Process: 673/2016-T

Date: August 25, 2017

Tax Type: IVA

Source: Original CAAD Decision

Summary

Process 673/2016-T addresses VAT deduction rights for an SGPS holding company that acquired services from a French provider on behalf of its foreign subsidiaries. The Tax Authority (AT) issued additional VAT assessments totaling €29,203.73, denying deductions claimed under the reverse charge mechanism. The AT argued that the operations fell outside the concept of economic activity under Article 20(1)(a) of the Portuguese VAT Code (CIVA). The SGPS challenged this, asserting it operates as a mixed holding providing management and financing services to subsidiaries, not merely holding passive investments. The company maintained that services re-billed to French subsidiaries C... and D... were consultancy services subject to VAT, making the upstream VAT fully deductible under Article 20(1)(b)(II) CIVA. The arbitration involved two corrections: €10,168.18 for reverse charge services (January 2013) and €19,035.55 relating to pro rata deduction calculations (December 2013). Central issues included whether holding companies exercise economic activity for VAT purposes, application of the neutrality principle to reverse charge transactions, and the impact of re-billing arrangements on deduction rights. The case highlights critical distinctions between strategic holdings that actively manage subsidiaries versus passive investment holdings, with significant implications for SGPS VAT compliance and the scope of deductible input tax.

Full Decision

ARBITRAL DECISION

The Arbitrator Dr. Filipa Barros (sole arbitrator), appointed by the Ethics Council of the Administrative Arbitration Centre ("CAAD") to form the Sole Arbitral Tribunal, constituted on 26 January 2017, decides as follows:

I. REPORT

The company A… SGPS, S.A., a legal entity…, with registered office at…, Street of …, no. … …, hereinafter "Claimant," hereby requests, pursuant to the provisions of article 2, no. 1, subsection a), and articles 10 et seq. of Decree-Law no. 10/2011 of 20 January, hereinafter referred to as "RJAT"[1], the constitution of an Arbitral Tribunal to rule on the illegality and consequent annulment of VAT assessments, and respective compensatory interest, relating to the year 2013, identified by the following numbers:

  • Additional VAT assessment resulting in the amount of €19,035.55 payable, and assessment of respective compensatory interest (CI) payable in the amount of €1,298.18, both numbered 2016 … and relating to period 1301 (January 2013);

  • Additional VAT assessment from which resulted the amount of €10,168.18 payable, and assessment of respective CI payable in the amount of €620.07, both numbered 2016… and relating to period 1312 (December 2013).

To substantiate its request, the Claimant considers, in summary, that in accordance with the inspection report, the VAT corrections made by the Tax and Customs Authority (AT), totaling €29,203.73, relate to alleged improper VAT deduction because relating to operations supposedly outside the concept of economic activity (article 20, no. 1, subsection a) of the VAT Code), and are subdivided as follows: (i) correction of €10,168.18 relating to period 1301; and (ii) correction of €19,035.55 relating to period 1312, being common to both corrections an incorrect interpretation and application of the provisions of article 20, no. 1 a) of the VAT Code.

It states that being this the only legal basis that the AT identifies to support both corrections, only against this legal basis may and should the taxpayer defend itself.

In the first place, services are at issue that were acquired from the French company "B…" (B…), located in Portugal, which are the basis of VAT self-assessment - reverse charge, that is, VAT assessed and deducted, in period 1301, in the total value of €10,168.18. Such services were acquired by the Claimant from B…, being invoiced to it, but on account of the French companies C… (C…) and D… (D…), for which reason they were re-debited to these in the following month, in February 2013, as services acquired on behalf of those French subsidiaries.

Since those services re-debited to C… and D… are not related to the sale of social participations that the Claimant held in France, the right to VAT deduction is ensured by the provisions of article 20, no. 1, b), II) of the VAT Code. In turn, constituting the debit of any charges supported a provision of services, in view of the provisions of article 4 of the VAT Code – an understanding which, moreover, is shared by the AT itself in various opinions issued – and no incomplete exemption contained in article 9 of the VAT Code being applicable to them, the VAT borne upstream by the Claimant in the services acquired by it from B… (the VAT in question here, therefore), is subject to deduction in the sphere of the Claimant, in accordance with article 20, no. 1 b) II) of the VAT Code.

Regarding this correction, it alleges that the Claimant is a mixed holding that provides management and financing services to its subsidiaries, and not insurance and reinsurance operations, covered by article 9, no. 28 of the VAT Code, as the AT affirms, hence there being an error in the factual premises, incorrect interpretation and application of tax law as well as erroneous legal-tax classification by the same whose legal consequence will be the annulment of the corrections proposed by the AT, in accordance with subsection a) of article 99 of the CPPT.

The Claimant considers that the sale of participations it held in the aforementioned French companies as well as in the Portuguese company "E…, Lda." (E…), constitute the exercise of an economic activity for VAT purposes.

Contrary to what the AT contends, the activity of management of social participations also constitutes an economic activity with a profit purpose, encompassing not only the sale of participations but the provision of services to the subsidiaries, namely services of financial intermediation, technical services of administration, conducting current management, support services to all businesses of the subsidiaries, guided by the ultimate objective of its strategic holding and the obtaining of gains from dividends and gains from its alienation.

Furthermore, in the situations identified by the AT – acquisitions of services provided by non-residents – obliged the Claimant to proceed with VAT self-assessment and deduction in the same amount ("reverse charge"), by virtue of subsection a) of no. 6 of article 6 and subsection c) no. 1 of article 19 and subsection a) of no. 1 of article 20 of the VAT Code, whereby it does not agree with the AT when it denies the deduction made for VAT purposes. It understands that it has a power-duty to deduct the VAT it self-assessed, being this a mere accounting movement, once one is dealing with services provided by non-residents and, if that were not the understanding, one would be violating the principle of neutrality by denying the right to deduction in VAT. It contends that the principle of neutrality is a structuring principle present both in the Sixth Directive, as recognized by various doctrine and European case law, as well as by national case law.

It further states that the Claimant is a holding of strategic control, not limiting itself to acquiring social participations in companies linked to the alternative energy sector with speculative intent, but rather intervenes effectively in the management of the businesses of the subsidiaries in that sector, having been levied VAT downstream as a consequence of the provision of technical services.

In this context, the services re-debited to C… and D… are not related to the sale of any participations, nor aimed at the acquisition or holding of shares, instead relate to consultancy services, subject and not exempt from VAT, provided to the Claimant by B…, in the name of the Claimant, but on behalf of those French companies (hence its re-debit to the same in February 2013). Thus, the value of the VAT in question was entirely deductible, there being a clear and unequivocal real allocation between those (i) services acquired by the Claimant upstream from B…, in which it assessed and deducted VAT (reverse charge) and (ii) the corresponding debit/invoicing of those same services, downstream, to the French companies C… and D…, subject and not exempt from VAT in France. Hence the fact that the re-debit was made without assessment, as it would be subject to VAT self-assessment in the country of destination.

Now, there are no doubts that given the nature of the services and the direct allocation (real allocation) that was made of the same to the French companies C… and D…, the corresponding VAT borne upstream is entirely deductible, in accordance with article 20, no. 1 b), II), and 23, no. 1, a) of the VAT Code.

In the second place, the amount of €19,035.55 was corrected, relating to VAT deducted by the Claimant based on the deduction percentage provided for in no. 4 of article 23 of the VAT Code (pro rata), calculated by the Claimant at 22.47%. Now, according to the AT the goods and services acquired by the Claimant in 1312 "are directly related to the social participations of A… (Claimant), and aim to contribute to the acquisition and holding of shares." Consequently, being all operations carried out by the Claimant in the taxation period of 2013 related to the sale of social participations, there would be no right to deduct any upstream VAT, the pro rata being null.

The Claimant disagrees with such classification, the goods and services acquired in period 1312 (December 2013) are not related (much less "directly") to the Claimant's social participations, nor do they aim to "contribute to the acquisition and holding of shares" – whatever is meant by such a diffuse assertion, without any objectivity. The Claimant invoiced F… (F…) part (40%) of the services that had been invoiced to the Claimant by G…, Lda. (G…), H… SGPS, SA (H…) and I…, (hereinafter "suppliers"). It argues that both the services invoiced by the suppliers to the Claimant, and the part of the services acquired invoiced by the Claimant to F…, constituted operations subject and not exempt from VAT, the invoicing to F… being obviously made with VAT assessment (downstream), which was duly remitted by the Claimant to the AT.

It emphasizes that, contrary to what the AT presumes, this was not a mere "re-invoicing" or "re-debit" of services to F…. Rather, the Claimant invoiced F… 40% of the services borne by the Claimant and which had been invoiced by the suppliers, when F…, given the shareholder position it held in the company "E…, Lda" (E…), was only 20%, that is, the amount invoiced to F… unquestionably constituted services provided to F… – subject and not exempt from VAT. Such circumstances reveal that the Claimant added a margin to the value invoiced to F…, on the amount of costs borne with the suppliers in the percentage that F… held in the capital of E… (20%). It further reinforces that it effectively developed an economic activity in 2013, contrary to the AT's understanding. Thus, these services were invoiced by the Claimant to F…, with margin, through invoice no.…, of 31.12.2013, in the amount of €122,000.00, plus VAT assessed to F… (and remitted to the State by the Claimant) of €28,060.00.

In the present case, the Claimant opted for the pro rata method, deducting only 22.47% (and not 100%) of the VAT borne in 1312, given that the services acquired upstream from the suppliers (in which it bore VAT) were not destined exclusively for the realization, downstream, of operations subject and not exempt from VAT (provision of services to F…), being also related to the negotiation process aimed at the sale by the Claimant of the share it held in E…, there being no, therefore, an exclusive link between the operations with VAT carried out upstream and the operations with VAT carried out downstream, contrary to what occurred in the case addressed in the correction referred to in the first place, which was a mere re-debit/cost pass-through, with VAT borne upstream and VAT assessed downstream. Thus, the services acquired from the suppliers, subject to VAT, were varied and of different nature, being that only a portion of the respective charges were invoiced to F…, while services provided, subject not exempt from VAT, the remainder "remaining" in the sphere of the Claimant - given that, in this remaining portion, the services related to the process of sale of the share of E… held by the Claimant itself.

It concludes that the AT erred regarding the factual and legal premises by considering that there were no active operations, subject and not exempt from VAT, which should appear in the numerator of the Claimant's pro rata in the year 2013, violating articles 20, no. 1, subsection a), and 23, no. 4 of the VAT Code. Furthermore, it understands that the assessments here challenged could never have resulted in additional VAT assessments and compensatory interest, as with reference to the months in question, the tax credits would have been reduced, not resulting in any unpaid tax in the State's coffers, much less any compensatory interest, being these, consequently, illegal.

On 08 November 2016, the request for constitution of the Arbitral Tribunal was accepted by the Honorable President of CAAD and immediately notified to the Defendant in accordance with law.

The Claimant did not proceed to appoint an Arbitrator.

Thus, in accordance with and for the purposes of the provisions of no. 1 of article 6 and subsection b) of no. 1 of article 11 of the RJAT, by decision of the Honorable President of the Ethics Council, duly communicated to the parties within legally prescribed periods, the signatory was appointed arbitrator of the Sole Arbitral Tribunal, who communicated to the Ethics Council and to the Administrative Arbitration Centre her acceptance of the appointment within the period stipulated in article 4 of the Ethics Code of the Administrative Arbitration Centre.

In conformity with what is prescribed in subsection c) of no. 1 of article 11 of Decree-Law no. 10/2011 of 20 January, as amended by article 228 of Law no. 66-B/2012 of 31 December, the Sole Arbitral Tribunal was constituted on 26 January 2017, followed by the pertinent legal procedures.

The Defendant, duly notified for that purpose, presented its response by means of objection, in which it defends the lack of merit of the request for arbitral ruling, alleging in summary the following:

In the context of VAT, the Claimant is characterized as a mixed taxable person, since it carried out operations subject to tax, namely regarding consultancy and management services invoiced to its subsidiaries, and carries out exempt operations relating to the management of its social participations, the granting of credits to its subsidiaries and the application of capital through financial instruments, namely bank deposits.

Regarding the tax period subject to inspection (2013), having analyzed the periodic declarations, it was found that only the declarations relating to the months of January and December of 2013 evidence the existence of taxable operations, it being necessary to assess whether the VAT capable of deduction had been correctly calculated.

For this purpose, it was determined that during the taxation period of 2013 the following operations occurred:

  • the Claimant alienated the French subsidiaries C… and D…, which it held entirely, which had been acquired in 2009 and 2010, which motivated a correction of €10,168.18 (operation carried out in January 2013);

  • the Claimant proceeded to alienate 72% of the 80% participation it held in the Portuguese company E…, Lda., which motivated a correction of €19,035.55 (operation carried out in December 2013).

As a consequence, the TIA made corrections for 2013 in the context of VAT in the total amount of €29,203.73, which corresponds to the entirety of the VAT deducted by the Claimant considering that the acquisitions of goods and services in which the tax deducted by the taxable person was borne "are directly related to the social participations of A…, and aim to contribute to the acquisition and holding of shares," being such operations "outside the field of the tax."

For such it considers that the neutrality of VAT is only guaranteed if the right to deduction is exercised only with relation to inputs relating to the exercise of an economic activity, there being no right to deduction in accordance with the Sixth Directive by a holding company whose only purpose is the taking of participations in other companies, not interfering, directly or indirectly, in the management of those companies, without prejudice to the rights that the said holding company has in its capacity as shareholder or member.

Now, A… does not dispute its qualification as a "mixed holding" given that, in addition to operations related to the holding of social participations (operations not considered economic activities for VAT purposes, in accordance with no. 2 of article 4 of the Sixth Directive), it alleges that it also provides management services to the subsidiary companies (operations subject to VAT) and carries out financing operations to the same (operations exempt from VAT in accordance with no. 27 of article 9 of the VAT Code). Furthermore, it bases its (purported) right to deduction solely and exclusively on the argument that the purchase, holding and sale of social participations constitute, for VAT purposes, an economic activity and that, as such, confers upon it the right to deduction, understanding with which the AT can agree.

Thus, although the Claimant alleges that in 2013 it re-invoiced services to C… and D…, and that those services confer the right to deduction, the truth is that not only, as has already been demonstrated, did it not develop any economic activity, but even if that were to be understood, the fact of appearing in the invoice of those services (of B…) as the recipient of the same, being that as it admits the services were destined to its subsidiaries, does not make it, as the recipient and provider of the services in question, but rather as their financer.

The AT also emphasizes the fact that there is no evidence in the Claimant's accounting as income of any provision of technical administration and management services to its subsidiaries in the taxation period of 2013.

Regarding the VAT deducted through application of the pro rata of 22.47%, once again there is the absence of economic activity to sustain such right to deduction.

In effect, the only invoice recorded during the year 2013 in account 72413 - Provision of Services – invoice no.…, issued on 31-12-2013 to F…, in the amount of €122,000.00, plus €28,060.00 of VAT – relates to "Costs incurred in the negotiation and assembly of joint investment opportunities," in accordance with its respective description. Such invoice does not relate to any provision of services, being instead a re-debit of expenses by A… to the shareholder in E…, F…, expenses which, in turn, had been debited to A… by G…, which bore them on account of the SGPS and which, as the Claimant itself informed during the inspection, relate to the negotiation of the sale of the participations in E….

Therefore, the AT considers that being a redebiting absolutely occasional, neither would this operation determine that there existed in 2013, by the Claimant, any economic activity to sustain the deduction of tax whose disregard is required.

In summary, the alienation of social participations does not integrate the concept of economic activity for VAT purposes, for which reason it is found outside the scope of application of this tax and an occasional operation – embodied in the value invoiced to F… of €122,000.00 – without character of continuity, also does not integrate the concept of economic activity.

Finally, the Defendant relies on the case law of the CJEU and CAAD to sustain its position, considering on the other hand that the Claimant did not demonstrate, as required in accordance with article 74, no. 1 of the LGT, the verification of the necessary prerequisites for the exercise of its right to deduction, that is, that the acquisition of the services in question relate to the exercise of an activity subject and not exempt from VAT.

It concludes by the lack of merit of the request for arbitral ruling with all legal consequences.

On 04 May 2017 the meeting provided for in article 18 of the RJAT took place, in which occurred, among other things, the examination of the witnesses listed by the Claimant (Ms. J… and Mr. K…) as well as the examination of the witness listed by the Defendant Ms. L…(cf. Minutes of the Meeting of the Sole Arbitral Tribunal).

During the meeting, the Claimant was notified to proceed with the attachment to the proceedings of the translation of the documents in foreign language attached in the request for arbitral ruling identified as Doc. no. 2 second part.

Written pleadings were presented by the Claimant, followed by the pleadings of the Defendant.

In the pleadings presented the parties reiterated, in essence, the positions defended in their respective motions.

II. PROCEDURAL SANITATION

The Arbitral Tribunal is materially competent and is regularly constituted, in accordance with articles 2, no. 1, subsection a), 5 and 6, no. 1, of the RJAT.

The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented, (cf. articles 4 and 10, no. 2 of the RJAT and article 1 of Ordinance no. 112-A/2011 of 22 March).

The proceedings do not suffer from any nullities.

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

III. GROUNDS

1. Facts Deemed Proven

The facts were deemed proven based on the testimony of the witnesses, the documents attached in the context of the administrative proceedings, the request for arbitral ruling and the response presented by the AT, as indicated hereinafter.

  • The Claimant exercises the activity of management of social participations in various Portuguese and foreign companies (headquartered in Spain, France, South Africa, Malta and the Netherlands), all operating in the renewable energy sector, of hydroelectric, wind, photovoltaic, biomass, cogeneration and solar thermal origin;

  • The Claimant is a mixed taxable person for VAT purposes with monthly periodicity (by choice) once that it has operations subject to tax, namely regarding consultancy and management services invoiced to its subsidiaries and exempt operations relating to the granting of credit to its subsidiaries and the application of capital through financial instruments, namely bank deposits;

  • The management of the Claimant is ensured by a board of directors of 3 to 7 members and one alternate;

  • During the period to which the inspection procedure refers, the TIA found that administrators M… and N… represent the majority shareholder SGPS H… and are responsible for current and operational management and strategic management of A…, while administrators O… and P… intervene in major decisions of the company namely those involving financings of substantial amounts;

  • The Claimant was subject to an Inspection Procedure conducted by the Finance Directorate of … authorized by Service Order no. OI2015…, of general scope;

  • In accordance with the RIT, the content of which is given here as entirely reproduced, the AT verified that in the year 2013, only the declarations relating to the months of January and December evidence the existence of taxable operations, it being necessary to assess whether the VAT capable of deduction had been correctly calculated;

  • During the taxation period of 2013, the Claimant alienated the French subsidiaries C… and D…, which it held entirely, which had been acquired in 2009 and 2010 in accordance with the contract executed on 26-03-2010;

  • The French company C… had as its corporate purpose "study and exploitation of electrical energy and others," being a project for construction of a 10MhW wind farm located in …, …, France, designated Project …;

  • Between the date of acquisition of C… and 11-10-2013, the Claimant made investments in that subsidiary that amounted to €2,226,784.58 having recorded in account 411 – Financial Investments – Investments in Subsidiaries, as follows:

    • By way of loans (in sub-account 4113645 – Loans Granted -C…), whose balance, before 11-10-2013, amounted to €2,090,924.58 (in accordance with excerpts relating to 2011, 2012 and 2013 which are attached in Annex 5 of PA);
    • As other investments (in sub-account 4151645 – Other Financial Investments Held until Maturity -C…), whose balance, before 11-10-2013, amounted to €135,860.00 (in accordance with excerpts relating to 2011, 2012 and 2013 which are attached in Annex 6 of PA);

  • On 05-10-2009, the Claimant acquired 100% of the capital of the French company called D…, in the amount of €5,429.00, being a project for construction of an 8MhW wind farm located in …, …, France, designated project …;

  • Between the date of acquisition of D… and 29-10-2013, the Claimant made investments in that subsidiary that amounted to €4,147,507.42, having recorded in account 411 – Financial Investments – Investments in Subsidiaries, as follows:

    • By way of loans (in sub-account 4113643 – Loans Granted -D…), whose balance, before 29-10-2013, amounted to €3,352,936.42 (in accordance with excerpts relating to 2011, 2012 and 2013 which are attached in Annex 8 of PA);
    • As other investments (in sub-account 4151643 – Other Financial Investments Held until Maturity – D…), whose balance, before 29-10-2013, amounted to €794,571.00 (in accordance with excerpts relating to 2011, 2012 and 2013 which are attached in Annex 9 of PA);

  • On 11 October 2013, the Claimant, sole shareholder of C…, recorded in its accounting an increase in capital in the amount of €1,449,000 (thereby causing the capital of that subsidiary to amount to €1,457,000), operated through set-off of the credit that it possessed on that date with respect to C…, and which thus went from €2,090,924.58 to €641,924.58, through internal entry note no.…;

  • The increase in capital of C… was carried out through conversion of advances;

  • During the years 2011, 2012 and 2013 until the date of their respective alienation the Claimant granted to the subsidiaries C… and D… the following advances:

[Table of advances from A… to subsidiaries C… and D… showing loan accounts 4113645 – C… and 4113643 – D… with balances and transactions from 01-01-2011 through 28-10-2013]

  • These advances were remunerated in the years 2011 and 2012, the contributor having debited interest to those French companies, as follows:

[Table of Account 7913 - Interest Charged to Subsidiaries showing C…, D…, and Total for 2011, 2012, and 2013]

  • Through its administrators the Claimant provided services to its subsidiary companies of assistance in the active and current conduct of their businesses, including to C… and D… (testimony of witness J…);

  • It is part of the DNA of the Claimant to intervene actively in the life of the subsidiaries, taking majority participations, appointing the administrators of the subsidiary companies, providing services to the subsidiaries in the most varied domains of current management, obtaining financing from banking, granting financings to the subsidiaries, defining the strategic orientation of the group, supporting in the development of the projects and defining the tariff policy; (testimony of witness J…);

  • On 29-10-2013, that is three and four years respectively after the acquisition of C… and D…, the Claimant alienated the entirety of the capital shares it held in those companies to the German company Q… in accordance with what results from the Share Purchase Agreement (contract for sale of shares) executed between the parties;

  • In the aforementioned contract the following counterparts are stipulated for the Claimant:

    • Global sale price of €407,001, corresponding to €1 for C… and €407,000 for D…;

    • Earn out caps in the maximum amount of €235,000 for C… and €125,000 for D…, to be paid over a period of 5 years, beginning on 01-01-2015 or 01-01-2016, by way of profits associated with the total energy output to be generated by each of the companies (see page 6 of Annex 17);

    • Development fees in the amount of €54,000.00 for C… and €46,000.00 for D… relating to services provided or to be provided by the company belonging to group R… – G…, Lda. – associated with the construction of Projects … and … – which, if they exist, will be paid by companies C… and D… within 30 days from the date of issue of the first invoice for energy produced by them to the French Electricity Distribution Company and will amount to at most €100,000, guaranteed by a comfort letter issued by Q…;

    • Reimbursement of loans made by shareholder A… SGPS;

  • In the operation of alienation of C…, the Claimant determined a loss of €1,528,852.73, recorded in account 6853 – Expenses and Losses in Subsidiaries - Alienations, having however, simultaneously, recorded in account 7852 – Income and Gains in Subsidiaries – Alienations, the amounts relating to the earn out caps and development fees mentioned above, which for C…, were calculated at €289,000 (= €235,000 + €54,000);

  • From the alienation of company C…, the Claimant received €1 as the base price, and €608,028.90 as reimbursement of the loans made to that subsidiary, in accordance with Entry Note no.…;

  • In the operation of alienation of D…, the Claimant determined a loss of €234,103.62, recorded in account 6853 – Expenses and Losses in Subsidiaries – Alienations, having however, simultaneously, recorded in account 7852 – Income and Gains in Subsidiaries – Alienations – the amounts relating to the earn out caps and development fees mentioned above, calculated at €171,000 (= €125,000 + €46,000);

  • From the alienation of company D…, the Claimant received €407,000 as the base price, and €3,328,040.68 as reimbursement of the loans made to that subsidiary, in accordance with entry note no.…;

  • On 29-10-2013, the date of the Sale Purchase Agreement for sale of C… and D…, the Claimant received €250,000.00 paid by Q…;

  • The amount mentioned was recorded in a third-party account by way of exclusivity agreement…, in accordance with entry note no.…;

  • The TIA questioned the contributor about the reason why income identified in point 21 had not been recognized;

  • In response to the question the Claimant explained that "the business agreed with Q… included, in addition to the alienation of C… and D…, the alienation of another French wind farm held entirely by A… SGPS, called S…, however, that sale did not come to be realized. Once Q… still found itself in debt with respect to A… SGPS regarding the earn out caps and development fees associated with the alienation of C… and D… – which will amount to a maximum of €460,000.00 – there is a strong possibility that this amount will be set off with the €250,000 advanced on 29-10-2013."

  • The alienation of C… and D… was not initially planned, having occurred due to the impossibility of ensuring the banking financing that was being negotiated with bank T… with a view to the operation of these wind farms in France (testimony of witness J…);

  • In the year 2013 the Claimant proceeded to alienate 72% of the 80% participation it held in the Portuguese company E…, Lda. (E…), in the terms that are detailed below, as results from the RIT:

"1. By means of a Contract of Transfer of Shares (...), on 20 June 2008 the contributor acquired 60% of the capital of the Portuguese wind energy company E…, corresponding to €3,000 (...), from two entities represented by the Swiss engineer E.E. U… (V… SGPS, SA and W…, headquartered in Switzerland), for the price of €792,000, to be paid as follows: a) €96,000 (which include credits held on V…, Lda., in the amount of €19,083.59): at the time of confirmation of ownership of the capital duly registered by the cedents; b) €217,800: on the date of execution of the contract with DGEG, after the attribution of injection capacity, in the context of the Competitive Procedure for Attribution of Power Injection Capacity to the Electricity Network of Public Service of 200 MW (relating to lot 7); c) The remainder €478,200 on the date of obtaining the License of Establishment attributed by DGEG.

  1. This acquisition of capital shares was recorded accounting-wise by the value corresponding to the first tranche agreed - €96,000 - through entry note no.…, of 30-06-2008 (see Annex 27, of 5 pages), nothing having been noted regarding the remainder €696,000;

  2. On 17-11-2008 it was subscribed by the shareholders at the date of E… – A… – and the four minority shareholders – F…, X…, Y… and Z… (holders of 10% of the capital each) an increase in capital in the amount of €47,000, with E… thus having a capital of €50,000, having also at that time, proceeded to the alteration of the registered office, purpose and Shareholders' Agreement of that company, in accordance with the Contract of Alteration of Shareholders' Agreement and Increase in Capital of Company E…, Lda, which is attached in Annex 28, of 5 pages;

  3. However, in addition to the €27,000 of increase in capital, corresponding to its share (60%), A… loaned €9,000 to the other shareholders (€2,250 each), having also in 2008, paid the €217,800 relating to the second tranche agreed;

  4. Of the €792,000 initially agreed to be delivered to the seller for 60% of the capital of E…, A… ended up paying only €313,800 (= €96,000 + €217,800), once the remaining €478,200 were de-recognized by the contributor in 2012, by virtue of the occurrence of supervening facts associated with the measurement of the financial participation held, as is derived from entry note no.…, of 31-13-2012 and respective Memorandum justifying it prepared on 11-02-2013, which are attached in Annex 30, of 4 pages;

  5. Transcribed below is the email sent by A… on 02-11-2015, containing the justification of the de-recognition of this asset and the summarized description of the business of E…:

"(...) 1. A… buys 60% of E… from an AA… group of Swiss origin that has a Portuguese subsidiary called V…, SGPS, Lda. that holds the majority of the capital of E…

  1. The intention of this purchase is to present the company to a public tender for attribution of wind power capacity Phase C.

  2. In buying a company that has no physical assets, the agreed price had as its main components: i) the wind measurements carried out at the location where they held the lease contracts and ii) the lease contracts entered into with the owners of the same.

  3. The proposal presented by E… for the lot of attribution of 8MW in the … mountains came out winning and a contract was signed with DGEG in November 2008.

  4. In the course of fieldwork for assembly of the different licensing dossiers we realized that it was not possible to obtain any land registration in the name of the owners who had signed the lease contracts and that the locations did not cover the needs for positioning to optimize the distance of connection to the national energy distribution network.

  5. Thus, six months after the purchase of the participation A… decided that it would not pay beyond the first two moments foreseen in the value of the transaction and that it had already paid, not even having recognized in the accounting of 2008 the remaining value to be paid once it had to negotiate new locations and repeat part of the studies done for different locations, in addition to the delay that all of this caused in the licensing process with the respective delay in obtaining revenues. In the understanding of A… the value perceived after due diligence was much lower than the value already paid.

  6. On the part of the seller there were no, after the payment of tranche 2, attempts at collection in informal or formal manner, which makes us think they had real awareness that they had sold "pigs in a poke."

  7. In this manner the price paid is the price considered as the value of acquisition of the subsidiary from the end of 2008, it not having been possible to contact the seller, at least from the moment that BB… enters, which asked us to ask for confirmation of balance statements and in the various attempts we could not succeed.

  8. The recognition in 2010 and de-recognition in 2012 of the liability with respect to the former owners of E…, were merely acts of compliance with the directives of the auditors of the company.

  9. The sale in 2013 to a company of Swiss public capital, responsible for the distribution of energy in the canton of Zurich is the consequence of the inability of A… to meet the conditions of external financing that since 2009/2010 have shown themselves to be practically non-existent in Portugal for financings of this capital-intensive type (and others).

See website CC… http://www..... -renewables.ch/content/…/en/projekte/portugal.html

As a note we can for example question whether everything had been OK and if it had been possible to start the investment and production earlier if it would have been necessary to sell the subsidiary that holds the operation of the most productive wind farm in Portugal. (...)"

[End of transcription]

  • On 20-12-2012 the Claimant acquired another 20% of the capital of E… for €418,000, from shareholders Y… and Z… (who transferred their respective shares of 10% for the value of €209,000 each) through the Deed of Transfer of Shares, whose accounting entry occurred through entry note no.…, of 20-12-2012;

  • Below is presented a summary table of the evolution of the capital of E… held by the Claimant between June 2008 and June 2015, when it alienated the remaining 8% it held in E…:

[Table showing evolution of capital of E… held by A… from 26-06-2008 to 26-06-2015, with details on acquisitions, capital increases, and transfers of shares]

  • On 18-12-2013 the Claimant executes with CC…, a Contract of Division and Transfer of Shares by means of which it alienates 72% of the 80% participation it holds in E…, to that Swiss company.

  • Through the same contract, F…, holder at the date of the remaining 20% of capital of E…, sells to CC… 18% of its participation, leaving this as holder of 90% of E…;

  • The contract executed between the Claimant and CC… provided for the acquisition of the entirety of E… for €3,000,000, to occur in two phases, as follows:

    • Phase I – December 2013 – acquisition of 90% of the capital (72% to the Claimant and 18% to F…) – being the global amount to be paid by CC… of €2,700,000;

    • Phase II – 6 months after the date of commencement of operation of the wind farm: acquisition of 10% of the capital (8% to the Claimant and 2% to F…) – being the global amount to be paid by CC… of €300,000.00;

  • During the taxation period of 2013, Phase I took place, during which the Claimant received €1,871,821.41 from CC… for the alienation of 72% of E… (in accordance with the trial balance before the alienation and entry note no.…, of 18-12-2013), amount calculated as follows:

[Table showing calculation of price for 72% of E… - from 100% price of €3,000,000 through various adjustments to final payment to A… of €1,871,821.41]

  • In the operation of alienation of E… the Claimant determined a gain of €1,330,664.10, recorded in account 7852 – Income and Gains in Subsidiaries – Alienations;

  • In the year 2013, the Claimant presented periodic VAT declarations with movements only for the periods of January and December, in which it declared the following amounts:

[Table showing VAT for periods 1301 and 1312 with columns for VAT Assessed and VAT Deducted, broken down by categories, plus regularization]

  • During the taxation period of 2013, the VAT calculated in favor of the State by the Claimant amounted to €42,843.00, being based on the VAT assessed in the following operations:

[List of VAT self-assessments and invoices with amounts]

  • During the taxation period of 2013, the VAT calculated in favor of the Claimant totaled the value of €32,134.79, and resulted from the regularization in its favor of €2,931.06 (by annulment of invoice no.…) and from the deduction of €29,203.73 of VAT, corresponding to the following portions:

    • €10,168.18 in period 1301, relating to the deduction of the self-assessed VAT on the acquisition of legal services from the law firm B… related to the wind farm projects that the Claimant held in France through its subsidiaries C… and D…;

    • €19,035.55 in period 1312, relating to the deduction of VAT based on the deduction percentage provided for in no. 4 of article 23 of the VAT Code (deduction pro rata) calculated by the Claimant for the year 2013 at 22.47%

  • In the periodic VAT declaration relating to January 2013 (1301), the VAT deducted amounted to €10,168.18 relating to the deduction of the self-assessed VAT by the Claimant in 4 invoices which are itemized in the table below, in the amount of €44,209.51, in which VAT was assessed and deducted in the value of €10,168.18:

[Table showing details of VAT deductions in period 1301 from B… (FR) invoices]

  • The services provided by B… were invoiced to the Claimant and paid by it on behalf of the French companies C… and D…;

  • In accordance with the proposal for provision of services presented by B… to the Claimant on 15 October 2010, the legal services include the following aspects:

    • Preparation and organization of documentation for consultation in "data room" presented with financial institutions for financing wind farms located in French territory;

    • Analysis and review of contracts presented by Financial Institutions;

    • Accompaniment and preparation of session of questions and answers posed by financial institutions;

    • Legal assistance, in light of French legislation, in the context of financing contracts, refinancing of ongoing projects and provision of guarantees relating to wind farm operation projects;

    • Issuance of legal opinions;

    • Fiscal assistance in the restructuring of assets in the context of ongoing projects;

    (See Proposal for provision of services and testimony of J…).

  • The projects for development of wind farms through companies C… and D… were aborted due to the refusal of Bank T… to finance those operations, given the fact that Portugal had meanwhile been financially intervened by the "Troika" (Cf. testimony of J…);

  • The invoices issued by B… are dated January 2013;

  • In February 2013 the Claimant re-debited to the French companies C… and D… services acquired from B… in the total amount of €44,209.51, in the percentage of 50% to each corresponding to the respective utilization;

  • Except for the taxation periods of 1301 and 1312 the Claimant recorded the tax borne in account #27811119 – VAT to regularize, having on 31-12-2013, through internal entry note no.…, proceeded to the deduction of this VAT in the percentage of 22.47%;

  • The Claimant proceeded to calculate the deduction pro rata as follows:

[Calculation showing pro rata of 22.47% derived from €122,000.00 / €542,943.99]

  • On 31-12-2013 an invoice no. … was issued to F… in the amount of €122,000.00, plus VAT in the amount of €28,060.00, containing the following mentions: "costs incurred in the negotiation and assembly of joint investment opportunities."

  • On 25-02-2016 the AT sent an e-mail to the Claimant requesting the following clarifications relating to that invoice:

"(...)

  • indication of which investments these are and when they were carried out;

  • identification of the said costs, with itemization of the amounts and dates when they were incurred, as well as the accounting records underlying them;

  • information on whether the invoice in question has already been paid and presentation of the respective supporting documentation (accounting statements and means of payment). (...)"

  • On 23-03-2016 the Claimant presented the following response to the TIA:

"(...) The invoice in question relates mostly to the allocation of Costs borne by A… SGPS with the negotiation of the sale of the participations of E…. We remind that much of these expenses originated in the re-invoicing carried out by G…, since they had been borne on behalf of A… SGPS. (...)"

  • In December 2013, the Claimant invoiced with VAT to F… part (20%) of the services that had been invoiced to the Claimant by the suppliers G…, Lda. (G…), H… SGPS, SA (H…) and Law Firm I…;

  • Engineer F… held a shareholder position in company E… corresponding to 20%;

  • In the services invoiced to F…, the Claimant obtained a margin of 100% on the costs borne, based on the time spent in the acts of preparation and accompaniment in the negotiation of the sale of the position of F… in E… as well as the benefits obtained by the shareholder in a turn-key business (testimony J…);

  • The amount contained in the invoice issued to F… by the Claimant constitutes the sum of two portions:

    • Re-debit of 20% of the costs borne upstream by the Claimant with the suppliers;

    • Margin ("plus") of 20% on the value of the re-debit, taking into account the assistance provided in the negotiations and the good result obtained with the sale of E…;

  • Through official letter no. …, of 2016-04-15, registered under no. RD … PT, the Claimant was notified of the inspection report project, to exercise its right of hearing, within the period of 15 days, in accordance with the provisions of article 60 of the LGT and article 60 of the RCPITA;

  • On 13-05-2016, the Claimant exercised the right of hearing, in writing, sent to the tax inspection services via CTT;

  • In exercising the right of hearing, and as concerns the VAT corrections that were proposed by the TIA, the Claimant invokes, in summary, disagreement with the same, once it carried out taxable operations with right to deduction, considering that the re-debits constitute provisions of services for VAT purposes;

  • In response to the arguments presented by the Claimant, the TIA considered in essence the following (in accordance with point IX.2, whose content is given here as entirely reproduced) "being goods or services exclusively destined to operations not resulting from an economic activity, the respective VAT borne cannot be subject to deduction.

For this classification it is irrelevant the entity that provides the service, or even the type of service acquired by A…, that is, it is not by the fact that the services in question result from re-debits that the VAT contained in them is not deductible in the sphere of the contributor, but rather by the circumstance that A… carried out solely, during this year, economic operations that find themselves outside the field of VAT;

In reality, the re-debit of expenses incurred with the alienation of the French company C… (which was taxed in VAT by the contributor), finds itself associated with operations that cannot be qualified as resulting from the exercise of an economic activity, in light of the aforementioned Court ruling, as we proceed to transcribe:

"The mere acquisition and mere holding of social participations should not be considered economic activities within the meaning of the Sixth Directive, conferring on its author the status of taxable person. Indeed, the simple taking of financial participations in other companies does not constitute an exploitation of a good with the aim of obtaining revenues with permanent character, because the eventual dividend, fruit of that participation, results from the simple ownership of the good (…).

The interference of a holding in the management of the companies in which it took participations constitutes an economic activity within the meaning of article 4, no. 2, of the Sixth Directive, to the extent that it implies the realization of transactions subject to VAT under article 2 of that directive, such as the supply of administrative, financial, commercial and technical services by the holding to its subsidiaries (…)"

By this being so, the argument contended by A… relating to the total deductibility of the VAT borne with the acquisition of the services that were re-debited to Engineer F… (in the only invoice issued in the year 2013) cannot prevail, once it does not comply with the essential condition provided for in the law: the realization of economic operations with right to deduction of the VAT borne upstream, inasmuch as all operations that the taxable person carried out find themselves outside the scope of application of this tax;

This very matter is corroborated by that Court ruling, when it establishes that: "is authorized to deduct the value added tax paid upstream, on condition that the services acquired upstream present a direct and immediate nexus with economic operations downstream with right to deduction."

  • By official letter no. … of 27-05-2016, the TIA concluded for the maintenance of the corrections carried out in the context of VAT;

  • On 03-06-2016, additional assessments of VAT and compensatory interest were issued, with the payment deadline of 10-08-2016;

  • On 12-06-2016 the Claimant provided a guarantee for the suspension of the Tax Execution Process;

  • On 8-11-2016, the Claimant deduced the request for constitution of the Arbitral Tribunal that gave rise to the present proceedings (cf. electronic request to CAAD).

2. Facts Not Proven

No facts with relevance to the appreciation of the matter were found that were not proven.

3. Motivation

Regarding the factual matter, the Tribunal does not have to pronounce on everything that was alleged by the parties, falling to it instead the duty to select the facts that matter for the decision and to discriminate the proven matter from the unproven (cf. art. 123, no. 2, of the CPPT and article 607, no. 3 of the CPC, applicable ex vi article 29, no. 1, subsections a) and e), of the RJAT).

In this manner, the facts pertinent to the judgment of the case are chosen and delineated in function of their legal relevance, which is established in attention to the various plausible solutions of the question(s) of Law (cf. former article 511, no. 1, of the CPC, corresponding to current article 596, applicable ex vi article 29, no. 1, subsection e), of the RJAT).

Thus, taking into consideration the positions assumed by the parties, in light of article 110, no. 7 of the CPPT, the documentary evidence, witness testimony and PA attached to the record, it was considered proven, with relevance to the decision, the facts enumerated above.

4. Legal Grounds

Fixed the relevant facts, it is necessary to delimit the object of the request in the present arbitral proceedings.

As results from the RIT, the corrections in the context of VAT, made by the AT in the total amount of €29,203.73, plus compensatory interest, relate to improper VAT deduction because relating to operations outside the concept of economic activity (in accordance with article 20, no. 1 subsection a) of the VAT Code), subdividing into two categories:

  • The correction of €10,168.18 relating to period 1301, relating to services acquired by the Claimant from the French law firm B…, and subsequently re-debited to the subsidiaries of the Claimant C… and D… in France, the reverse charge mechanism having been applied and integral deduction of the self-assessed VAT;

  • The correction of €19,035.55 relating to period 1312, relating to the deduction of VAT, by the pro rata method (of 22.47%), in an invoice issued by the Claimant to F…, plus a margin in relation to the amount of costs borne with the suppliers, as consideration for the services provided within the scope of the process of negotiation and alienation of the social participation that F… held in company E…;

Thus, the question to be decided in the present proceedings passes through assessing whether the VAT relating to the operations above identified is capable of deduction in the sphere of the Claimant, taking into consideration the rules that govern this tax in accordance with European Union Law, with the respective transposition at the domestic level and with the administrative and judicial interpretation that has been conducted on the same, especially by the Court of Justice of the European Union (CJEU).

Considering the argumentation developed by the AT, to the effect that the operations above identified would be outside the concept of economic activity for VAT purposes because related to services in support of the alienation of social participations, it is important to make some preliminary considerations regarding the nature and scope of the right to deduction, the concept of economic activity and its relationship with the exercise of that right so that one can respond to the question of whether there was violation of law in the additional VAT assessments made by the AT.

For this purpose, and given the evident similarity of the thema decidendum, the Arbitral Tribunal will follow closely the argumentation developed in arbitral proceedings no. 278/2016-T, which it subscribes to, insofar as applicable to the present case.

4.1 The Right to Deduction

As is well known, VAT is an indirect tax of community origin, multiphase, which tends to reach every act of consumption.

The right to deduction is an essential element of the functioning of the tax, and must guarantee its principal characteristic – neutrality. In reality, the right to deduction is embodied as the essential element of the functioning of the tax, the cornerstone of the system of the value added tax, based on the so-called deduction method of the tax, method of tax credit, indirect subtractive method or further method of invoices. In accordance with this method, and in conformity with the provisions of article 19 of the VAT Code, through an arithmetic operation of subtraction, from the tax calculated on sales and services (outputs) and identifiable in the respective invoices, is deducted the tax borne in purchases and other expenses (inputs). As determines the 2nd paragraph of no. 2 of article 1 of the VAT Directive (VATA), "In each operation, the VAT, calculated on the price of the good or service, is due, with prior deduction of the amount of tax that has incurred directly on the cost of the various elements constituting the price.";

The mechanism of exercise of the right to deduction permits the taxable person to expunge from its burden the VAT borne upstream, not thus reflecting it as an operational cost of its activity, removing, in this manner, the cumulative or cascade effect, providing the economic neutrality of the tax. In conformity with what is foreseen in the VATA, the VAT Code determines, as a general rule, the deductibility of the tax owed or paid by the taxable person in acquisitions of goods and services made from other taxable persons. The express situations of exclusion from the right to deduction are exceptional and report to specific cases enunciated by the national legislator in taxative terms, in accordance with what is provided for in the VATA, in function of the type of expenses in question[2]. In conformity with the provisions of article 168 of the VATA, transposed in part by subsection a) no.1 of article 20 of the VAT Code, the taxable person can deduct the VAT borne in the Member State in which it is established in transmissions of goods and provisions of services, as well as in assimilated operations in intra-community acquisitions of goods and in imports located there, "When the goods and services are used for the purposes of its taxed operations (…)". This norm, in conformity with the rules of European Union Law, thus requires that there exist a nexus of causality between the good or service acquired (input) and the output taxed, so that the VAT be capable of being deductible. That is, the VAT borne upstream in a given operation is only deductible to the extent that it can be related downstream with an operation actually taxed, the relationship having to be assessed in function of the reporting and inclusion of the cost borne in the price of the taxed operation. In this context, the CJEU, in the BLP Case[3], concluded that goods or services upstream must present a direct and immediate relationship with one or diverse operations subject to tax downstream, being that the right to deduction of VAT presupposes that the expenses in question must constitute an integral part of the constitutive elements of the price of the taxed operations. However, the density of this relationship can be different depending on the quality of the taxable person and the nature of the operations effected and these variables can also have repercussions on the burden of proof of the existence of the relationship, which falls on the operator interested in the deduction. Thus, in accordance with the case law of the CJEU, whenever a taxable person exercises economic activities destined to realize exclusively taxable operations, it is not necessary, so that one can deduct in full the tax, to establish, for each upstream operation, the existence of a direct and immediate relationship with the specific taxed operation[4]. What the legislator only requires is that the goods and services be used or capable of being "for the purposes of the proper taxable operations." It is not necessary the existence of a relationship with a specific taxable operation, it being sufficient that there exist a relationship with the activity of the company. One should assess whether the upstream operation subject to VAT presents a direct and immediate relationship with one or more operations that confer the right to deduction, presupposing the reporting of its cost in the price of the operations. Should this not occur, it is then necessary to analyze whether the expenses realized for the acquisition of the goods or services upstream are part of the general expenses linked to the entirety of the economic activity of the taxable person, presupposing the incorporation of its cost in the prices of the goods or services supplied by the taxable person within the scope of its economic activities.

As notes the CJEU, the principle of neutrality of VAT, in what concerns the fiscal burden of the company, requires that the investment expenses made for the needs and for the objectives of a company be considered economic activities conferring an immediate right to deduction of VAT[5].

It is also important to note that, in conformity with the case law of the CJEU, the principle of neutrality of VAT requires that the deduction of the tax paid upstream be granted should the substantive requirements have been fulfilled, even if taxable persons have neglected certain formal requirements. In this context, in accordance with the CJEU, insofar as the Tax Administration has the necessary data to determine that the taxable person, as recipient of the operations, is debtor of VAT, it cannot impose, regarding its right to deduction, additional conditions that could have the effect of making the absolute exercise of that right unfeasible[6]. In summary, from the case law of the CJEU it results clearly that the exercise of the right to deduction of VAT is a fundamental right, which cannot be limited save in the cases expressly permitted by the norms of European Union Law or by the general principles of law accepted in this domain, such as the principle of abuse of rights.

4.2 The Concept of Economic Activity and Its Relationship with the Right to Deduction Relating to the Acquisition and Alienation of Social Participations

Notwithstanding being before an indirect tax on consumption, endowed with a very broad scope of application, a fact which stems immediately from the residual concept of provision of services foreseen in no. 1 of article 4 of the VAT Code, such as the CJEU has come to refer, only activities that have economic character when practiced by a taxable person are covered by that provision.

With effect, attending to the principle of neutrality that informs the common system of VAT, a person should only bear VAT if it has incurred on the goods and services that it used for private consumption and not for its taxable professional activities. It is not possible to deduct the VAT borne upstream should this relate to the activity of the taxable person that does not carry the nature of economic activity in the meaning of the VATA.

Regarding the management of social participations, the CJEU has come to embrace an increasingly broad interpretation, being that the establishment of a causal nexus between the deductible VAT and a given operation, individualized and concretized, cannot be embraced. In accordance with the case law of the CJEU, "it is equally admitted a right to deduction in favor of the taxable person, even in the absence of a direct and immediate nexus between a given upstream operation and one or more downstream operations with right to deduction, when the costs of the services in question form part of its general expenses and are, as such, constitutive elements of the price of the goods that it provides or of the services that it renders. These costs have, in effect, a direct and immediate nexus with the entirety of the economic activity of the taxable person"[7].

However, it is imperative that there exist a relationship with the economic activity of the taxable person, the need for its unequivocal demonstration remaining. As was noted in the Cibo Case[8], "1) The interference of a holding in the management of the companies in which it took participations constitutes an economic activity within the meaning of article 4, no. 2, of Sixth Directive 77/388/EEC of the Council, of 17 May 1977, relating to the harmonization of the legislations of the Member States regarding taxes on turnover - Common system of value added tax: uniform taxable matter, to the extent that it implies the realization of transactions subject to value added tax under article 2 of that directive, such as the supply, by the holding to its subsidiaries, of administrative, financial, commercial and technical services. 2) The expenses incurred by a holding with the various services that it acquired within the scope of a taking of participation in a subsidiary form part of its general expenses, whereby they have, in principle, a direct and immediate nexus with the entirety of its economic activity. Therefore, if the holding effects both operations with right to deduction as well as operations without right to deduction, it follows from article 17, no. 5, first paragraph, of Sixth Directive 77/388 that only the part of the value added tax proportional to the amount relating to the first category of operations can be deducted." (cf. §§ 1 to 3 of the conclusions);

Just as emphasizes the CJEU in the I/S Fini y Skatteministeriet Case[9], the concept of taxable person is always tied to that of economic activity, being precisely this economic activity that justifies the qualification of the taxable person with the right to deduct. Now, if the exercise, in an independent manner, of an economic activity is, by itself, a condition of subjective incidence of this tax, thus from the possibility of conferring right to deduction and if the right to deduction is, as we have seen, the guarantor of the neutrality of the tax, the delimitation of that concept should necessarily be the broadest possible.

As is foreseen in article 9, no. 1, 2nd paragraph, 2nd part, of the VATA, in the definition of VAT taxable person "(...) It is in special considered economic activity the exploitation of a corporeal or incorporeal good with the aim of obtaining revenues with permanent character (...)." Now, it is at the level of the management of social participations that there has been much discussion concerning the determination of the scope of this concept, being especially relevant in this context the conclusions of the EDM Case[10]. As notes the Advocate General Philipe Léger in his conclusions in this Case[11], "(...) it is settled case law that the simple exercise of the right of property by its holder cannot, by itself, be considered an economic activity". Already before in the Polystar Case[12], concerning a pure holding, the CJEU had concluded that the mere acquisition and holding of social participations, without intervention in the management of other companies, should not be considered an economic activity, within the meaning of the Sixth Directive, not conferring on its author the status of taxable person. In the conclusions of the EDM Case[13] the CJEU further states that the simple sale of shares and other negotiable securities, such as participations in investment funds, as well as the income inherent to these funds, do not constitute an "economic activity" within the meaning of the Sixth Directive, whereby they are not covered by the scope of its application. In conformity with this ruling, the simple taking of a financial participation in another company does not constitute an exploitation of a good with the aim of obtaining revenues with permanent character, to the extent that the eventual dividend, fruit of such participation, results from the simple ownership of the good and not from consideration for any economic activity[14]. In the same logic, the transfer of the referred participations also does not meet the concept of economic activity, as is referred to in the Satam/Sofitam Case[15]. Being not consideration for an economic activity, in the meaning of the Sixth Directive, the receipt of dividends does not enter the field of application of VAT, nor can be qualified as a consideration for eventual services provided by the SGPS to its subsidiary, which consummate in an intervention in its management (eg. support services for technical management).

It is important to emphasize in particular that in the Floridienne and Berginvest Case[16], which has underlying a holding company, the CJEU states that should be considered as economic activity the intervention in the management of the subsidiaries, to the extent that it implies transactions subject to VAT, such as the supply of administrative, accounting and computer services. That is, it is important in special to highlight that the CJEU, regarding the acquisition of financial participations, has already decided that the situation is different, fitting within the scope of the exercise of an economic activity, in the case where the acquisition of a financial participation in a company is accompanied by "(...) direct or indirect interference in the management of the companies (...)" [17] in which occurred the taking of participation, without prejudice to the rights that the holder of the participation has in the capacity of shareholder or member[18], to the extent that such interference implies the realization of transactions subject to VAT in accordance with the VATA, such as the supply of administrative, accounting and computer services. The CJEU distinguishes, in this measure, the holdings that interfere, directly or indirectly, in the management of the subsidiaries, from those that do not do so.

As to the treatment to be granted to the management (acquisition, holding and alienation) of social participations beyond the case of holdings, in the context of the participations of a parent company in subsidiaries or associates, it follows from the case law of the CJEU that the operations relating to shares or participations in companies are covered by the scope of application of VAT when effected in the context of a commercial activity of negotiation of securities or when they constitute the direct, permanent and necessary prolongation of the taxable activity[19].

Being the acquisition of social participations a passive operation, to assess the deductibility of VAT relating to expenses associated we will necessarily have to analyze to what extent that participation is held and what are the downstream operations that resulted from those expenses – will or will not such operations be economic activities subject and not exempt from VAT.

As refers Rui Bastos, "Thus, the acquisition of participations in a pure investment perspective, having in view the obtaining of revenues such as dividends, remits its holding to outside the concept of economic activity, being that acquisition in a context of commercialization of securities would remit to the exercise of an activity subject, although exempt. The same should not occur in a context of acquisition of a participation that represents the natural and necessary prolongation of the commercial or industrial activity of the acquiring company, in a context of business restructuring or in a process of expansion, opting for the acquisition of a subsidiary, to the detriment of the constitution of a permanent establishment, the same not occurring in a context of intervention in the management of the subsidiaries and, concomitantly, in activities taxed by them exercised."[20]

With particular relevance to the case at hand, refers the CJEU in the SKF case, invoking the principle of equality of treatment and fiscal neutrality, that the economic nature of the takings of participations accompanied with the interference by the parent company in the management of the subsidiaries should be extended to situations of transmission of participations that put an end to that interference (underlined by us). Within the framework of the transmission of shares, considers the CJEU that the right to deduction of VAT paid upstream on services destined to effect a transmission of shares is conferred, by virtue of article 168 of the VATA, should there exist a direct and immediate relationship between the expenses related to the upstream services and the entirety of the economic activities (taxed) of the taxable person, the so-called "general expenses"[21]. In that proceeding, the transmission of shares in question, carried out with a view to the restructuring of a group of companies by the parent company, was considered an operation of obtaining revenues with permanent character from activities that exceed the framework of the simple sale of shares. This operation presented a direct nexus with the organization of the industrial activity exercised by the group and constitutes thus the direct, permanent and necessary prolongation of the taxable activity of the taxable person, whereby that operation of sale of shares would be covered by the scope of application of VAT, capable of conferring the right to deduction of VAT of the respective inputs. The CJEU considers that these services have a direct and immediate relationship with the entirety of the economic activity of the taxable person, permitting the right to deduction of the entirety of the VAT of the said services.

It was debated whether the inputs associated with the alienation of social participations could be capable of permitting the deduction of VAT, by way of their qualification as general expenses of the activity, in the case where that alienation is not subject to VAT, a more frequent situation, as we have seen, in holdings, or then, be subject but exempt, as happens with the parent company that manages a group of companies. In the case of non-subjection, the Advocate General, basing itself on the conclusions of the Krettztechnik Case (no. 36), considers this type of expenses capable of being qualified as general expenses, possessing therefore a direct and immediate relationship with the entirety of the economic activity of the taxable person, enabling its deduction. On the contrary, in the case where the alienation of social participations is qualified as exempt from VAT, such as occurred in the SKF Case, the Advocate General, basing itself on the conclusions of the BLP Group Case, considered that the VAT paid upstream of the services acquired possesses a direct and immediate relationship with the exempt operation, interrupting thus the chain of VAT.

Now the CJEU, in the SKF Case, comes to place the accent on the fact of knowing whether the company that is a VAT taxable person is or is not involved in the management of the companies in which occurred the taking of participation, companies these that develop taxed activities (underlined by us). In this sense, considered the Court that to refuse the right to deduction of VAT paid upstream for consultancy expenses linked to an exempt transmission of shares by reason of the involvement in the management of the company whose shares are transferred and to admit this right to deduction for such expenses linked to a transmission that is situated outside the scope of application of VAT because they constitute general expenses of the taxable person would lead to a different fiscal treatment of objectively similar operations, in violation of the principle of fiscal neutrality.

As to the deduction of VAT, the CJEU has already concluded in the Kretztechnik Case[22] that in an issuance of shares (despite being, by itself, an operation that is not covered by the scope of application of VAT, given not being qualified as transmission of goods or provision of services) effected in a context of reinforcement of capital for the benefit of the general economic activity of a company, it is considered that the costs of the services acquired[23] by a company form part of its general expenses and are, as such, constitutive elements of the

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Frequently Asked Questions

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Can an SGPS holding company deduct input VAT on services acquired on behalf of its subsidiaries under Portuguese tax law?
Under Portuguese VAT law, an SGPS can deduct input VAT on services acquired on behalf of subsidiaries if it exercises economic activity and the services have direct allocation to taxable downstream operations. Article 20(1)(b)(II) of CIVA permits deduction when services are re-billed to subsidiaries as taxable supplies. The key distinction is whether the SGPS operates as a strategic holding providing management services (economic activity) or merely holds passive investments (non-economic activity). Where services are acquired specifically for subsidiaries and re-invoiced, establishing clear real allocation, the corresponding upstream VAT is fully deductible.
How does the reverse charge mechanism apply to cross-border services between an SGPS and its French subsidiaries?
The reverse charge mechanism under Article 6(6)(a) and Article 19(1)(c) CIVA requires Portuguese recipients of services from non-resident providers to self-assess VAT. Simultaneously, Article 20(1)(a) CIVA grants the right to deduct this self-assessed VAT in the same period. For cross-border services between an SGPS and French subsidiaries, the Portuguese holding self-assesses VAT on acquisition, deducts it immediately, then re-bills the service to the foreign subsidiary without Portuguese VAT (as it becomes subject to VAT in the destination country). This mechanism ensures neutrality, avoiding definitive VAT burden on business-to-business transactions.
What does Article 20 of the Portuguese VAT Code (CIVA) establish regarding the right to deduct VAT for holding companies?
Article 20 of the Portuguese VAT Code establishes that taxable persons have the right to deduct input VAT on goods and services used for their taxable transactions. For holding companies, Article 20(1)(a) covers VAT on operations within their economic activity, while Article 20(1)(b)(II) specifically addresses situations where costs can be directly allocated to taxable operations. The critical issue for SGPS companies is whether their activities constitute 'economic activity' under VAT law. If the holding merely acquires and holds passive investments for dividends, this typically falls outside economic activity. However, if the SGPS actively manages subsidiaries, provides services, and engages in strategic control, it may qualify for VAT deduction rights.
What are the grounds for challenging additional VAT assessments issued by the Portuguese Tax Authority (AT) before CAAD arbitration?
Grounds for challenging additional VAT assessments at CAAD include: (i) illegality due to incorrect interpretation or application of tax law (Article 99(a) CPPT); (ii) error in factual premises or erroneous legal-tax classification; (iii) violation of fundamental VAT principles, particularly the neutrality principle; (iv) improper denial of deduction rights under Article 20 CIVA; (v) incorrect application of the reverse charge mechanism; and (vi) mischaracterization of the taxpayer's economic activity. The arbitration procedure is governed by RJAT (Decree-Law 10/2011), allowing taxpayers to seek annulment of assessments and compensatory interest charges through an independent arbitral tribunal rather than traditional court litigation.
How does re-billing of services to foreign subsidiaries affect VAT deduction rights for Portuguese SGPS companies?
Re-billing services to foreign subsidiaries significantly affects VAT deduction rights for Portuguese SGPS companies by establishing direct allocation of costs to taxable operations. When an SGPS acquires services from third parties on behalf of subsidiaries and subsequently re-invoices them, this creates a chain of taxable supplies. The re-billing itself constitutes a provision of services under Article 4 CIVA, which if taxable and not subject to incomplete exemption under Article 9 CIVA, supports full deduction of the corresponding upstream VAT under Article 20(1)(b)(II) and Article 23(1)(a) CIVA. The crucial element is demonstrating clear real allocation between the upstream acquisition and the downstream re-billing, ensuring the costs relate to taxable rather than exempt activities.