VAT Exemption Waiver for Dental Services: CAAD Arbitral Tribunal Decision 681/2016-T

ARBITRAL AWARD

The arbitrators Fernanda Maçãs (President arbitrator), Mariana Gouveia de Oliveira and Filomena Salgado Oliveira (arbitrators), appointed by the Deontological Council of the Centre for Administrative Arbitration to form the Arbitral Tribunal, constituted on 01-07-2016, decide as follows:

REPORT

A…, LDA., legal entity no. …, with registered office at …, no. …, …-… Porto (hereinafter simply "A…" or "Claimant"), integrated in the Tax Service of Porto - …, hereby, pursuant to the provisions of paragraph a) of article 2(1) and articles 10 et seq. of Decree-Law no. 10/2011, of 20 January, in conjunction with paragraph a) of article 99 and paragraph d) of article 102(1), both of the Tax Procedure and Process Code — by force of paragraph a) of article 100(1) of the aforementioned Decree-Law —, submits a request for constitution of a collective arbitral tribunal and for an arbitral pronouncement, with the Tax and Customs Authority (AT) as the Respondent.

The request for constitution of the arbitral tribunal was submitted on 16-11-2016 by the Claimant pursuant to the combined provisions of articles 2 and 10 of Decree-Law no. 10/2011, of 20 January (Legal Framework for Arbitration in Tax Matters), the Claimant not having appointed an arbitrator.

The request for constitution of the arbitral tribunal was accepted by the Esteemed President of the CAAD and automatically notified to the Tax and Customs Authority on 02-12-2016.

Pursuant to the provisions of paragraph a) of article 6(2) and paragraph b) of article 11(1) of the Legal Framework for Arbitration in Tax Matters, as amended by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council appointed the arbitrators of the collective arbitral tribunal who communicated their acceptance of the appointment within the applicable deadline.

On 17-01-2016, the parties were duly notified of such appointment and did not express any intention to challenge the designation of the arbitrators, pursuant to the combined provisions of article 11(1), paragraphs a) and b) of the Legal Framework for Arbitration in Tax Matters and articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provisions of paragraph c) of article 11(1) of Decree-Law no. 10/2011, of 20 January, as amended by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was constituted on 01-02-2017.

The request for arbitral pronouncement is presented with a view, as the primary relief sought, to the revocation of the decision issued on 29 August 2016 by the Division of Administrative Justice and Contentious Matters of the Tax Office of Porto, which dismissed the objection filed by the Claimant, and consequently the annulment of the additional Value Added Tax (VAT) assessments for 2011, 2012, 2013 and the first quarter of 2014 in the amount of VAT assessed of Euro 114,869.19 and interest in the amount of Euro 12,945.92, amounts totalling Euro 127,815.11 as follows:

The Claimant bases its request on the following grounds:

The claimant is a limited liability company engaged in providing medical care in the specialty of Dental Medicine (CAE 86230 — Dental medicine and odontology activities), having begun its activity in 2010.

In the declaration of commencement of activity, the Claimant chose the Normal Quarterly Regime, with no express prior waiver of VAT exemption stated therein.

The Claimant considers that "… if we look at table 10 of the Declaration of changes in activity in force at the time of these events, particularly in its completion instructions, and in the AT's completion manual — which can be found on the tax authority portal at http://info.portaldasfinancas.gov.pt/NR/rdonlyres/982B3F68-04BD-4750-9384-9C45A6A0186B/0/MANUAL D ALTER.ACOES PF.pdf - we find that the indication of the VAT regime as 'normal quarterly' corresponds to a classification which, in the case of a company whose default VAT regime is exemption without right to deduction, expresses an option for waiver of VAT exemption.

Further stating that "Furthermore, given that there is no other table in said Declaration specifically intended for the option to waive exemption, this observation becomes absolutely evident."

Continuing, "In fact, the claimant has always had as its activity, as results from the Rationale, the practice of medicine, particularly dental medicine, corresponding to it the Activity Code (CAE) 86230 - Dental medicine and odontology activities — which includes activities carried out by dental physicians, odontologists and pediatric dentists, carried out in offices, clinics and similar premises, without hospitalization.

Such activity which, by its very nature, is exempt under article 9(2) of the VAT Code.

The Claimant states that as "it did not intend for the exemption that applied to its activity to deprive it of the ability to deduct VAT borne upstream, the claimant declared, notwithstanding that CAE, that it would carry out only 'operations that confer the right to deduction'.

Based on this information, the competent Tax Service classified it in the Normal Quarterly Regime (as opposed to the 'exemption regime' that would result from the activity actually carried out by the claimant and the corresponding CAE).

Following an external inspection carried out by the AT following a VAT refund request submitted by the Claimant, it was notified of the conclusion of an inspection procedure regarding VAT for the years 2011 and 2012 which gave rise to the VAT assessments and respective compensatory interest now in question.

The AT arrived at the decision to make corrections to the VAT deducted in the years under analysis (cf. article 1 supra) because the claimant was classified in the normal VAT regime - when, allegedly, it should have been inserted in the exemption regime — without prior waiver of exemption, the only possible means to achieve such deduction.

What the AT specifically argued was that the taxable person was not in an exemption situation covered by article 9(2) of the VAT Code, but rather by article 9(1) of the same provision, which does not permit any waiver of exemption.

That is: the taxable person could never exercise such faculty because, in the words of the AT, it only allows for waiver of exemption when this is founded on article 9(2), while the claimant's activity would only fall within the provision of article 9(1) of the same provision.

Now, as the Claimant cannot agree with the content of such grounds nor, consequently, with the correlative additional assessments, as it understands that they are illegal and unjust, suffering from error in fulfilling both the factual and legal presuppositions of the invoked taxable reality, it now sets forth the evident and irrefutable grounds that support its claim.".

The Claimant concludes by requesting the annulment of the contested assessments and condemning the Tax and Customs Authority to reimburse the amounts unduly paid, increased by the appropriate compensatory interest, pursuant to article 43 of the General Tax Law.

The AT submitted a procedural file and replied by raising the dilatory exception of incompetence of the arbitral tribunal, understanding that the matter at issue is the recognition of the right to waive the exemption provided for under article 9(2) of the VAT Code, as provided in article 12(1), paragraph b), both of the VAT Code.

Moreover, it requested that, even if this were not the case, and considering that there is no Community case law capable of direct application to the present proceedings, the case be referred to the CJEU, pursuant to article 267 of the TFEU, for the purpose of defining the scope of waiver of the said exemption regime.

As to the merits, the Respondent argues, among other things, that as the activity of Dental Medicine and Odontology is classified under article 9(1), there is no possibility of waiver under paragraph b) of article 12(1) of the VAT Code, because this is only applicable to taxable persons exempt under article 9(2) of the VAT Code.

On the other hand, the AT argues that "the option for taxation of the operations carried out by the Claimant would only be admissible if they were classified within the scope of article 9(2) of the VAT Code and the option was previously communicated, through the submission of a declaration of commencement of activity or of changes, as appropriate, taking effect always from the date of its submission" considering this to be "a formal condition stated by the legislator as an essential/fundamental requirement for the taxable person to be able to choose taxation of certain operations", sustaining such conclusion on the Award of the Southern Administrative Court of 21 May 2013, issued in case no. 05235/11.

The Claimant submitted a written response to the exception and to the request for a preliminary ruling.

By order of 14 March 2017, the meeting provided for in article 18 of the Legal Framework for Arbitration in Tax Matters was dispensed with and it was decided that the proceedings would continue with written arguments. Moreover, the deadline for issuing the award was set as 17 July 2017, which was extended by order of 12 July 2017, fixing 17 September 2017 as the deadline for issuing the award.

The parties waived submitting written arguments.

PRELIMINARY MATTERS

2.1. Standing and Capacity

The parties enjoy standing and capacity, are duly entitled and are represented (articles 4 and 10(2) of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

A…, Lda., legal entity no. …, was merged into B…, S.A., taxpayer no. …, with registered office at …, no. …, …, Offices … to … Porto. The effects of the merger by incorporation are dated 22.12.2016, as stated in the Certificate … /2016… of the commercial register. By virtue of the aforementioned merger by incorporation operation, B… assumed the status of Claimant in the present proceedings, as it became the holder of all rights and duties of the merged company, particularly before the Tax and Customs Authority.

With respect to the value of the case, it is noted that in the initial request the Claimant indicates the amount of Euro 127,781.48. As the Respondent entity itself points out, presumably through oversight, the amount indicated does not correspond to the total value of the additional VAT assessments subject to challenge and identified in point I of the Report. That value corresponds to the amount of Euro 127,815.11.

The value of the case is hereby fixed ex officio at Euro 127,815.11, in accordance with the provisions of article 97-A of the Tax Procedure and Process Code, applicable by force of article 29(1), paragraph a), of the Legal Framework for Arbitration in Tax Matters and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings.

The case is not vitiated by any nullities.

2.2. Material Competence Exception

As noted, the AT raised the exception of material incompetence because the matter at issue is the recognition of a right in tax matters, which must be assessed as a matter of priority.

The exception of incompetence is of priority jurisdiction, as results from the provisions of article 13 of the Code of Administrative Court Procedure, applicable to tax arbitral proceedings by force of the provisions of article 29(1), paragraph c), of the Legal Framework for Arbitration in Tax Matters.

The AT defends the incompetence of the Arbitral Tribunal to assess the request for arbitral pronouncement on the ground that the central question to be assessed concerns the recognition of the right to waive exemption on the part of the Claimant. Defending its thesis on the fact that in the present case, the acts of additional VAT assessment should be qualified as consequential acts taking into account the concept, albeit restricted, adopted both by doctrine and by case law. To that effect, it considers that only those acts that were produced, or endowed with certain content, by reason of the existence of earlier supposedly valid acts that serve as their cause, basis or presupposition should be qualified as consequential acts.

Considering thus that in the present case, the acts of additional VAT assessment, pending assessment in this arbitral instance, are in a relationship of dependence on the recognition or non-recognition of the Claimant's right to waive VAT exemption, under article 12(1), paragraph b), of the VAT Code.

The Claimant submitted a Response to the AT, where it rebuts the arguments presented by the AT based on case law already established by the Arbitral Tribunal itself.

In fact, this same exception question has already been assessed in previous proceedings, particularly in the Awards issued in Cases no. 168/2005-T, no. 782/2015-T and no. 789/2015-T.

It is established case law in the said Awards that Ordinance no. 112-A/2011, concerning acts falling within the scope indicated in article 2, merely excluded from the scope of the binding of the Tax Administration, in non-customs matters, claims relating to self-assessment, withholding and payment on account acts that were not preceded by recourse to the administrative remedy and claims relating to acts determining collectible matter and acts determining taxable matter, both by indirect methods, including the decision of the review procedure.

Since none of the situations in which Ordinance no. 112-A/2011 removes the jurisdiction of arbitral tribunals functioning at the CAAD are present, jurisdiction must be assessed solely in light of the Legal Framework for Arbitration in Tax Matters.

The jurisdiction of arbitral tribunals functioning at the CAAD is defined, in the first instance, by article 2(1) of the Legal Framework for Arbitration in Tax Matters, which establishes the following:

1 - The jurisdiction of arbitral tribunals comprises the assessment of the following claims:

a) The declaration of illegality of acts assessing taxes, self-assessments, withholdings and payments on account;

b) The declaration of illegality of acts fixing the taxable matter when they do not give rise to the assessment of any tax, of acts determining the collectible matter and of acts fixing patrimonial values.

In the second instance, the jurisdiction of arbitral tribunals functioning at the CAAD is limited by the binding of the Tax and Customs Authority which, pursuant to article 4(1) of the Legal Framework for Arbitration in Tax Matters, was defined by Ordinance no. 112-A/2011, of 12 March, which establishes the following, insofar as relevant here:

The services and organisms referred to in the preceding article bind themselves to the jurisdiction of arbitral tribunals functioning at the CAAD having as object the assessment of claims relating to taxes whose administration is entrusted to them referred to in article 2(1) of Decree-Law no. 10/2011, of 20 January, with the exception of the following:

a) Claims relating to the declaration of illegality of self-assessment, withholding and payment on account acts that were not preceded by recourse to the administrative remedy pursuant to articles 131 to 133 of the Tax Procedure and Process Code;

b) Claims relating to acts determining the collectible matter and acts determining the taxable matter, both by indirect methods, including the decision of the review procedure;

c) Claims relating to customs duties on imports and other indirect taxes affecting goods subject to import duties; and

d) Claims relating to tariff classification, origin and customs value of goods and tariff contingents, or whose resolution depends on laboratory analysis or proceedings to be carried out by another Member State within the framework of administrative cooperation in customs matters.

On the other hand, the Award relating to case no. 186/2015-T also states:

"As can be seen from article 2 of the Legal Framework for Arbitration in Tax Matters, the jurisdiction of arbitral tribunals functioning at the CAAD was defined by such framework solely taking into account the type of acts that are the object of claims by taxpayers and not as a function of the type of questions that need to be assessed to decide whether the acts are legal or illegal.

There is, in particular, no prohibition on assessment of matters relating to verification of the prerequisites of the right to waive VAT exemption or any other questions of legality relating to the acts of the types referred to in article 2 of the Legal Framework for Arbitration in Tax Matters. A tax assessment that proceeds from disregarding an exemption or a waiver of exemption ceases not to be a tax assessment act. And the claim for assessment of the legality or illegality of such disregard underlying a tax assessment act remains, therefore, the assessment of a claim relating to the declaration of illegality of tax assessment acts, in which such disregard is materialized.

Thus, in arbitral proceedings, similarly to what occurs in judicial challenge proceedings, in principle, any illegality may be imputed to tax assessment acts, as follows from article 99 of the Tax Procedure and Process Code, subsidiarily applicable. This will not be the case only where the law provides for autonomous challengeability of administrative acts that are prerequisites of the tax assessment acts, and only to that extent is the assessment of the legality of the tax assessment acts in all aspects ruled out.

But, for such autonomous challengeability to exist, there must be some administrative act in tax matters, as challengeability relates to acts and not to legal positions assumed explicitly or implicitly as prerequisites of the tax assessment acts, but not materialized in autonomous tax acts.

The consequential acts of which the Tax and Customs Authority speaks are consequential to other earlier tax or administrative acts and, in the case at hand, there is no record of any administrative act having been performed assessing whether the Claimant has or does not have the right to waive VAT exemption.

That is, for there to be a limitation on the challengeability of the tax assessment acts being challenged, some administrative act that was a prerequisite of these tax assessment acts would have had to be performed earlier, which did not occur in the case at hand.

Therefore, as the tax assessment acts are injurious to the interests of the Claimant and are the only acts performed by the Tax Administration regarding the situation assessed in them, their contentious challengeability must be ensured on the basis of any illegality, as follows from the principle of effective judicial protection, enshrined in articles 20(1) and 268(4) of the Portuguese Constitution.

Moreover, where there is no autonomously challengeable act prior to a tax assessment act concerning its prerequisites, any illegality previously committed may 'be invoked in the challenge of the final decision' (final part of article 54 of the Tax Procedure and Process Code), whereby all questions relating to the legality of the tax assessment acts may be assessed in tax courts in judicial challenge proceedings, as follows from paragraph a) of article 97(1) and article 99 of the same Code.

In fact, in tax courts, even when, having been performed tax assessment acts, one is dealing with a situation where it might be more useful for the taxpayer to use the action for recognition of a right or legitimate interest (by enabling, in addition to the assessment of the legality of acts, the definition for the future of the taxpayer's rights), the use of the action instead of judicial challenge is a mere option, as follows from the text of article 145(3) of the Tax Procedure and Process Code itself, in saying that 'actions may only be proposed whenever such procedural means is the most adequate to ensure full, effective and efficient protection of the right or legally protected interest'.

That is, what is provided in this rule is a limitation on the use of the action and not a limitation on the use of the judicial challenge process.

Indeed, it is manifest that the judicial challenge process includes the possibility of recognition of rights in tax matters, such as the right to annulment or declaration of nullity of assessments, the right to compensatory interest and the right to compensation for unjust guarantees, so that the fact that recognition of rights is at issue is no obstacle to the use of the judicial challenge process.

Thus, as the Tax and Customs Authority states, given that the tax arbitral process was created as an alternative to the judicial challenge process, it may be concluded that there is no obstacle to the legality of the tax assessment acts at issue in this process being assessed by this Arbitral Tribunal, because in tax courts such legality could be assessed in judicial challenge proceedings.

Therefore, as to the request for annulment of the tax assessment acts, the exception of material incompetence raised by the Tax and Customs Authority on the ground that recognition of a right in tax matters is at issue does not prosper."

Finding no reason to depart from the learned arguments in the awards just cited, with which we agree entirely, both in reasoning and in conclusion, the exception of material incompetence raised by the Respondent does not prosper.

FACTUAL MATTERS

3.1. Proven Facts

• The Claimant was established in June 2010, in the legal form of a limited liability company;

• The Claimant carries out the activity of providing medical care in the specialty of Dental Medicine (CAE 86230 — Dental medicine and odontology activities);

• The now Claimant had as its activity, at the date of the facts under analysis, the provision of Dental Medicine and Odontology services in an establishment open to the public, including the carrying out of medical consultations and a whole set of treatment and/or surgical acts within the scope of dental medicine, as well as complementary diagnostic examinations, such as radiographs;

• In the declaration of commencement of activity, in the context of VAT, and since the beginning of its activity, on 1 June 2010, the Claimant was classified in the Normal taxation Regime, with Quarterly frequency;

• The tax classification of the Claimant in the context of VAT resulted from the Declaration of Commencement of Activity which was made by verbal declaration, called "front-office", at the Tax Service of Porto-…, on 14 June 2010;

• In the said verbal declaration the Claimant's activity was duly indicated;

• In the Declaration of Commencement of Activity, regarding the type of operations, neither the exemption provided for in article 9 of the VAT Code nor the waiver of exemption provided for in article 12 of the same Code was expressly indicated;

• As a result of the classification indicated in the Declaration of Commencement of Activity, the Claimant assessed VAT on all operations carried out within the scope of the activities developed, having also proceeded to deduct the tax borne in accordance with the provisions for taxable persons classified in the normal quarterly regime;

• The external tax inspection of the Claimant, of general scope, covered the fiscal years 2011 and 2012 and was based on the Service Order no. OI2014…, issued on 12 March 2014 by the Tax Office of Porto. By order of 24 March 2015 from the Head of the … Division of the Tax Office of Porto, the deadline of the inspection procedure for fiscal years 2011 and 2012 was extended by a further 3 months;

• The additional VAT assessments made by the AT originated from the correction of VAT deducted in the periods of 2011 and 2012, also covering fiscal year 2013 and the 1st quarter of 2014, together with the respective compensatory interest;

• The Claimant chose to proceed with full payment of the additional VAT assessments and respective interest within the voluntary payment period.

3.2. Unproven Facts

There are no facts relevant to the decision of the case that were not proven.

3.3. Rationale for the Determination of Factual Matters

The proven facts are based on the documents submitted with the request for arbitral pronouncement, on the administrative file, and on the position assumed by the parties and freely assessed by the Tribunal.

AS TO THE MERITS

4.1. Formalization of the Waiver of VAT Exemption

In the declaration of commencement of activity, in the context of VAT, and since the beginning of its activity, on 1 June 2010, the Claimant was classified in the Normal taxation Regime, with quarterly frequency.

The tax classification of the Claimant in the context of VAT resulted from the Declaration of Commencement of Activity which was made, on 14 June 2010, by verbal declaration, called "front-office", at the Tax Service of Porto-…, on 14 June 2010.

In the said verbal declaration, the Claimant's activity was duly indicated at the date of commencement of activity (1 June 2010), the Claimant being classified in the Normal Quarterly Regime, such classification presupposing the "prior" waiver of VAT exemption of article 9 of the VAT Code (CIVA), which lists exemptions on operations.

Additionally, it is apparent from the handwritten Declaration of Commencement of Activity (which is attached to the case and to the Printout of "Confirmation of Activity Data"), in which is inserted the seal of the Certified Public Accountant, that in Table 13 relating to "VAT – Option for Taxation Regime", the exercise of the right to choose the Normal VAT Regime is marked in accordance with article 12 of the CIVA (i.e. waiver of exemption), being presented in Table 11 relating to "Type of Operations" the field A marked – Transfers of goods and/or provision of services that confer the right to deduction.

The Claimant indicated to the said Tax Service that it carries out the activity of providing medical care in the specialty of Dental Medicine (CAE 86230 — Dental medicine and odontology activities).

In the wording in force at the time of the events, article 35 of the VAT Code stated the following:

Article 35

Submission of Declarations

1 - The declarations referred to in articles 31 to 33 are sent by electronic data transmission or submitted at any tax service or other legally authorized location, by verbal declaration made by the taxable person, of all elements necessary for registration and commencement of activity, alteration of data contained in that registration and cessation of activity, these being immediately entered into the computer system and confirmed by the declarant, after printing on a standardized form.

2 - The supporting document relating to the declarations mentioned in the preceding paragraph, submitted at tax services or other authorized locations, is delivered to the taxable person after authentication by the receiving official and affixing of the seal of the certified public accountant, if applicable, who assumes fiscal responsibility for the taxable person to whom the declarations relate.

3 - The declarations are informed within 30 days by the Directorate-General of Taxes, which pronounces on the declared elements and any others of interest for the assessment of the situation.

4 - In the event that the Directorate-General of Taxes disagrees with the declared elements, it fixes those it deems appropriate, notifying the taxable person accordingly.

The first question to be analyzed concerns the initial classification made in the Declaration of Commencement of Activity. According to the information in the case, the Claimant used one of the procedures provided for in article 35 of the VAT Code "by verbal declaration made by the taxable person, of all elements necessary for registration and commencement of activity".

Pursuant to that procedure, the data provided by the taxable person, now Claimant, would be "… immediately entered into the computer system and confirmed by the declarant, after printing on a standardized form".

Now, according to facts proven documentally in the present case, the Claimant was classified by the Tax Service of Vila Nova de Gaia … as exercising as sole activity "Medicine Activities", under CAE 86230.

In parallel, the same Tax Service of Vila Nova de Gaia … classified the Claimant in the Normal Quarterly Regime, i.e., as a taxable person fully subject and not exempt from VAT, which moreover is supported by information contained in the table relating to the type of operations, where it is stated that it only carries out operations that confer the right to deduction.

Whether this statement was made based on the verbal declaration of the Respondent or not - given that it seems to be in contradiction with the handwritten declaration attached to the case - the contradiction of its own terms is evident – on one hand, the sole activity carried out (CAE 86230) is exempt from VAT without right to deduction - whether under article 9(1) or article 9(2) - and on the other, the taxpayer is classified in the normal regime, with full right to deduction of VAT borne.

Now, it is very important and extremely relevant that, at the moment of presentation of the Declaration of Commencement of Activity, made by verbal declaration (front-office), there are no doubts whatsoever in the sphere of the taxable person regarding its tax classification, and the consequences arising from such classification, in particular in VAT matters, especially bearing in mind the principle of cooperation enshrined in article 59 of the General Tax Law.

On the other hand, it should be noted that the Tax Services of Vila Nova de Gaia … had at their disposal all the relevant elements for a correct classification of the Claimant's activity, as well as of its intention to choose the Normal Regime in VAT matters, having questioned nothing in that regard.

Moreover, pursuant to articles 3 and 4 of article 35 in the wording in force at the time, and also currently, the AT had to, within 30 days, inform the declarations pronouncing itself "on the declared elements and any others of interest for the assessment of the situation" and, in the event of "… disagreement with the declared elements" fix "those it deemed appropriate, notifying the taxable person accordingly".

Now, the AT did nothing in this regard, which leads us to conclude that it accepted the classification of the Claimant in the Normal Quarterly Regime, understanding the same as a manifestation of the option to waive VAT exemption, pursuant to article 12 of the respective Code, which was marked in Table 13 of the Handwritten Declaration.

While it is true that waiver of exemption is dependent on compliance with a formal requirement of effective exercise of such option and, even accepting that the formalization of this option did not follow all the formalities usually provided for, it is no less true that the Claimant manifested its intention to apply the Normal Quarterly Regime, which implicitly entails the option to waive exemption in its declaration of commencement of activity.

On this point, it is important to recall that article 12 of the CIVA provides only, in its paragraph 2, that the option for taxation must be exercised in the declaration of commencement of activity. Now, it seems to follow unequivocally from the classification of the taxable person contained in said declaration of commencement of activity that it sought to waive exemption having classified itself in the normal taxation regime, declaring to conduct operations subject that confer the right to deduction. The mere fact of not correctly marking the appropriate box on the form in question cannot override the substantial classification declared by the Claimant and accepted by the AT – i.e., that of full subjection to VAT.

This understanding is all the more relevant when it is certain that it was the AT that filled in the declaration of commencement of activity in the computer system, not having marked the option for the taxation regime indicated by the Claimant in the handwritten declaration, despite having accepted the declaration of exercise of a medical activity as a provision of services that confers the right to VAT deduction. Now, this procedure of the AT is capable of calling into question the duty of cooperation enshrined in article 59 of the General Tax Law, whereby the AT must provide the necessary assistance for compliance with the ancillary obligations of taxpayers.

On the other hand, if the AT understood that the option for the normal VAT taxation regime was not in consonance with the formal requirements imposed, it would necessarily have to, within 30 days, pursuant to article 35(3) of the VAT Code, pronounce itself on the declared elements, as well as on any others of interest for assessment of the situation.

To that end, it would also have to, pursuant to article 35(4) of the same article, notify the Claimant, if it disagreed with the declared elements, fixing those it deemed appropriate.

Now, in the absence of such procedure, the only conclusion that can be drawn is that the Tax Services did not detect any irregularity in the classification of the Claimant's activity in the Normal VAT Regime.

In those terms, the Claimant proceeded to assess VAT on all operations carried out within the scope of the activity developed – provision of Dental Medicine and Odontology services in an establishment open to the public, which consists in the carrying out of medical consultations and a whole set of treatment and/or surgical acts within the scope of dental medicine, as well as complementary diagnostic examinations – in full consonance with the classification contained in the Declaration of Commencement of Activity.

Similarly, the Claimant proceeded to deduct the tax it bore in accordance with the classification resulting therefrom.

Given the principles of prevalence of substance over form, proportionality, legal certainty and substantive justice, this Tribunal understands that the AT cannot prevail itself of a mere error in the completion of a form – frequently of difficult understanding – and in which it participated, to reclassify the taxable person in VAT matters, collecting not only the VAT charged to the Claimant's clients but also the VAT borne by it in the exercise of its activity.

Thus, we understand that the AT is not justified in this point, with the matter at hand being a mere error in the completion of the declaration of commencement of activity and not the omission of the exercise of the option for taxation under article 12 of the CIVA.

The Award of the CAAD issued in Case no. 782/2015-T, of 30 September 2016, pronounced in the same sense.

On this matter, it should also be noted that the situation described in the case is not equivalent to that analyzed in the Award of the Southern Administrative Court of 21 May 2013 cited by the AT.

In fact, in the Award of the Southern Administrative Court of 21 May 2013, issued in case no. 05235/11, the challenger conducted a set of diverse activities, some subject and not exempt from VAT and others exempt without right to deduction. As reported in the said judgment, the taxable person in question had marked fields 1 and 2 of table 11 of its declaration of commencement of activity, corresponding to "transfers of goods and/or provision of services that confer the right to deduction" and "transfers of goods and/or provision of services that are exempt and do not confer the right to deduction".

Now, this classification as a mixed taxable person (and likewise, the other facts described that are not relevant to the present case) led the learned Tribunal to consider that the challenger "assumed inadequate conduct incapable of enabling the conscientious assertion of having acted as a 'fully subject taxable person', during all the time comprised between January 2000 and June 2006, so that, immediately, the presupposition supporting the question intended to be submitted to the jurisdiction of the CJEU is not satisfied".

4.2. Classification of the Claimant's Activity and Possibility of Waiving VAT Exemption

The question to be decided was raised in cases no. 168/2015-T, of 18 September 2015, no. 303/2015-T, of 18 November 2015, no. 315/2015-T, of 27 November 2015, no. 788/2015-T, of 24 May 2016, no. 782/2015-T, of 30 September 2016 and no. 789/2015-T, of 19 July 2016, with the arbitral tribunals constituted at the CAAD having judged matters entirely identical to those of the present case, whose conclusions this Tribunal, agreeing with them, follows closely.

It thus falls to this Tribunal, with competence to that effect, to verify the legality of the additional VAT assessments and respective compensatory interest, now being challenged.

To that end, it is important to decide on the classification of the Claimant's activity, in VAT matters, and, in that way, to decide whether it is susceptible to being covered by article 9(1) or article 9(2) of the VAT Code and, consequently, whether it is capable of waiving exemption from the tax.

In this way, it is important to note, for what is relevant here, the provisions of articles 9 and 12 of the VAT Code.

In matters of exemption, in the matter under assessment, article 9 of the VAT Code states the following:

Article 9

Exemptions on Internal Operations

The following are exempt from the tax:

1. The provision of services carried out in the exercise of the professions of physician, dentist, midwife, nurse and other paramedical professions;

2. Medical and health services and operations closely related thereto carried out by hospital establishments, clinics, dispensaries and similar;

(…)

On the other hand, article 12 of the VAT Code regarding the waiver of exemption from VAT in health services states that:

Article 12

Waiver of Exemption

1 - May waive exemption, opting for the application of the tax to their operations:

a)(…);

b) Hospital establishments, clinics, dispensaries and similar, not belonging to public law legal entities or private institutions integrated into the national health system, which carry out medical and health services and operations closely related thereto;

(…)

2 - The right of option is exercised by submission, at any tax service or other legally authorized location, of the declaration of commencement or of changes, as appropriate, taking effect from the date of its submission.

These exemptions are connected with article 132 of Directive no. 2006/112/EC, of 28-11-2006, which establishes in particular the following:

Member States shall exempt the following operations:

(...)

b) Hospitalization and medical care, as well as operations closely related thereto, provided by public law organisms or, under conditions analogous to those applicable to the latter, by hospital establishments, medical care and diagnostic centers and other establishments of the same nature duly recognized;

c) The provision of care services carried out in the exercise of medical and paramedical professions, as defined by the Member State in question;

(…)

Pursuant to paragraph b) of article 12(1) of the CIVA, waiver of VAT exemption is permitted for "Hospital establishments, clinics, dispensaries and similar, not belonging to public law legal entities or private institutions integrated into the national health system, which carry out medical and health services and operations closely related thereto", with article 9(2) of the VAT Code providing for exemption of "medical and health services and operations closely related thereto carried out by hospital establishments, clinics, dispensaries and similar".

Thus, waiver of exemption from VAT is only possible if the activity carried out by the Claimant is that of "medical and health services and operations closely related thereto carried out by hospital establishments, clinics, dispensaries and similar" and provided that the Claimant qualifies under the concept of "hospital establishments, clinics, dispensaries and similar, not belonging to public law legal entities or private institutions integrated into the national health system, which carry out medical and health services and operations closely related thereto".

In the understanding of the AT, the fields of application of paragraphs b) and c) of article 132 of Directive no. 2006/112/EC correspond to the fields of application of articles 9(2) and 9(1), respectively, of the CIVA, and with that presupposition, following the case law of the CJEU on the field of application of the norm of paragraphs b) and c) of article 13-A(1) of the Sixth Directive [literally corresponding to paragraphs b) and c) of article 132 of Directive no. 2006/112/EC].

Moreover, understanding that:

"These paragraphs consecrate the totality of exemptions for medical services in the strict sense, exempting, as stated in the Award issued in case C-141/00 of 10 September 2002 (Kügler Award), 'Paragraph b) of this provision (…) all services provided in the hospital setting, whereas paragraph c) is intended to exempt medical services provided outside that setting, both in the patient's home or any other place'."

In this way, the AT concludes that as the Claimant's activity is "… dental medicine/odontology, as it is carried out by the latter as a private law entity. Therefore, we can only conclude that its activity indeed has legal place in the provisions of article 9(1) of the CIVA". Adding further that, "to understand that the claimant's activity does not fall under article 9(2) of the CIVA, that the 'activity carried out by the latter (in commercial establishments clinics – outside the hospital setting), cannot be inserted because of that, in the provisions of that norm".

In this way, it concludes that as the activity carried out is outside the hospital setting, the exemption under article 9(1) of the VAT Code should apply to it and, as such, the Claimant could not waive VAT exemption.

In our understanding and following the earlier Awards issued by the CAAD, already previously referred to, the understanding that the AT makes of the Kügler Award has been clarified by the CJEU in the L.u.P. Award (of 08-06-2006, issued in case no. C-106/05), subsequent to the Kügler Award.

Indeed, the CJEU clarified, in the said L.u.P. Award that:

"Article 13-A(1), paragraph b), of the Sixth Council Directive 77/388/EEC of 17 May 1977, (…) must be interpreted to mean that clinical analyses aimed at the observation and examination of patients for preventive purposes, which are carried out, as in the present case, by a private law laboratory external to a medical care establishment under the prescription of general practitioners, are capable of being covered by the exemption provided for in that provision as medical care provided by another".

In this L.u.P. award, the CJEU understood that:

"since clinical analyses are covered, taking into account their therapeutic purpose, by the concept of 'medical care' provided for in article 13-A(1), paragraph b), of the Sixth Directive, a laboratory such as that at issue in the main proceedings must be considered an establishment of 'the same nature' as 'hospital establishments' and 'medical care and diagnostic centers' within the meaning of that provision".

In support comes what is drawn from point 35 of the CJEU award De Fruytier, of 02-07-2015, issued in case no. C-334/14, in which the awards L.u.P., C‑106/05, points 18 and 35 and CopyGene, C‑262/08, point 60 are cited, "that a private law laboratory carrying out clinical analyses must be considered an establishment 'of the same nature' as the 'hospital establishments' and 'medical care and diagnostic centers' within the meaning of that provision, since those analyses are covered, taking into account their therapeutic purpose, by the concept of 'medical care'."

Thus, it is sufficiently clear in this matter the Community case law, to the effect that, as written in the decision of arbitral case 168/2015-T, cited above, that "the exemption provided for in paragraph b) of article 132 covers services provided by entities of the types that the Claimant provides, regardless of whether the provision occurs in a hospital setting or not, an interpretation that is in manifest harmony with the text of this rule, by making reference to the exemption of operations closely related to hospitalization and medical care provided by 'medical care and diagnostic centers'."

Therefore, it must be concluded that, in light of the CJEU case law, the exemption provided for in paragraph b) of article 132 covers the services provided by the Claimant of provision of medical care in the specialty of dental medicine and odontology, regardless of whether the provision occurs in a hospital setting or not.

In our understanding, this is the interpretation that is in manifest harmony with the text of this rule, by making reference to the exemption of operations closely related to hospitalization and medical care provided by "medical care and diagnostic centers".

With respect to the classification of the Claimant's activity within the scope of the CIVA, the position set out in the previous Awards is reiterated, as follows:

"With respect to article 9 of the CIVA, the text of its paragraph 2) also provides no explicit support for the thesis defended by the Tax and Customs Authority that only activity carried out in a hospital setting falls within it and, in particular, that the provision of clinical analysis and diagnostic services connected with hospital activities is outside its scope. In fact, in this paragraph 2) of article 9, reference is made, in addition to hospital establishments, also to 'clinics, dispensaries and similar'."

"The reference to 'dispensaries' unequivocally encompasses the provision of health services outside that hospital setting, since the meaning of 'dispensary' is 'a charitable establishment for the treatment of patients with economic difficulties, giving them access to free consultations and medicines', or 'an establishment to provide, free of charge, care and medicines to poor patients who can be treated at home'."

"On the other hand, the reference to 'similar', interpreted in consonance with the parallel rule of paragraph c) of article 132 of Directive no. 2006/112/EC, which makes reference to 'medical care and diagnostic centers and other establishments of the same nature', allows one to conclude that entities of the type of the Claimant, which provides health services for clinical analyses and diagnostics in connection with hospital establishments, should also fall within that concept. Thus, the thesis defended by the Tax and Customs Authority that the exemption applicable to establishments of the type of the Claimant is not provided for in article 9(2) of the CIVA has no textual support."

Thus, as the activity developed by the Claimant is covered by article 9(2) of the VAT Code, the thesis defended by the AT has no textual support, so it is concluded that the Claimant is legitimately entitled to opt for waiver of the exemption from the tax, pursuant to article 12 of the same Code.

In this way, the assessments made by the AT are vitiated by the defect of violation of law, by error as to the legal prerequisites.

The assessments of compensatory interest have as their basis the VAT assessments in which they are integrated (article 25(8) of the General Tax Law), so they are vitiated by the same defect.

In those terms, the Claimant's request should be judged to have merit and, as a consequence, the contested assessments should be annulled, including the respective compensatory interest.

4.3. Preliminary Ruling

The Respondent, in its response, requests that the case be referred to the CJEU, pursuant to article 267 of the TFEU, for the purpose of defining the scope of waiver of the said exemption regime.

To that end, it alleges that "As the acts of additional VAT assessment, pending assessment in this arbitral instance, are in a relationship of dependence on the recognition or non-recognition of the Claimant's right to waive VAT exemption (as stated above), and given that there is no Community case law capable of direct application to the present proceedings, it is requested that the case be referred to the CJEU, pursuant to article 267 of the TFEU, for the purpose of defining the scope of waiver of the said exemption regime".

This matter has also been the subject of decision in several CAAD Awards, which we follow, in particular those issued in Cases no. 303/2015-T, no. 315/2015-T, no. 782/2015-T and no. 789/2015-T.

As has been extensively evidenced, the recommendations to national judicial bodies relating to the presentation of preliminary ruling cases (2012/C 338/01 of the CJEU), in particular regarding the role of the Court of Justice in the context of the preliminary ruling procedure, state that "… consists in interpreting Union law or pronouncing on its validity, and not in applying this law to the factual situation underlying the main proceedings. This role is incumbent on the national judge and, therefore, it is not incumbent on the Court to pronounce on questions of fact raised in the context of the dispute in the main proceedings or on possible differences of opinion regarding the interpretation or application of national law rules."

Added to all this is the fact that the very matter on which the AT seeks clarification, in generic terms, is not a matter regulated directly by European Union law, but rather left to the discretion of the Member States, which are competent to define the terms and scope of application of any right to waive exemption. Thus, pursuant to article 267 of the TFEU, the Court of Justice of the European Union will not have competence to proceed with the interpretation of domestic rules on waiver of exemption.

The same applies to the actual interpretive doubts regarding the concrete content of articles 9(1) and 9(2) of the VAT Code.

Lastly, as there is European and national case law on the matter and the situation under analysis raises no real doubt as to the possibility of applying such case law to the concrete case, allowing not only to define the scope of the exemption provided for in the VAT Directive and in articles 9(1) and 9(2) of the VAT Code, but also the waiver of exemption provided for in article 12 of this Code, it falls to national judicial bodies to interpret the concrete content of the said provisions.

In those terms, this is not a situation that justifies a preliminary ruling, so the request presented by the Tax and Customs Authority is dismissed.

5. Compensatory Interest

The Claimant further requests that the AT be condemned to reimburse it of the amounts unduly paid, increased by appropriate compensatory interest, pursuant to article 43 of the General Tax Law.

This same question has already been raised in various previous cases in which matters entirely identical to those of the case are analyzed, among which Case 303/2015-T of the CAAD, where it is written what is now, with due deference, transcribed:

"In accordance with the provisions of paragraph b) of article 24 of the Legal Framework for Arbitration in Tax Matters, the arbitral decision on the merits of the claim to which no remedy or challenge lies binds the tax administration from the end of the period provided for remedy or challenge, and this administration must, in the exact terms of the success of the arbitral decision in favor of the taxable person and until the end of the period provided for spontaneous execution of the decisions of the tax courts, 'restore the situation that would have existed if the tax act subject of the arbitral decision had not been performed, adopting the acts and operations necessary for that purpose', which is in harmony with the provisions of article 100 of the General Tax Law [applicable by force of the provisions of paragraph a) of article 29(1) of the Legal Framework for Arbitration in Tax Matters] which establishes that 'the tax administration is obliged, in case of total or partial success of a complaint, judicial challenge or appeal in favor of the taxable person, to the immediate and complete restoration of the legality of the act or situation subject of the dispute, comprising the payment of compensatory interest, if applicable, from the end of the deadline for execution of the decision'."

Although article 2(1), paragraphs a) and b), of the Legal Framework for Arbitration in Tax Matters uses the expression 'declaration of illegality' to define the jurisdiction of arbitral tribunals functioning at the CAAD, making no reference to condemnatory decisions, should it be understood that their jurisdiction comprises the powers that in judicial challenge proceedings are attributed to tax courts, and this is the interpretation that harmonizes with the sense of the legislative authorization on which the Government based itself to approve the Legal Framework for Arbitration in Tax Matters, in which it proclaims, as the first guideline, that 'the tax arbitral process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters'.

The judicial challenge process, although essentially an annulment process of tax acts, admits condemnation of the Tax Administration in the payment of compensatory interest, as can be inferred from article 43(1) of the General Tax Law, in which it is established that 'compensatory interest is due when it is determined, in a gracious complaint or judicial challenge, that there was error attributable to the services from which resulted payment of the tax debt in an amount higher than that legally due' and from article 61(4) of the Tax Procedure and Process Code (as reworded by Law no. 55-A/2010, of 31 December, corresponding to article 61(2) in the initial wording), which states that 'if the decision recognizing the right to compensatory interest is judicial, the payment period runs from the beginning of its spontaneous execution period'.

Thus, article 24(5) of the Legal Framework for Arbitration in Tax Matters, in stating that 'payment of interest, regardless of its nature, is due, in the terms provided in the general tax law and in the Tax Procedure and Process Code', should be understood as permitting the recognition of the right to compensatory interest in arbitral proceedings, as well as the reimbursement of the amount paid, which is the presupposition for the existence of such interest."

In the sequence of the illegality of the acts of additional VAT assessment and compensatory interest, subject of the present challenge proceedings, there is no doubt that the AT must proceed, not only to the restitution of the amounts unduly paid by the Claimant in the amount of Euro 127,815.11, complying with the imperative of article 100 of the General Tax Law cited above, but also to the payment of the respective compensatory interest that is due from the dates on which the payments were made by the Claimant until the date on which the respective reimbursement occurs.

DECISION

In these terms, and with the grounds set forth above, this Arbitral Tribunal decides:

• To dismiss the exception of material incompetence raised by the Respondent;

• To fully uphold the request for arbitral pronouncement, with the declaration of illegality, for the reasons set forth above, of the additional VAT assessments for the year 2011, 2012, 2013 and 1st quarter of 2014 subject of these proceedings and respective compensatory interest, with the consequent annulment of such assessments as they are vitiated by the defect of violation of law, by error as to the factual and legal prerequisites;

• To annul the order of 29 August 2016 from the Division of Administrative Justice and Contentious Matters of the Tax Office of Porto, which dismissed the complaint filed by the Claimant;

• To condemn the Respondent to payment of compensatory interest;

• To condemn the Respondent to payment of the costs of the proceedings.

VALUE OF THE CASE

In accordance with the provisions of article 305(2) of the Code of Civil Procedure and article 97-A(1), paragraph a), of the Tax Procedure and Process Code and article 3(2) of the Regulation on Costs in Tax Arbitration Proceedings, the case is assigned the value of Euro 127,815.11.

COSTS

Pursuant to article 22(4) of the Legal Framework for Arbitration in Tax Matters, the amount of costs is fixed at Euro 3,060.00, in accordance with Table I appended to the Regulation on Costs in Tax Arbitration Proceedings, to be borne by the Tax and Customs Authority.

Notify. Lisbon, 15 September 2017

The Arbitrators,

Fernanda Maçãs (President)

Mariana Gouveia de Oliveira (arbitrator)

Filomena Salgado Oliveira (arbitrator)