Project identified in paragraph K) and the amount of the contribution of the European Union are defined in Grant Agreement no. ..., with the amount of the contribution of the European Union to finance the support activities borne by the Claimant being € 42,300.00 (See pages 61 to 63 of Grant Agreement no. ..., at pages 68 and 69 of the Administrative File).

• The FP7 financed the GPRIX Project (Good Practices in Innovation Support Measures for SMEs: Facilitating Transition from the Traditional to the Knowledge Economy (Grant Agreement no. ...) which had the objective of assessing a set of innovation support measures in seven European regions characterized by having a large number of SMEs in traditional sectors (See Grant Agreement no. ..., at pages 83 et seq. of the Administrative File).

• The Claimant was included in the list of 7 beneficiary entities of the Project identified in the preceding paragraph, originating from France, Italy, United Kingdom, Spain, Germany, Netherlands and Portugal (See page 1 (List of beneficiaries) of Grant Agreement no. ..., at page 83 of the Administrative File).

• The Claimant assumed the role of Project Coordinator identified in paragraph O), providing administrative support to all beneficiary entities and facilitating communication between participants in accordance with what was established in point R1 - Project Manager of Grant Agreement no. ..., at page 115 of the Administrative File.

• The participation of the Claimant in the Project identified in paragraph O) is described in Table 10 (Project Consortium overview) of Grant Agreement no. ... as follows: "will be leading the WP1 – "Assessment of innovation support measures in target regions" – for the definition of the methodology to be used in the assessment process in the target regions with the collaboration of all partners. Moreover, as co-ordinator, B… will be leading the WP5 – "Management of the Coordination and Support Action". Moreover, B… will also be responsible for the analysis of R&D&I support measures in the North/Central region of Portugal." (See page 79 of Grant Agreement no. ..., at page 122 of the Administrative File).

• The total cost of the financing of the European Union for the Project identified above is € 936,539.00, with the amount intended for the Claimant being € 248,775.00 (See pages 61 and 81 of Grant Agreement no. ..., at pages 113 and 123 of the Administrative File).

• The FP7 financed the TURBLOG Project (Transferability of Urban Logistic Concepts and Practices from a World Wide Perspective (Grant Agreement no. ...) which had the objective of promoting better dissemination and transfer of the results of research on Urban Logistics, between the EU and Latin America, through the creation and dissemination of a set of case studies and the promotion of workshops and local visits.

• The Claimant was included in the list of 7 beneficiary entities of the Project identified in the preceding paragraph, composed of entities originating from Netherlands, United Kingdom, Brazil, Peru and Portugal (See page 1 (List of beneficiaries) of Grant Agreement no. ..., at page 120 of the Administrative File).

• The Claimant is responsible for the following in the Project identified in paragraph T): Task 6.1 – Exploitation plan; Task 6.2 – Web site; Task 6.3 – Newsletters; Task 6.4 – 1st Workshop – EU; Task 6.5 – 2nd Workshop – Peru; Task 6.6 – 3rd Workshop – EU; Task 6.7 – 4th Workshop – Brasil (See pages 33 to 37 of Grant Agreement no. 234061, at pages 137 to 140 of the Administrative File).

• The amount intended for the Claimant, financed by the European Union, in the Project identified above is € 202,444.00 (See page 3 of Grant Agreement no. ... at page 131 of the Administrative File).

• With respect to the FP7 Community Programs described in the preceding paragraphs, the Tax Inspection Report stated "(…) the activity exercised by B..., through fulfillment of the operational objectives defined in the community initiative programs referred to, does not constitute an activity of economic character, because it does not have underlying any relationship of reciprocity characteristic of a commercial relationship nor of obtaining gains with permanent character." "(…) the active operations carried out cannot be qualified as such. This is because the existence of a provision of services performed on an onerous basis presupposes the existence of a direct nexus between the service provided and the consideration received, or subsidy, which, in the present case, is not verified, neither in relation to any potential beneficiaries of the web sites, online courses, technological platforms, surveys, newsletters, press-releases, case studies, show cases, documents or guides to best practices recommendations and final results, workshops, presentations, conferences, nor in relation to the European Commission, since, from its perspective, B... does not provide a service that can be considered individualized, supplied within the scope of a legal relationship in which reciprocal relationships are exchanged." "(…) it is concluded that the VAT borne directly attributable to participation in the projects referred to is not deductible, by virtue of the provisions of no. 1 of Article 20 of the VAT Code, because the services carried out within the scope of the projects in question do not constitute a provision of services for VAT purposes."

• The Claimant, in 2010, also participated in projects within the scope of National Research and Development Programs carried out with the involvement of the Innovation Agency SA (ADI) and the Institute for Support of Small and Medium Enterprises (IAPMEI).

• Within the scope of the projects referred to in the preceding paragraph, emphasis is placed on participation in the ACTIVENT Project (Contract 2008/1273) – Contract for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development, entered into with IAPMEI, which had as its object the granting of a financial incentive for the execution of the project designated Innovative E-service for Inventive and Creative Activity for Problem Resolution Based on Public Information from the Industrial Property Register, with a view to developing a database search service for industrial property.

• The Claimant participated in the NITEC and NIDT Projects – (Contracts 2008/1362 and 2008/1564) – Contracts for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development, entered into with IAPMEI, which had as their object the granting of a financial incentive for the execution of the project designated Nuclear Research and Technological Development of IAITI and for the creation of a R&D&T nucleus.

• The Claimant participated in the NFCE Project (Contract 2009/5358) – Contract for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development, entered into with ADI, which had as its object the research and development of new equipment in the area of medical diagnosis, as the conclusions obtained generated new research and development needs a new Project was developed called ..., with completion expected for mid of the following year (see no. 78 f. of the Request for Arbitral Pronouncement).

• The Claimant participated in the E-EMPRESAS Project (Contract 2009/5429) – Contract for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development, was intended for the execution of the project designated E-EMPRESAS – Software and IT Solutions as an Accelerator of Competitiveness of National StartUps and SMEs, with a view to developing a new product through industrial research and experimental development activities.

• With respect to the National Research and Development Programs described in the preceding paragraphs, the Tax Inspection Report stated "(…) regarding these active operations it is not concluded that it is a transaction subject to tax insofar as it does not constitute an activity of economic character because it does not have underlying any relationship of reciprocity, characteristic of a commercial relationship, with stipulation of a price or consideration and, therefore, is qualifiable as a subsidy outside the scope of tax, giving rise to no tax assessment. Indeed, this was the classification given by the taxpayer, since it did not assess VAT upon accounting recognition of the subsidy." "(…) the VAT borne attributable to participation in the projects does not confer the right to deduction, by virtue of the provisions of no. 1 of Article 20 of the VAT Code, because the active operations directly related to such expenses are the subsidies received, which do not constitute the exercise of an economic activity for VAT purposes."

• The Claimant provided a service, inserted in the outsourcing of innovation from which resulted R&D audits, a database search service for industrial property, which was provided to the following clients: (i) E..., S.A. (invoice no. 143/2013, of 19-06-2013); (ii) F..., S.A. (invoice no. 20/2013, of 14-02-2013); (iii) G..., S.A., (invoice no. 211/2012, of 23-10-2013); (iv) H..., Lda. (invoice no. 2014/184, of 2014-06-27); (v) I... (invoice no. 2014/372, of 2014-11-14); (vii) Centro para a Valorização de Resíduos (invoice no. 2010/15, of 2010-02-02). (See Document no. 2 attached to the Request for Arbitral Pronouncement, which is fully reproduced for all legal purposes).

• The Claimant made sales in technology transfer processes to the following clients: (i) J..., S.A. (invoice no. 260/2011, of 15-12-2011); (ii) K... S.A. (invoice no. 177/2011, of 29-08-2011) (See Documents nos. 3 and 4 attached to the Request for Arbitral Pronouncement, which are fully reproduced for all legal purposes).

• The Claimant made sales of strategic and feasibility studies, as well as business plans, to the following clients: (i) L... Lda. (invoices nos. 2014/62, 2014/97 and 2014/189, of respectively 2014-03-06, 2014-04-03 and 2014-06-27); (ii) M... Lda. (invoice no. 135/2012, of 28-06-2012); (iii) N..., Lda., (invoice no. 134/2012, of 28-06-2012); (iv) O..., S.A., (invoice no. 219/2013, of 12-09-2013); (v) P... (invoice no. 249/2013, of 20-09-2013) (See Documents nos. 5, 6, 7, 8 and 9 attached to the Request for Arbitral Pronouncement, which are fully reproduced for all legal purposes).

• The Claimant did not assess VAT on the amounts it received as subsidies resulting from participation in the projects identified in paragraphs K), O), T), Z), AA), BB), CC).

• The Claimant, on 26-11-2014, filed a Petition for Administrative Review, which received no. -...2014..., against the assessments identified in paragraph E).

• The Petition for Administrative Review referred to in the preceding paragraph was dismissed by order of the Head of the Administrative and Litigation Justice Division of the Finance Directorate of Porto, on 16-11-2016, and notified to the Claimant on 22-11-2016.

• The Claimant filed, on 07-12-2016, an administrative appeal directed to the Minister of Finance, which was dismissed by order of the Head of VAT Services, in the exercise of delegated authority, on 30-11-2017, and notified to the Claimant on the same date.

16.3. Unproven Facts

• It was not proven that the sales made by the Claimant contained in the invoices identified in paragraph EE) of the preceding no. resulted from the Claimant's participation in the Project ... (Contract 2008/1273) – Contract for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development.

• It was not proven that the sales made by the Claimant contained in the invoices identified in paragraph FF) of the preceding no. resulted from the Claimant's participation in the Projects ... and ... – (Contracts 2008/1362 and 2008/1564) – Contracts for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development.

• It was not proven that the sales made by the Claimant contained in the invoices identified in paragraph GG) of the preceding no. resulted from the Claimant's participation in the Project ... (Contract 2009/...) – Contract for the Granting of Financial Incentives within the System of Incentives for Research and Technological Development.

• The invoices submitted by the Claimant, identified in paragraphs EE), FF), GG) and HH) of the preceding no., prove that the Claimant made sales of services to various entities, but are insufficient (due to the scant descriptive elements contained therein) to establish the connection to the results of the National Research and Development Programs in which it participated. The Claimant did not clarify the said connection through other means of proof, namely testimonial proof.

There are no other facts with relevance to consideration of the merits of the case that have not been proven.

16.4. Substantiation of Matters of Fact

With respect to matters of fact, having regard to the provisions of Article 123, no. 2, of the Code of Tax Procedure (CPPT) and Article 607, no. 3, of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, no. 1, paragraphs a) and e), of the LRTA, the Tribunal is not required 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 proven from unproven matters.

Thus, in accordance with the provisions of Article 596 of the Code of Civil Procedure (CPC), applicable by virtue of Article 29, no. 1, paragraph e), of the LRTA, the facts relevant to judgment of the case were selected and defined according to their legal relevance, which was established taking into account the legal questions raised.

Having regard to the positions assumed by the parties, in light of Article 110, no. 7, of the Code of Tax Procedure (CPPT), the documentary evidence and the Administrative File, attached to the record, the facts listed above were considered proven, with relevance for the decision.

16.5. Cumulation of Claims

The present request for arbitral pronouncement concerns twenty-two assessments relating to additional VAT and the respective compensatory interest.

Having regard to the provisions of Article 3 of the LRTA and Article 104 of the Code of Tax Procedure (CPPT) and taking into account the identity of the tax facts and the identical grounds of fact and law invoked, the tribunal considers that nothing prevents the cumulation of the present claims.

III.2. Matters of Law

1. The issue in question in the present arbitral proceedings is whether the Claimant's participation in community programs and national research and development programs constitutes the exercise of an activity of economic character for VAT purposes and consequently confers the right to deduction of VAT attributable to participation in the said projects.

This is for consideration.

1. The taxation of a given reality in the VAT field depends on the meeting of a set of conditions of objective, subjective, spatial and temporal incidence in accordance with the community model of said tax on multistage consumption, currently established in Directive 2006/112/EC, of the Council, of 28 November 2006 (VAT Directive) transposed into the VAT Code (hereinafter "VAT Code").

2. The right to deduction is regulated in Section I of Chapter V (Assessment and payment of tax) of the VAT Code (Articles 19 to 29) and with respect to the present arbitral proceedings the following provisions are relevant:

"Article 19
Right to Deduction

1 - For determination of the tax due, taxable persons shall deduct, in accordance with the following articles, from the tax levied on the taxable transactions they carry out:

a) The tax due or paid for the acquisition of goods and services from other taxable persons;

b) The tax due for the importation of goods;

c) The tax paid for acquisitions of goods or services covered by paragraphs e), h), i), j) and l) of no. 1 of Article 2;

d) The tax paid as recipient of taxable transactions carried out by taxable persons established abroad, when they do not have in the national territory a legally accredited representative and have not invoiced the tax;

e) The tax paid by the taxable person on the exit of goods from a non-customs warehouse regime, in accordance with no. 6 of Article 15.

2 - Only the tax mentioned in the following documents confers the right to deduction, in the name and possession of the taxable person:

a) In invoices issued in the legal form;

b) In the VAT payment receipt which forms part of the import declarations, as well as in documents issued electronically by the Tax and Customs Authority, in which the number and date of the cash movement are recorded.

c) In receipts issued to taxable persons included in the "VAT cash accounting scheme", issued in the legal form provided for in this scheme.

3 - Tax resulting from a simulated transaction or where the price shown in the invoice is simulated cannot be deducted.

4 - Tax resulting from transactions in which the transferor of goods or provider of services has not delivered to the State Treasury the tax assessed cannot be deducted, when the taxable person knew or should have known that the transferor of goods or provider of services does not have an adequate business structure capable of exercising the declared activity.

5 - In the case of invoices issued by the acquirers of goods or services themselves, the exercise of the right to deduction is conditioned on the verification of the conditions provided for in no. 11 of Article 36.

6 - For purposes of exercising the right to deduction, invoices issued in the legal form are considered as those containing the elements provided for in Articles 36 or 40, as the case may be.

7 - Tax relating to real property used in the business cannot be deducted, to the extent that such property is intended for use by the owner of the business, his staff, or generally for purposes other than the business.

8 - In cases where the obligation to assess and pay the tax is incumbent on the acquirer of goods and services, only the tax assessed by virtue of that obligation confers the right to deduction."

"Article 20
Operations Conferring the Right to Deduction

1 - Only the tax that has been levied on goods or services acquired, imported or used by the taxable person for the carrying out of the following operations can be deducted:

a) Transfers of goods and supplies of services subject to tax and not exempt therefrom;

b) Transfers of goods and supplies of services consisting of:

I) Exports and exempt operations pursuant to Article 14;

II) Operations carried out abroad that would be taxable if carried out in the national territory;

III) Supplies of services whose value is included in the taxable amount of imported goods, in accordance with paragraph b) of no. 2 of Article 17;

IV) Transfers of goods and supplies of services covered by paragraphs b), c), d) and e) of no. 1 and by nos. 8 and 10 of Article 15;

V) Exempt operations pursuant to nos. 27) and 28) of Article 9, when the recipient is established or domiciled outside the European Community or which are directly connected to goods intended to be exported to countries not belonging to the same Community;

VI) Exempt operations pursuant to Article 7 of Decree-Law no. 394-B/84, of 26 December.

2 - However, it does not confer the right to deduction the tax relating to operations that give rise to payments referred to in paragraph c) of no. 6 of Article 16."

1. As to the framework of the right to deduction, we refer to the provisions of Arbitral Decision no. 426/2017-T, of 25 March 2018, which we transcribe:

"The right to deduct VAT is a fundamental pillar of the tax which, as a rule, should not be limited.

In the words of ALEXANDRA MARTINS, "the right to deduction constitutes a central foundation of the common VAT system and aims to free taxable persons from the burden of the tax within their economic activities, in order to guarantee that fiscal neutrality applies 'whatever the purposes or results of those activities, provided that the said activities are themselves, subject to VAT.'" (ALEXANDRA MARTINS, Deconstructing dogmas: the right to deduction and exemptions, VAT Notebooks 2016, Coimbra: Almedina, 2016, p. 29).

In this sense, the Court of Justice of the European Union (hereinafter "CJEU") has consistently held that "the deduction system is designed to completely free the businessman from the burden of the VAT due or paid in the context of all his economic activities. The common VAT system thus ensures neutrality as regards the tax burden of all economic activities, whatever their purposes or results, provided that the said activities are themselves, in principle, subject to VAT (v., in particular, Eon Asset Management, C-118/11, EU:C:2012:97, no. 43 and case law referred to)." (Judgment of the CJEU of 22 October 2015, handed down in case C126/14, Sveda, ECLI:EU:C:2015:712).

As BEN TERRA and JULIE KAJUS state, in light of the VAT Directive, tax borne by the taxable person in the acquisition of goods and services for the exercise of his activity should be deductible, except if the acquired goods or supplied services are exempt from VAT or their use is not intended for commercial purposes. In the exact words of BEN TERRA and JULIE KAJUS, which we transcribe here: "no deduction is permitted for goods and services supplied based on Article 132 of the VAT Directive (exempt transactions) or used for non-business purposes (unless treated as general costs, i.e. subservient to business purposes)" (BEN TERRA and JULIE KAJUS, European VAT Directives – Introduction to European VAT 2016, Vol. I, IBFD, p. 1225)."

1. With respect to the question of subsidies, the relevant legal framework is contained in the following provision:

"Article 16
Taxable Amount in Domestic Operations

1 - Without prejudice to the provisions of nos. 2 and 10, the taxable amount of transfers of goods and supplies of services subject to tax is the value of the consideration obtained or to be obtained from the acquirer, the recipient or a third party.

(...)

5 - The taxable amount of transfers of goods and supplies of services subject to tax includes:

(...)

c) Subsidies directly connected to the price of each transaction, considered as such those established in accordance with the number of units transferred or the volume of services supplied and fixed prior to the carrying out of the transactions."

1. Having regard to the factual content of the present arbitral proceedings (see paragraphs A), B) and H) of no. 16.2 above), the Claimant is a commercial company that provides diversified consulting services in technological innovation, innovation training and technological innovation services, innovation training and carrying out innovation projects, having participated in projects integrated in the FP7 Community Programs and National research and development programs. The services of the Claimant provided to clients are subject to VAT and the tax borne on acquisitions of goods and services attributable to its activity is deductible.

2. The Claimant did not assess VAT on the amounts it received as a subsidy in the Projects in which it participated (see paragraph HH) of no. 16.2 above). By not assessing tax on those active operations, the Claimant, in addition to admitting that such operations are not subject, makes impossible the claim to then deduct the tax borne on the passive operations.

3. The FP7 Community Programs described in paragraphs K) to W) of no. 16.2 above, in which the Claimant participated, concerned: (i) dissemination of the results of food research; (ii) assessment of innovation support measures in seven European regions; (iii) dissemination of research results on urban logistics, between European Union and Latin America.

All of these purposes fall within the objectives of European Union public policies regarding research and technological development.

1. In view of the characterization of the type of work to which the Claimant was bound in said programs, which is contained in the Grant Agreements (see paragraphs M), R) and V) of no. 16.2 above), it is manifest that the amounts paid by the European Union to the Claimant do not constitute a consideration for the services provided, but only the reimbursement of expenses incurred in carrying out the activities provided for in the Programs. Consequently the financing does not have the nature of a subsidy in the sense of a grant made available to the entity for use in its activity, but only the reimbursement of expenses incurred within the scope of specific projects. What is only in question is the reimbursement of expenses and not the granting of subsidies, provided for in Article 16, no. 5, paragraph c), of the VAT Code, so that the Claimant's clients benefit from a lower price.

In this context, the Claimant is not pursuing its normal commercial activity of consulting in technological innovation, but only carrying out actions for dissemination of knowledge (AgriFoodResults and Turblog Projects) and administrative support (GPRIX Project), in the context of the implementation of European public policies in the field of research and technological development.

In summary, the Claimant's participation within these Community Programs does not constitute an economic activity for VAT purposes and consequently the Claimant cannot exercise the right to deduction regarding the expenses incurred.

1. With respect to projects integrated within the scope of National Research and Development Programs, characterized in paragraphs Y) to CC) of no. 16.2 above, the invoices submitted by the Claimant, identified in paragraphs EE), FF) and GG) of no. 16.2 above, show that the Claimant, in the exercise of its activity, made sales of services relating to: i) R&D audits; ii) industrial property database searches; iii) technology transfer processes; iv) strategic and feasibility studies; v) business plans. But the Claimant failed to prove that the said sales resulted directly from its participation in the National Research and Development Programs identified above (see 16.3 above).

Thus, it is clear that it was not proven that the economic activity developed by the Claimant in the scope of said Programs, and consequently it cannot exercise the right to deduction, regarding the VAT borne on acquisitions made in those Programs.

1. Having regard to the foregoing, the Tax Inspection Report in stating expressly that the activity exercised by the Claimant within the scope of community initiative programs and National Research and Development Programs does not constitute an activity of economic character because it does not have underlying any relationship of reciprocity characteristic of a commercial relationship did not commit an error (see paragraphs X) and DD) of no. 16.2 above).

In these terms, it is concluded that there is no error in the material substantiation of the tax acts in question, with the consequent legality of the assessments subject of the present proceedings.

1. The assessments of compensatory interest are based on the respective VAT assessments, but the Claimant obtained forgiveness of the compensatory interest through forgiveness under the PERES Program (see paragraph F) of 16.2 above), so the question of reimbursement of those amounts does not arise.

2. The Claimant also requests that it be recognized the right to indemnitory interest, pursuant to Article 43 of the General Tax Law (LGT).

Pursuant to no. 1 of Article 43 of the LGT, indemnitory interest is owed "when it is determined, in administrative review or judicial challenge, that there was an error attributable to the services, which results in payment of the tax debt in an amount greater than legally due." As follows from Article 24, no. 5, of the LRTA, the right to the said interest may also be recognized in the arbitral process.

The necessary condition for the award of indemnitory interest consists in demonstrating the existence of an error regarding the factual or legal presuppositions attributable to the Tax Authority.

Having this Tribunal concluded that the contested tax acts are not subject to any defect, consequently, pursuant to the provisions of Article 43 of the LGT, the Claimant has no right to indemnitory interest.

IV - Decision

In view of the foregoing, the Arbitral Tribunal decides to judge the request for arbitral pronouncement as unfounded and, consequently, to absolve the Respondent of the claim, with the due legal consequences.

V - Value of the Proceedings

Having regard to the provisions of Articles 32 of the Code of Administrative Court Procedure (CPTA), 306, no. 2, of the Code of Civil Procedure and 97-A of the Code of Tax Procedure (CPPT), applicable by virtue of the provisions of Article 29, no. 1, paragraphs a) and b), of the LRTA, and Article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings (RCPAT), the value of the proceedings is fixed at € 51,971.77 (fifty-one thousand nine hundred and seventy-one euros and seventy-seven cents).

VI - Costs

The amount of costs is fixed at € 2,142.00 (two thousand one hundred and forty-two euros) to be borne by the Claimant, in accordance with Table I of the RCPAT, in compliance with the provisions of Articles 12, no. 2, and 22, no. 4, both of the LRTA, as well as the provisions of Article 4, no. 4, of the RCPAT.

Notice shall be given.

Lisbon, Centre for Administrative Arbitration, 17 October 2018

The Arbitrator

Olívio Mota Amador

[1] Formerly designated B..., S.A.