VAT Deduction Rights on Credit Negotiation: CAAD Arbitration Ruling 660/2015-T

ARBITRAL DECISION

The arbitrators Dr. Jorge Manuel Lopes de Sousa (Presiding Arbitrator), Dr. Ricardo Jorge Rodrigues Pereira and Dr. Susana Maria Afonso Claro, appointed by the Deontological Council of the Administrative Arbitration Center to constitute the Arbitral Tribunal, constituted on 14-01-2016, hereby agree as follows:

1. Report

A..., LDA., legal entity no. ..., with registered office at Building ..., Avenue ..., no. ..., ...-... Lisbon (hereinafter referred to as "Claimant" or "A..."), filed a request for constitution of a collective arbitral tribunal, pursuant to article 2, paragraph a), of Decree-Law no. 10/2011, of 20 January (hereinafter "RJAT"), with a view to declaring the illegality of the additional Value Added Tax (VAT) assessments nos. ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ..., in the total amount of € 760,440.14.

The request for constitution of the arbitral tribunal was accepted by the President of the CAAD and notified to the TAX AND CUSTOMS AUTHORITY on 06-11-2015.

In accordance with the provisions of paragraph a) of article 6, no. 2, and paragraph b) of article 11, no. 1 of the RJAT, the Deontological Council appointed the undersigned arbitrators, who communicated their acceptance of the appointment within the applicable timeframe.

On 29-12-2015, the parties were notified of this appointment and did not express any intention to challenge the appointment of the arbitrators, in accordance with the combined provisions of article 11, no. 1, paragraphs a) and b) of the RJAT and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of article 11, no. 1 of the RJAT, the collective arbitral tribunal was constituted on 14-01-2016.

The Tax and Customs Authority responded, raising the exception of untimeliness of the request for arbitral pronouncement regarding assessments nos. ..., ... and ..., and defending the inadmissibility of the request for arbitral pronouncement.

On 29-03-2016, a hearing took place at which witnesses were examined and it was agreed that the proceedings would continue with written submissions.

The parties submitted written arguments.

The arbitral tribunal was duly constituted and is competent.

The parties have legal personality and capacity, are legitimately represented (arts. 4 and 10, no. 2, of the same decree-law and art. 1 of Ordinance no. 112-A/2011, of 22 March), and are properly represented.

The proceedings do not suffer from any nullities.

It is necessary to examine the preliminary issue of partial untimeliness of the request for arbitral pronouncement raised by the Tax and Customs Authority regarding three of the assessments.

A decision must be rendered.

2. Statement of Facts

2.1. Proven Facts

The following facts are considered proven:

• The Claimant, which previously had the business name B... LDA., has as its object of activity the "provision of business consulting, management, marketing, advertising, promotion, software development and support for business development in the real estate sector, franchising services";

• With respect to VAT, the Claimant falls within the normal regime with monthly periodicity;

• The Claimant commenced its activity in 1999 with share capital of €25,000.00;

• C... is a well-known international real estate franchising network, with the company D... being the sole holder of the license to operate in Portugal the rights relating to the brand and know-how that make up the C... business concept (testimony of witness E...);

• By public deed executed on 14-07-2006, D... acquired ownership of the C... brand through a capital contribution made in kind by shareholder F... (document no. 26 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

• In 2005, the share capital of the Claimant was increased to €125,000.00, effected by the capital contribution made in cash by the new shareholder, D..., S. A. (hereinafter only...), taxpayer no. ..., a company in which G... and H... also appear as administrators;

• The governance and shareholdings of the Claimant are as follows (see page 4 of the RIT):

[shareholding structure not fully reproduced in original]

• The structuring of this business was, from the beginning, divided between D... and the Claimant, with all real estate and movable property - the brand - allocated to D..., which has links with C... International, and the Claimant being responsible for current management matters of the brand and direct negotiations with franchisees, namely, at the level of contracting, using the franchising contracts imposed by C... International (testimony of witness E...);

• On 01-09-2006, a mandate contract was entered into between D... and the Claimant (document no. 27 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

• In practice, D... controls the activities of the Claimant, which, in turn, controls the activities of the franchisees (testimony of witness E...);

• The Claimant, in the franchising contracts it enters into with the various real estate agencies, presents itself as holder of the rights of use and licensing to third parties for the operation of the real estate mediation activity under the C... business concept and brands in Portugal (testimony of witness E...);

• D... performs a buffering function between the Claimant and C... International that is of strategic importance by strengthening the position of the former in periodic renewals, by being the one who has information about the franchisees (testimony of witness E...);

• Based on these contracts, the Claimant transfers the rights to operate the brand to each franchisee, for a determined period and over a determined geographic area (testimony of witness E...);

• As consideration, the Claimant receives amounts resulting from an entry fee (and subsequent renewal) with a term of 5 years (whose gains are temporally apportioned) and operational fees, consisting of a fixed amount and a variable amount, the latter depending on the monthly gross invoicing of the client;

• The Claimant issues invoices with the description "fixed royalties," "variable royalties," and "entry fees";

• In graphic terms, the following is observed:

[diagram not reproduced]

• The manner of invoicing the royalties owed to D... through the services provided by the latter is justified by the buffering structure that the Claimant and D... intended to create, as the Claimant's statutory auditor understands that there is no way for the Claimant to issue invoices to franchisees including the portion of royalties owed to D... without such invoices being included in the Claimant's income statements (testimony of witness E...);

• Because D... and the Claimant are in a situation of special relations for corporate income tax purposes, they were concerned with fixing the prices of services provided between them so as to distribute the profits of the business in accordance with the contract and in line with normal market values, including in the prices of services provided by D... the value of the portion of royalties that pertains to it under the contract, which are paid in full by the franchisees to the Claimant (testimony of witness E...);

• Most of the services provided by D... to the Claimant relate to control and supervision of activities, which fall within the strategic part of the business, which includes providing instructions, training, and marketing;

• The hourly rates of services provided by D... were calculated taking into account the company's structure and the distribution of overall results generated by the two companies based on the participation each has in the overall activity (testimony of witness E...);

• For the type of services provided by D..., there are no market indicators because what is at issue is not just the price of individual service provision, but the overall costs incurred by the company for the provision of its services, including the high costs of advertising, which are distributed across the hours of service provision by its employees (testimony of witness E...);

• A tax inspection procedure was conducted under Service Order no. 012012..., which resulted in VAT corrections in the total amount of € 688,085.32;

• Initially, the said procedure, of an external nature, had only a partial scope, covering only VAT for 2011, and subsequently the scope of this inspection procedure was altered to general, of which the Claimant was notified on 04-11-2014 (page 23 of the administrative procedure document "PA_parte+1.pdf");

• An extension of the inspection procedure's timeframe by an additional period of three months was effected, which was notified to the Claimant through Office no. .../..., of 24-02-2015, sent by registered mail with postal registration no. RM...PT;

• Within the scope of the inspection procedure, a Tax Inspection Report was prepared, a copy of which is found in document no. 1 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced, and which refers, among other things, to the following:

VAT

In the periodic VAT declarations for 2011, the company calculated VAT payable in the amount of €768,310.70, which resulted from the difference between VAT charged, which amounted to €2,259,364.98, and VAT deducted, in the amount of €1,491,954.26.

The company provided credit referral and/or rebate services to financial institutions that it considered exempt from VAT, under paragraphs a) and b) of no. 27 of art. 9 of the VAT Code. These services amounted to €387,954.67.

As consideration, A... proceeded to fully deduct the VAT borne on acquisitions of goods and services it made and did not make any pro rata adjustment in the last periodic VAT declaration of the year.

(...)

On 2014-11-04, company A... was notified to, on 2014-11-20, provide a set of clarifications and supply documents on the activity developed by the company in 2011.

On 2014-11-21, the company delivered a set of individual items on some items contained in the notification made, committing itself to provide the clarifications and deliver the missing items within 10 days.

To the present date, no additional items have been delivered.

I – DESCRIPTION OF FACTS AND GROUNDS FOR PURELY ARITHMETIC CORRECTIONS

III – A) Deduction of VAT mentioned in invoices not issued in legal form

i) Royalties transferred and acquired by A...

As mentioned in section II – B.3.4) of this Report, A... mentions in the franchising contracts it enters into with the various C... real estate agencies (clients obtained throughout Portuguese territory and which are entities independent of A...) and that it presents itself as holder of the rights of use and licensing to third parties for the operation of real estate mediation activity under the 'C... Business Concept' and brands in Portugal.

Based on these contracts, A... transfers the rights to operate the brand to each franchisee, for a determined period and over a determined geographic area.

As consideration for the transfer of these rights, A... receives:

• An amount corresponding to the entry fee (and subsequent renewal) with a term of 5 years (whose gains are temporally apportioned);

• A fixed monthly royalty and another variable, the latter depending on the client's monthly gross invoicing;

The term royalties may be defined as remuneration of any nature allocated for the use or granting of use of a copyright on a literary, artistic, or scientific work, including cinematographic films, of a patent, of a manufacturing or trade mark, of a design or model, of a plan, formula, or secret process, or for information regarding experience acquired in the industrial, commercial, or scientific sector (as per art. 94 of the Corporate Income Tax Code – as worded in 2011 – and art. 12 of the OECD Model Convention).

Thus, both the entry fee and the operating commission required by A... from its franchisees constitute royalties, as they correspond to consideration for the transfer of rights to use the C... brand and the use of its know-how (acquired experience) in the sector, although A... does not classify the entry fee as a royalty in the invoices issued to its clients, nor were they subject to withholding at source as payment on account by its clients, as defined in art. 94 of the Corporate Income Tax Code.

For A... to transfer the rights already described, it would be a prerequisite that it also acquired them (or produced them, which is not the case). However, there is no record in the accounting or in any of the invoices relating to acquisitions made by the company that the company acquired royalties or that it proceeded to any withholding at source on any income so qualified.

II) Service Provision Contract entered into between D... and A...

The rights that A... transfers to its franchisees are based on a contract entered into between A... and D... (its majority shareholder) executed on 2006-09-01.

In that contract, designated as 'Service Provision Contract', it states that "D... is currently the sole holder of the license to operate in Portugal the rights relating to the brands and Know-How that make up the C... business concept," according to the following clauses:

WHEREAS:

I. D... is currently the sole holder of the license to operate in Portugal the rights relating to the brands and Know-How that make up the C... business concept;

II. It has entered into various franchising contracts within the scope of its activity relating to the said brand and Know-How;

III. B... is engaged in the provision of business consulting services, management, advertising, promotion and development of companies and franchising services.

It is hereby executed in good faith this MANDATE according to the following terms and conditions:

CLAUSE ONE

(Object)

By this Contract, D... constitutes B... as its agent, for the exercise of management acts, namely:

• Marketing and advertising of the C... Brand;

• Promotion and acquisition of Franchising Contracts;

• Technical assistance, supervision and quality control of services provided by franchisees;

• Contracting the provision and assistance of Software adapted to the activity developed by franchisees;

• Processing payments of Royalties or other payments to be made to C... Europe owed by D... by virtue of the contract mentioned in the above recital.

CLAUSE TWO

(Term)

This contract shall commence on 1 September 2006 and shall be in force for a period of one year, being renewed automatically, for equal and successive periods, unless terminated in writing, with a minimum notice of sixty days from the end of the current contractual period.

CLAUSE THREE

(Remuneration)

1- For the services provided under this contract, B... shall be entitled to remuneration corresponding to 40% of the amount invoiced in the name of D..., by virtue of the exercise of the respective right to exploit the C... business model brand and Know How.

2- All expenses necessary for the proper and timely performance of the contracted services shall be the sole responsibility of B....

(...)

CLAUSE FIVE

(Identification of Collaborators)

As a consequence of the performance of this contract, the persons who, on behalf of B..., participate in the provision of the contracted services shall be identified as representatives of an entity totally independent of D..., and may in no circumstances perform any other activity other than the provision of contracted services, whether in relation to D... or in relation to its potential clients.

In accordance with what is expressed in this contract, D... is the sole holder of the license to operate in Portugal the rights relating to the brands and Know-How that make up the C... business concept, with A... constituting its agent for a set of management acts, remunerated in the amount of 40% of the amount invoiced in the name of D....

There is no transfer of rights between D... and A....

For the invoicing order to be consistent with what is defined in this contract, it should be D... that invoices the totality of its rights to the franchisees, with A... having to invoice 40% of that amount to D... by virtue of its "commission" due under the mandate contract.

However, what is observed in reality is different, because:

• A... identifies itself in the contracts, entered as the holder of the brand rights and Know-how and, based on that ownership, conditionally transfers these rights;

• A... invoices, in its own name, the royalties owed (which would not occur if it invoiced within the scope of a mandate contract – art. 1157 of the Civil Code);

• On the other hand, D... does not invoice any royalties to the franchisees or to A..., although it is the original holder of the rights, which are acquired through monthly payments made to the Swiss company called I... Inc. (C... Europe).

In graphic terms, the following is observed:

[diagram not reproduced]

Given the inconsistencies noted, the company A... was notified on 2014-11-04, in the following terms (point 4 of the Notification):

4 – Given that:

• Company D..., S. A. (hereinafter only D...), taxpayer no. ..., is the holder of the license to operate in Portugal the rights relating to the brand and know-how that make up the C... business concept;

• D... and A... entered into a service provision contract on 2006-09-01, through which D... constitutes A... as its agent for the performance of management acts;

• The franchising contracts are entered into between A... and real estate mediators and state in the same that A... is holder of the rights of use and licensing to third parties of the right to operate real estate activity under the 'C... business concept' (royalties);

• to be specified.

4.1 – Since the rights relating to the C... brand belong to D..., for what reason are these same rights recorded in invoices issued by A... and not by D... .

4.2 – Given that A... has rights of use and licensing, for what reason does it not pay royalties to D... .

4.3 – For what reason were the entry fees (limited use rights of the brand) paid by the real estate mediators obtained by A... and received by it not subject to withholding at source, as well as the 60% of these same amounts that are owed by A... to D... .

4.4 – Being D... the holder of the rights relating to the C... brand, for what reason is only A... the beneficiary of the fixed royalties and variable royalties (dependent on the sales volume of each franchisee) charged to the real estate mediators.

To the present date, A... has not provided any response to what was requested.

III Invoices issued by D... to A... recorded by the latter in account ...-Other Costs and Losses/Service Provisions-Contracts/Renewals/Other

A... bears expenses that are debited to it by D... and that are recorded in accounting under account ... - Other Costs and Losses / Service Provisions - Contracts/Renewals/Other - according to the description of the following invoices:

[table not reproduced]

As observed, these invoices issued by D... to A... have as their description the provision of the following services:

• Marketing and Advertising of the C... Brand (quantity measured in hours - 1,200€/hour);

• Supervision and Quality Control of Services Provided by Franchisees (quantity measured in hours - €500.00/hour);

• Processing of royalty payments by virtue of the contract entered into on 1 September 2006 (quantity measured in hours - €800.00/hour);

• Promotion and Acquisition of Franchising Contracts (percentage of value).

Accountingly, expenses with promotion and acquisition of franchising contracts are deferred by A... for a period of five years - corresponding to the period of validity of the contracts - so that the value recorded as an expense in the 2011 fiscal year (account ... - Other Costs and Losses / Service Provisions - Contracts/Renewals/Other) corresponds to one-fifth of the total of these expenses, with the remainder being recorded in account ... -Deferrals/Expenses to be Recognized/Entry Fees.

On the other hand, expenses that were deferred from prior fiscal years are recorded in this same account ... - Other Costs and Losses / Service Provisions - Contracts/Renewals/Other.

As for the remaining expenses, they are recorded in full as an expense in the 2011 fiscal year.

Given that the amount charged for the services provided by D..., high, A... was notified (point 5 of the Notification) on 2014-11-04, to:

• Justify in detail the nature of the services acquired and the price practiced.

• If known to A..., identify the persons executing the services provided.

To the present date, the company has not provided any response to the questions posed.

However, it is observed to conclude that the prices/hour practiced are excessive, ranging from €500.00 to €1,200.00 for the tasks allegedly executed, such as payment processing (administrative character) or quality control of services.

In this context, a comparative analysis was conducted between the entry fees and royalties charged by A... to its franchisees (values obtained from SAFT-PT3) and the value of the invoices issued by D... to A....

As to the volume of A...'s invoicing, which corresponded to entry fees and royalties charged to franchisees, it amounted to €4,988,888.33, according to the following table:

[table not reproduced]

On the other hand, according to table 8, the invoices issued by D... to A... during 2011 that have descriptions such as marketing and advertising of the C... brand, supervision and quality control of services provided by franchisees and processing of royalty payments by virtue of the contract entered into on 1 September 2006 and promotion and acquisition of franchising contracts, amounted to €2,525,253.02.

Comparing the values, the following table results:

[table not reproduced]

c) According to the contract entered into between A... and D..., on 2006-09-01, A... should invoice a commission of 40% of the amount invoiced in the name of D.... However, A... did not invoice in the name of D..., but rather in its own name, and D... did not invoice to A... 60% of what the latter invoiced in its own name.

Thus, the invoicing by D... to A... issued in 2011 and listed in item iii) of this chapter, in the amount of €2,525,253.02, to which was added VAT in the amount of €580,608.20 has implicit therein a royalty charged by D... to A..., in accordance with the transfer of rights and contract entered into between the parties, and unrealistic in terms of hours of work, so it is concluded that the descriptions of the invoices listed in the previous point iii) of this chapter do not correspond to the operations performed, as they do not represent the descriptions therein mentioned, but rather a way to charge royalties from D... to A....

That is, the quantity and usual denomination of the services that were actually provided are not recorded in the documents, so it is concluded that the invoices in question were not issued in legal form, as they do not comply with what is set forth in paragraph b) of no. 5 of art. 36 of the VAT Code.

(...)

Accordingly, it is considered that the VAT recorded in the invoices indicated in the following table was improperly deducted, in the amounts listed in the following table:

[table not reproduced]

III – B) Failure to assess VAT on commission earned

a) Invoices issued

Company A... provided services to financial institutions relating to credit referrals that it recorded as revenue in its accounting accounts... – Service Provisions/Commission on Processes Exempt – and ... - Service Provisions/Commission on Processes w/VAT -, according to the following tables:

[tables not reproduced]

The invoices recorded in account... - Service Provisions/Commission on Processes Exempt -, in the total amount of €387,954.67, were issued to various financial institutions, namely Bank J..., Bank K..., Bank L..., M..., N... and O....

These invoices have as their descriptions "Commission Due for Real Estate Credit Acquisition," "Commission on Processes" or "Rebate relating to protocol... ", and these operations were considered exempt from VAT, under paragraphs a) and b) of no. 27 or no. 28 of art. 9 of the VAT Code.

*Note: The reference to no. 28 of art. 9 of the VAT Code should result from a clerical error.

As for the invoices recorded in account... – Service Provisions/ Commission on Processes with VAT -, in the total amount of €84,481.57, they were issued to bank K... with the description "Rebate – Information Services necessary for the implementation of real estate acquisition", and these operations were considered subject to and not exempt from VAT.

Paragraphs a) and b) of no. 27 of art. 9 of the VAT Code provide as follows:

"Operations exempt from tax:

(...)

1. The following operations:

a) The granting and negotiation of credit, in any form, including discount and rediscount operations, as well as its administration or management carried out by those who granted it;

b) The negotiation and provision of guarantees, endorsements, pledges, securities and other guarantees, as well as the administration or management of credit guarantees carried out by those who granted it;

In these respects, it is verified that A... understands that the credit referrals it makes to financial institutions would be classifiable in the expression "credit negotiation" and, as such, would be operations exempt from VAT. As an exception, the services provided to bank K... would be only information necessary for real estate acquisition, and as such would be subject to and not exempt from VAT.

Furthermore, these credit referral services are not provided directly by A..., as it does not possess retail locations, but rather by its franchisees, so these should also earn income relating to the so-called credit referral.

Analyzing the accounting of A..., it was found that these services provided by A... would be associated with expenses incurred in obtaining the same, namely commissions that are paid to entity P..., Lda, taxpayer no. ... (entity related to A...).

These commissions represented an expense of €316,219.86 and are recorded in accounting account... – Commissions.

b) As to the applicability of VAT exemption to services provided by A... to financial entities

In accordance with understandings sanctioned by the Tax and Customs Authority, such as Binding Information no. …, of 2011-11-16, the concept of "negotiation" refers to an activity executed by an intermediary who does not take the place of a party in a contract relating to a financial product and whose activity is different from the typical contractual performances carried out by the parties in contracts of that type.

It is considered in those understandings that the activity of "negotiation" is a service provided to a contracting party (financial institution) and by it remunerated as a distinct activity from mediation. Among other things, it may consist in indicating opportunities to enter into a certain contract, entering into contact with the other party and negotiating on behalf and for account of the client the details of the reciprocal performances.

The purpose of this activity is, thus, to proceed with what is necessary for both parties to enter into a contract, without the negotiator (A...) having a direct interest as to the contents thereof. Conversely, there is no negotiation activity when one of the parties in the contract (financial institution) entrusts a subcontractor with a part of the material operations linked to the contract.

Thus, the expression "negotiation" is associated with the technical information underlying the financial product, namely, characteristics, structure, maturity and other conditions established by the lending entity, leading to the granting of credit, and is not, therefore, an activity of negotiation to provide only information of a documentary nature and, possibly, to receive credit subscription proposals.

If A... does not limit itself to providing potential clients with documentary information relating to financial products, but instead has the objective of ensuring that a credit contract is entered into between the banking entity and the client that best suits the client's financial situation and needs/conveniences, there is a service provision that underlies a credit negotiation operation. This may be evidenced in the case where the remuneration received from the lending institution is calculated based on the approved credit.

In order to clarify the treatment given in VAT for the services provided by A... to the aforementioned financial institutions, the company was notified (point 6 of the Notification) on 2014-11-04, to provide the following items and provide the appropriate clarifications:

"6 – In relation to the services of 'Real Estate Credit Acquisition / Information Services Necessary for the Implementation of Real Estate Acquisition' provided by A... to its clients, namely Bank J..., Bank K..., Bank L..., M..., N... and O..., which are recorded in accounting under account SNC ... – Commission on Processes:

6.1 – Deliver photocopies of the contracts entered into with those entities and in force during the 2011 fiscal year.

6.2 – Deliver photocopies of the contract entered into with entity P..., Lda, taxpayer no. ..., and in force during the 2011 fiscal year, associated with invoices issued by that entity to A... with the description of 'Commission due for real estate credit acquisition and recorded in accounting as the counterpart of account SNC 6225 – Commissions.

6.3- Describe in detail the nature of the services provided by A... to its clients and which services are provided by P..., Lda to A....

6.4- Justify the difference existing as to the services provided to Bank K... and to the remaining entities, which justify the assessment of VAT with reference to the services provided to Bank K... and the non-assessment of the same tax with respect to the services provided to the remaining entities.

6.5 – Given that the company provides services exempt from VAT in the overall scope of its activity, clarify the non-deduction of the tax in the percentage corresponding to the annual amount of operations that give rise to deduction.

In response, the company only exhibited:

• Letter sent by K... to A... dated 26-02-2008;

• Protocol entered into with Bank L... of 19-12-2002;

• Housing Credit Protocol entered into with Q... (M...) of 23-10-2010.

• Financial and Cooperation Protocol entered into with N... on 17-10-2004.

That is, A...:

• Did not exhibit contracts entered into with J... or O...;

• No contract entered into with P..., Lda (hereinafter only P...) was exhibited

• Did not describe what the services provided by A... and P... consisted of.

• Did not explain the reason why VAT is assessed on service provisions rendered to client K... and is not on services provided to the remaining entities.

• Did not clarify the non-application of the percentage deduction method (pro rata).

As to the contracts exhibited, the terms recorded therein are summarized in the following paragraphs.

Letter sent by K... to A...

As for bank K..., no contract or protocol was exhibited but only a letter sent by the financial institution in which it is not possible to ascertain the conditions relating to the protocol signed between these two entities.

From the analysis of the invoices, it is found that the service described consists of providing information necessary for the implementation of real estate acquisition, with the value of the service resulting from the amount of credit referrals made by the various C... agencies (rebate of 0.25%).

In this situation, the services provided by A... will not include the negotiation of the specific credits, but rather a partial action of centralization and information provision.

By A... performing only one of the material operations linked to the contract, it is considered that the operation will not be exempt from VAT, as A... understood.

Protocol entered into with Bank L...

In accordance with the said protocol, it is incumbent on A... to disclose the conditions of the protocol to all C... locations, collaborate with campaigns, support the placement of disclosure material in the locations, inform about the opening of new locations and control the volume of business referred to Bank L... by its sales network.

A... agrees that a cooperation protocol be established between each C... location and Bank L..., with payment to each C... location being provided of 1% of the credit granted referred by each agency (the amount of A...'s commission not indicated).

Protocol entered into with M... (Q...)

The bank provides franchisees of C... Portugal with a housing credit simulator, with C... franchisees being remunerated with 1% of the value of the credit executed, while A... receives 0.1% to A... (to be calculated annually).

Protocol entered into with N...

In accordance with the protocol, A... undertakes to disclose in the franchisee network the conditions of the protocol and to take steps with them to sign the protocol of accession.

A...'s remuneration consists of a rebate of 0.125% on the amounts of credit contracted in each calendar year by the set of franchisees who come to subscribe to collaboration protocols with N... (the amount of commission to be paid to agencies not indicated).

c) Analysis

With respect to the services provided to N..., M... and Bank L..., it is observed that the services provided by A... cannot be considered as "negotiation" given that:

• A...'s activity consists in disclosure of the protocol to its franchisees (independent entities), collaboration in campaigns and control of sales volume;

• Any "negotiation" of credits is carried out by C... franchisees with their clients (property purchasers), as these are the entities that constitute the sales network;

• A... receives a commission on sales but is not the intermediary in the relations between the parties that enter into the credit contract, nor does it include these services in the invoices issued.

Accordingly, the services provided by A... and invoiced to financial institutions correspond to only a part of the operations, which do not include the so-called "negotiation," so the same cannot benefit from the VAT exemption provided in paragraphs a) and b) of no. 27 of art. 9 of the VAT Code.

With respect to the services provided to Bank J..., no items were exhibited, so it is not possible to distinguish these services from those provided to the remaining financial institutions.

As to the description of the invoices issued to Bank J..., the same is similar to what is mentioned in the invoices issued to Bank L... or M...: "Commission due for real estate credit acquisition," and it is not possible to ascertain whether this commission is or is not associated with possible "negotiation," as described above, or a possible benefit of exemption.

Thus, it is understood that the services provided by A... already identified in this item do not benefit from VAT exemption, being subject to tax in accordance with paragraph a) of no. 1 of art. 1, art. 4, art. 7 and art. 8 of the VAT Code, with its taxation being carried out at the standard rate defined in paragraph c) of no. 1 of art. 18, also of the VAT Code, so the tax owed for the services provided is not assessed, according to the following table:

[table not reproduced]

(...)

III – G) VAT adjustments in favor of A... without A... having in its possession proof that the acquirer became aware of the adjustment or that it was reimbursed for the tax

The company recorded in its account... – VAT Adjustments. FE.-DC-Tx Norm Sales – various movements relating to credit notes issued to its clients, and deducted the VAT relating to those documents in field 40 of the periodic VAT declaration corresponding to each time period.

Through notification made to the taxpayer on 2014-11-04, A... was requested to exhibit proof that the acquirers of the services became aware of the adjustments made or of the reimbursement of the tax embodied in the credit notes identified, as provided by no. 5 of art. 78 of the VAT Code (point 12 of the notification made).

(...)

In partial response from the company, materialized on 2014-11-21, it delivered photocopies of some Credit Notes signed by its clients, namely Credit Note no.../2011, dated 24-02-2011, Credit Note no.../2011, dated 24-02-2011 and Credit Note CN 2011/..., dated 06-04-2011, which correspond to VAT deducted of €82.80, €4,600.00 and €1,380.00, respectively.

As for the remaining credit notes, the company did not exhibit any proof that its recipients became aware of them, so the company did not have legitimacy to proceed with the deduction of the VAT mentioned in the respective documents, in accordance with no. 5 of art. 78 of the VAT Code.

"When the taxable value of an operation or its respective tax has been rectified downward, the adjustment in favor of the taxpayer may only be made when the latter has in its possession proof that the acquirer became aware of the rectification or was reimbursed the tax, without which the respective deduction is deemed improper."

In light of the foregoing, A... improperly deducted the following amounts in the periodic declarations corresponding:

[table not reproduced]

• As a consequence of the inspection, the Tax and Customs Authority issued the following assessments of additional VAT and compensatory interest (documents nos. 2 to 25 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced):

[table not reproduced]

• With respect to assessments nos. ..., ... and ... the date 21-08-2015 was indicated as the final date of the voluntary payment period (documents nos. 22, 24 and 25 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced);

• The invoices that appear in documents nos. 28 to 42 attached with the request for arbitral pronouncement are hereby reproduced;

• In Invoices FA2011/... (document no. 28) FA2011/... (document no. 29), FA2011/... (document no. 31), FA2011/... (document no. 32), FA2011/... (document no. 33), FA2011/... (document no. 34), FA2011/... (document no. 35), FA2011/... (document no. 36), FA2011/... (document no. 37), FA2011/... (document no. 38), FA2011/... (document no. 39), FA2011/... (document no. 42), express reference is made to "royalties by virtue of the contract entered into on 1 September 2006";

• The Claimant (then B...) entered into a "Financial and Cooperation Protocol" with N..., a copy of which is found in document no. 44 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced;

• The Claimant (then B...) entered into a "Protocol" with Bank L..., a copy of which is found in document no. 45 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced;

• The "Housing Credit Protocol" that appears in document no. 43 attached with the request for arbitral pronouncement, the contents of which are hereby reproduced, entered into between Q... and R..., Lda, representing agent in Portugal under the franchising regime of the C... brand, is hereby reproduced;

• On 28-10-2015, the Claimant filed the request for arbitral pronouncement that gave rise to the present proceedings.

2.2. Unproven Facts and Reasoning for the Finding of Facts

The facts were found proven based on the documents attached to the initial petition and which appear in the administrative record as well as on the witness testimony.

Witness E..., who is a statutory auditor, appeared to testify with impartiality and with direct knowledge of the matters on which she testified.

What was alleged by the Tax and Customs Authority in the Tax Inspection Report and in the present proceedings was not proven regarding the Claimant not having recorded in its accounting any invoices relating to the acquisition of royalties and that D... did not invoice any royalties to the Claimant, as Invoices FA2011/... (document no. 28) FA2011/... (document no. 29), FA2011/... (document no. 31), FA2011/... (document no. 32), FA2011/... (document no. 33), FA2011/... (document no. 34), FA2011/... (document no. 35), FA2011/... (document no. 36), FA2011/... (document no. 37), FA2011/... (document no. 38), FA2011/... (document no. 39), FA2011/... (document no. 42), make express reference to "royalties by virtue of the contract entered into on 1 September 2006".

It was also not proven that the services indicated in the invoices that appear in documents nos. 28 to 42 were not provided, as witness testimony points in the opposite direction.

It was not proven that the hourly rates mentioned in the invoices issued by D... are excessive, taking into account the general expenses it must bear for its employees to provide the services they provided, nor that a comparison was made by the Tax and Customs Authority between the prices practiced and similar ones provided by any other company.

3. Exception of Untimeliness of the Request for Arbitral Pronouncement

The Tax and Customs Authority raises the issue of untimeliness of the request for arbitral pronouncement with respect to three of the VAT assessments challenged, namely those having the nos. ..., ... and ....

The request for arbitral pronouncement was filed on 28-10-2015.

The Tax and Customs Authority attached a document to its response for the purpose of proving the dates on which the notifications occurred.

However, it is evident from documents nos. 22, attached with the request for arbitral pronouncement, that with respect to the amounts assessed, the date 21-08-2015 was indicated as the final date of voluntary payment.

In accordance with article 10, no. 1, paragraph a) of the RJAT, the request for constitution of the arbitral tribunal must be filed "within a period of 90 days, counted from the facts provided for in nos. 1 and 2 of article 102 of the Tax Procedure and Procedural Code, as to acts susceptible to autonomous challenge."

Paragraph a) of no. 1 of article 102 of the CPPT establishes as the fact for determining the period for judicial challenge "the end of the period for voluntary payment of tax obligations legally notified to the taxpayer."

Therefore, with respect to assessment acts in which a voluntary payment period is indicated, it is with its end that the 90-day period provided for in article 10, no. 1, paragraph a), of the RJAT begins to run.

Having the voluntary payment period ended on 21-08-2015, it is manifest that the request for constitution of the arbitral tribunal, filed on 28-10-2015, was made within the 90-day period.

The exception raised by the Tax and Customs Authority is accordingly not sustained.

4. Matter of Law

4.1. Question of the Exercise of the Right to Deduction with Improperly Completed Invoices not Referring to Royalties

The Tax and Customs Authority proceeded to make a correction relating to invoices which it considered improperly completed issued by company D... and which served as the basis for the deduction of VAT.

As presuppositions of that correction, the Tax and Customs Authority understood, in sum, that:

– D... is the sole holder of the license to operate in Portugal the rights relating to the brands and Know-How that make up the C... business concept, with A... constituting its agent for a set of management acts, remunerated in the amount of 40% of the amount invoiced in the name of D....

– The Claimant A... mentions in the franchising contracts it enters into with the various C... real estate agencies that it is holder of the rights of use and licensing to third parties for the operation of real estate mediation activity under the 'C... Business Concept' and brands in Portugal;

– The entry fee as well as the operating commission required by A... from its franchisees constitute royalties, as they correspond to consideration for the transfer of rights to use the C... brand and the use of its know-how, despite A... not classifying the entry fee as a royalty in the invoices issued to its clients;

– There is no record in the accounting or in any of the invoices relating to acquisitions made by the company that the company acquired royalties or that it proceeded to any withholding at source on any income so qualified;

– There is no transfer of rights between D... and A...;

– For the invoicing order to be consistent with what is defined in the contract between D... and A..., the latter should invoice the totality of its rights to the franchisees, with A... having to invoice 40% of that amount to D... by virtue of its "commission" due under the mandate contract;

– In accordance with the contract entered into between A... and D..., on 2006-09-01, A... should invoice a commission of 40% of the amount invoiced in the name of D..., but A... did not invoice in the name of D..., but rather in its own name, and D... did not invoice to A... 60% of what the latter invoiced in its own name;

– Thus, the invoicing by D... to A... issued in 2011, in the amount of €2,525,253.02, to which was added VAT in the amount of €580,608.20 has implicit therein a royalty charged by D... to A..., in accordance with the transfer of rights and contract entered into between the parties, and unrealistic in terms of hours of work, so it is concluded that the descriptions of the invoices do not correspond to the operations performed, as they do not represent the descriptions therein mentioned, but rather a way to charge royalties from D... to A...;

– That is, the quantity and usual denomination of the services that were actually provided are not recorded in the documents, so it is concluded that the invoices in question were not issued in legal form, as they do not comply with what is set forth in paragraph b) of no. 5 of art. 36 of the VAT Code.

The Claimant argues, in sum, the following:

– The Tax and Customs Authority eliminated services actually provided by D... replacing them with royalties, based on a percentage distribution stipulated contractually almost 10 years ago and which presently has no adherence to reality;

– The descriptions contained in the invoices in question correspond effectively to the operations performed, not constituting exclusively a way to charge royalties from D... to the Claimant, as the AT contends;

– The invoicing of the services that D... provides to the Claimant takes into account diverse components, being included in the price/hour practiced other costs - namely, the charging of royalties relating to the C... brand;

– The amount of the hourly values indicated, according to the aforementioned formula, is normal and is not minimally disconnected from reality, as the AT contends;

– The AT does not minimally support this consideration of theirs, which it arrives at "only based on rules of empirical economic evidence," without resort to any economic indicators or similar nature criteria, considering fulfilled and proven uncertain and abstract concepts, which does not fall within the technical discretion charged to the AT;

– The AT does not seek to support its statement with concrete data, such as, for example, a comparison with values practiced for the provision of services of the same type, in the same type of business, nor obviously taking into account the various components of the price/hour determined by application of the formula above described.

– To intend to eliminate the services actually provided by D... and replace them with royalties, one knows not on what criterion nor with what measure, appealing only and in incorrect terms to a mere percentage distribution stipulated contractually almost 10 years ago and which, presently, does not have full adherence to reality, is to discard the conceptual difference of the notion of service provision for VAT purposes;

– The concept of service provision is a functional concept and not an ontological one, and there should "exist between the provider and the beneficiary a legal relationship during which reciprocal performances are transacted, with the remuneration received by the provider constituting the effective countervalue of the service provided to the beneficiary" (see Judgment of 3 March 1994, Case Tolsma, Case C-16/93, p. 1-00743).

– The services that were provided by D... to the Claimant naturally fall within the concept of service provision;

– For VAT purposes, royalties, not constituting a transfer, an intra-community acquisition or an importation of goods, also fall within the definition of "service provision";

– The value of the services provided by D... to the Claimant has implicit therein the payment of a royalty;

– In accordance with the provisions of article 16, no. 1 of the VAT Code, "...the taxable value of transfers of goods and service provisions subject to tax is the value of the consideration obtained or to be obtained from the acquirer, the recipient or a third party";

– That value, which is also subjective, and not merely a value estimated according to objective criteria, may consist of a sum of money agreed between the parties, and should always present a nexus between the terms of the service provided and the consideration received;

– The price of the services was calculated on the basis of a formula with diverse components, including the value of the service, the value of the royalty incorporated in the service (which, in fact, makes it possible) and the general costs borne with the service;

– Presently, the value of the C... brand is around twenty-five million euros and the cost of the brand for D... amounted in 2011 to one million and five hundred thousand euros, paid by means of services provided by D... to the Claimant;

– This reality makes perfectly understandable the values charged by D... to the Claimant, with the costs of the C... brand naturally being implicit in the services provided by the former – and inseparable therefrom by virtue of ownership of the brand – and, consequently, in the hourly values stipulated;

– Accordingly, the considerations of the AT as to the disconnection with reality of the price/hour practiced by D... is something that lacks proof, and such burden is borne, in accordance with the rules of burden of proof distribution in challenge proceedings, by the AT itself, there being no document, information, transaction or any other foundation that permits it to support such reasoning;

– Despite the price of the service having to incorporate a portion as royalties, the AT cannot disregard all of the services that were actually provided, invoking simply that the description of the invoices is not correct and that all of them should only mention royalties;

– The AT cannot, on the basis of a merely formal aspect, draw this erroneous conclusion and restrict the legitimate exercise of the right to deduction of the tax borne;

– Exclusions from the right to deduction are exceptional and pertain to specific cases enumerated by the national legislator in exhaustive terms, depending on the type of expenses in question;

– As objective requirements for the exercise of the right to deduction of tax, we have, namely, the fact that the tax borne should appear in an invoice passed in legal form (that is, it should comply, in its requirements, with the general terms provided for in article 36, no. 5 of the VAT Code), that it be Portuguese VAT, and that the expense, by itself, confers the right to deduction of VAT (that is, it should not be an expense excluded from the right to deduction, in accordance with the provisions of article 21 of the VAT Code);

– As subjective requirements for the exercise of the right to deduction of tax, it is determined, namely, that goods and services should be directly related to the exercise of the activity;

– The VAT borne upstream in a given operation is only deductible to the extent that it may be related downstream with an operation actually taxed, with the relation being ascertained based on the carrying forward and inclusion of the cost borne, in the price of the taxed operation;

– It is indisputable the strict connection between upstream and downstream operations, that is, that the services provided by D... by virtue of ownership of the brand for the advancement and growth of the business have an intrinsic connection with the activity of exploitation of the brand with franchisees developed by the Claimant;

– The existence of a direct and immediate relationship between a given upstream operation and one or more downstream operations with the right to deduction is, in principle, necessary for the right to deduction of VAT paid upstream to be recognized to the taxpayer and to determine the extent of such right;

– It is equally admitted the right to deduction in favor of the taxpayer, even in the absence of a direct and immediate relationship between a given upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides;

– At the limit, what is admitted though not conceded, the situation sub judice would always be subsumable within this field of the right to deduction internationally recognized;

– The CJEU emphasized that, in the absence of fraudulent or abusive circumstances and subject to adjustments, the right to deduction remains acquired;

– One is not in a situation of this type, as there was no intention to obtain any tax advantage;

– Even if we were, as the AT contends, only dealing with the payment of royalties, such amount would constitute the consideration for a provision of taxable services;

– With the end result being exactly the same in terms of taxation - a transaction taxed at the standard VAT rate.

The Claimant recognizes that there is payment of royalties to D... and says that its value is included in the value of the services provided and invoiced by it.

Some of the invoices attached by the Claimant with the request for arbitral pronouncement contain the indication of "royalties by virtue of the contract entered into on 1 September 2006," as is the case with Invoices FA2011/... (document no. 28) FA2011/... (document no. 29), FA2011/... (document no. 31), FA2011/... (document no. 32), FA2011/... (document no. 33), FA2011/... (document no. 34), FA2011/... (document no. 35), FA2011/... (document no. 36), FA2011/... (document no. 37), FA2011/... (document no. 38), FA2011/... (document no. 39), FA2011/... (document no. 42).

On the other hand, from witness testimony it follows that services were provided by D... to B... (predecessor of the Claimant) of the types indicated in the invoices referred to, and it is certain that these reveal the nature of the services provided.

The thesis of the Claimant that royalties are implicit in the invoicing of these services, as well as the general costs of D... underlying the provision of services by its employees appears to be credible, as the concept of royalties does not refer only to the exploitation of the "C... " brand, also encompassing know-how, constituted (as the Tax and Customs Authority itself refers to in the Tax Inspection Report) by "information regarding experience acquired in the industrial, commercial or scientific sector," as referred to in paragraph a) of no. 1 of article 94 of the Corporate Income Tax Code.

On the other hand, as the witness E... well stated, without any contrary proof having been adduced, it is not usual that mediators when presenting to clients their account of services, namely the amount of the commission agreed in the mediation contract, specify in invoices any amount relating to royalties, although they are implicit in that amount charged.

Furthermore, for VAT purposes, it being not relevant for the purpose of determining the applicable rate the explicit invoicing of royalties relating to know-how autonomously or within the scope of the value of services provided in which the acquired experience is applied, one cannot understand that the invoices in question, in the part in which they do not explicitly refer to royalties, do not sufficiently refer to the services provided, for the purposes of article 36, no. 5 of the VAT Code, in the part that requires the indication of the "quantity and usual denomination of the goods transferred or services provided, with specification of the elements necessary to determine the applicable rate."

On the other hand, even if a deficiency or irregularity in the invoicing of know-how by the method used by the Claimant were to be understood to exist, the principle of VAT neutrality would always require that these hypothetical formal invoice irregularities, which do not call into question the correct levy of the tax nor the possibility of auditing, nor provide any advantage to the Claimant, not be considered obstacles to the exercise of the right to deduction.

Accordingly, it is concluded that, with respect to this question of royalties, the challenged assessments are affected by error as to the factual presuppositions and error as to the legal presuppositions [article 36, no. 5, paragraph b) of the VAT Code].

Therefore, the request for arbitral pronouncement is sustained in this part, justifying the annulment of the challenged assessments, in the respective part.

4.2. Question of the Commissions Earned by the Claimant Relating to Credit Referral to Financial Institutions

The Claimant provided services to financial institutions relating to credit referrals that it recorded as revenue in its accounting... – Service Provisions/Commission on Processes Exempt – and ... - Service Provisions/Commission on Processes with VAT.

The Claimant understood that the credit referrals it made to financial institutions recorded in account ... would be classifiable in the expression "credit negotiation" and, as such, would be operations exempt from VAT, under paragraph a) of no. 27) of article 9 of the VAT Code.

With respect to the services provided to bank K..., recorded in account..., in the total amount of € 84,481.57, the Claimant recorded them with the description "Rebate – Information Services necessary for the implementation of real estate acquisition," and considered these operations as subject to and not exempt from VAT.

No. 27) of article 9 of the VAT Code establishes that operations are exempt from tax "the granting and negotiation of credit, in any form, including discount and rediscount operations, as well as its administration or management carried out by those who granted it."

The Tax and Customs Authority understood in the Tax Inspection Report that "these credit referral services are not provided directly by A..., as it does not possess retail locations, but rather by its franchisees, so these should also earn income relating to the so-called credit referral" and that "analyzing the accounting of A..., it was found that these services provided by A... would be associated with expenses incurred in obtaining the same, namely commissions that are paid to entity P..., Lda, taxpayer no. ... (entity related to A...). These commissions represented an expense of €316,219.86 and are recorded in accounting account ... – Commissions."

The Tax and Customs Authority understood in the Tax Inspection Report that, with respect to the services provided to N..., M... and Bank L..., the services provided by A... cannot be considered as "negotiation" given that:

– A...'s activity consists in disclosure of the protocol to its franchisees (independent entities), collaboration in campaigns and control of sales volume;

– Any "negotiation" of credits is carried out by A... franchisees with their clients (property purchasers), as these are the entities that constitute the sales network;

• A... receives a commission on sales but is not the intermediary in the relations between the parties that enter into the credit contract, nor does it include these services in the invoices issued.

Based on these presuppositions, the Tax and Customs Authority understood that the services provided by A... and invoiced to financial institutions correspond to only a part of the operations, which do not include the so-called "negotiation," so the same cannot benefit from the VAT exemption provided in paragraphs a) and b) of no. 27 of art. 9 of the VAT Code.

The Claimant argues, in sum, that:

– "It does not limit itself to providing potential clients with documentary information relating to financial products, but instead has the objective of ensuring that a credit contract is entered into between the banking entity and the client that best suits the client's financial situation and needs/conveniences";

– "From an analysis of the relevant contracts, it is easily concluded that the Claimant, in the context of sales promotion, commits itself to financial institutions to present to clients the possibility of recourse to financing from these";

– "Promoting, for this purpose, a series of actions, namely, the disclosure of the respective financing conditions to all C... locations, the placement in all C... locations of all necessary material for disclosure purposes and the participation in joint campaigns";

– "The credit referrals that the Claimant makes to financial institutions are, therefore, and contrary to what the AT concludes, qualified as operations of 'credit negotiation' and, as such, exempt from VAT".

However, it was not proven that the Claimant develops any activity specially designed for the implementation of each of the credits, and it is certain that the Claimant itself, in article 147 of the request for arbitral pronouncement, describes its activity as consisting of "presenting to clients the possibility of recourse to financing from these, promoting for this purpose a series of actions, namely, disclosing the financing conditions to all C... locations, placing in all C... locations all necessary material for disclosure purposes and participating in joint campaigns."

However, the contacts with clients are made by the franchisees.

The CJEU has adopted a broad concept of "credit negotiation operation," considering that "the activity of negotiation is a mediation activity that may consist, among other things, in indicating to a party in the contract opportunities to enter into a certain contract, in entering into contact with the other party and in negotiating on behalf and for account of the client the details of the reciprocal performances, with the purpose of this activity being to proceed with what is necessary for both parties to enter into a contract, without the negotiator having a direct interest as to its contents" (point 28 of the CJEU judgment of 21-06-2007, case no. C-453/05).

The activity of credit negotiation does not presuppose the necessity of direct contact between the negotiator and the two parties to the credit granting contract, as "it follows from the principle of tax neutrality that operators must be able to choose the organizational model that, from a strictly economic perspective, best suits them, without running the risk of seeing their operations excluded from the exemption" (point 35 of the same CJEU judgment).

But, "in order to be qualified as operations exempt in the sense of article 13, B, paragraph d), of the Sixth Directive, the services provided must form a distinct set, appreciated globally, which has the effect of fulfilling the specific and essential functions of the negotiation service" (points 27 and 36 of the same CJEU judgment).

The activity of the Claimant that results from the protocols with banking institutions that it attached to the case file does not consist of the referral and organization of credit proposals nor in any of the activities referred to in point 28 of the cited judgment, but in the promotion of the preferential treatment that will be granted by the credit institutions, which is done in the locations of the franchisees.

Accordingly, the Claimant develops a partial activity within the scope of credit negotiation, which, globally, is complemented with the contacts with clients that are made by the franchisees, who are the ones who have these contacts, as witness E... stated. The credit referral services are not provided directly by the Claimant, which does not possess retail locations, but rather by the franchisees.

There is not observed, thus, in the activity of the Claimant a "distinct set" of services that has the effect of fulfilling the specific and essential functions of the negotiation service, as only with the activity of the franchisees, which are entities independent of the Claimant, is it possible to establish the contacts with clients that are essential for the conclusion of credit granting contracts.

Therefore, in light of the cited CJEU jurisprudence, one is not in a situation in which the exemption provided for in paragraph a) of no. 27) of article 9 of the VAT Code should be applied.

Accordingly, in this part, the position assumed by the Tax and Customs Authority is correct, so the request for arbitral pronouncement is not sustained.

5. Decision

In accordance with the foregoing, this Arbitral Tribunal hereby agrees to:

a) Rule against the exception of untimeliness;

b) Rule that the request for declaration of illegality of the VAT assessments nos. ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ..., ... and ... is partially sustained, in the parts in which they are based on the deduction of VAT considered improper in the Tax Inspection Report;

c) Rule that the request for declaration of illegality of the said assessments is partially not sustained, in the remaining parts.

6. Value of Case

In accordance with the provisions of art. 306, no. 2, of the CPC and 97-A, no. 1, paragraph a), of the CPPT and 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the value of the case is set at € 760,440.14.

7. Costs

In accordance with art. 22, no. 4, of the RJAT, the amount of costs is set at € 11,016.00, in accordance with Table I annexed to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Claimant in the proportion of 13.32% and to the Tax and Customs Authority in the proportion of 86.68%.

The proportions are based on the assumption that, without taking into account compensatory interest, the value of the corrections relating to VAT deduction is € 580,808.20 and the value of the corrections relating to the consideration of VAT exemption is € 89,229.57, proportions of which are 86.68% and 13.32%.

Lisbon, 25-05-2016

The Arbitrators

(Jorge Manuel Lopes de Sousa)

(Ricardo Jorge Rodrigues Pereira)

(Susana Maria Afonso Claro)