CAAD 70/2014-T: SGPS VAT Deduction Rights Mixed Taxable Person

Process: 70/2014-T

Date: September 3, 2014

Tax Type: IVA

Summary

This Portuguese tax arbitration case (Process 70/2014-T) addresses VAT deduction rights for an SGPS holding company operating as a mixed taxable person. The taxpayer, A, SGPS, S.A., challenged VAT assessments for 2010 totaling €1,045,785.54, which disallowed input VAT deductions on expenses allegedly related to non-taxable shareholding management activities. The Tax Authority's inspection questioned whether the SGPS could deduct VAT on acquisitions used for managing shareholdings (non-taxable activity) versus providing technical administration and management services to subsidiaries (taxable activity). During arbitration proceedings, the Tax Authority partially revoked the contested assessments, accepting €289,749.59 in VAT deductions relating to expenses re-billed to subsidiaries at 50%. This revocation recognized that when an SGPS re-charges expenses to subsidiaries for services rendered, the input VAT becomes deductible as it relates to taxable output transactions. The arbitration continued regarding VAT deductions on expenses used exclusively for shareholding management activities and mixed-use expenses. The case illustrates the critical distinction in Portuguese VAT law between an SGPS's non-taxable core activity (mere shareholding management) and taxable ancillary activities (providing management services). For mixed taxable persons like holding companies, proper allocation of input VAT requires distinguishing between expenses linked to taxable operations with deduction rights, non-taxable operations without deduction rights, and mixed expenses requiring pro-rata calculation. The partial revocation demonstrates that re-billed services create a direct and immediate link to taxable output, supporting deduction rights under Article 19 of the Portuguese VAT Code and EU VAT Directive principles. The case also references the possibility of requesting preliminary rulings from the CJEU on EU VAT law interpretation, highlighting the interaction between Portuguese tax arbitration and European Union law.

Full Decision

ARBITRAL DECISION

CAAD: Tax Arbitration

Case No. 70/2014 – T

Topic: VAT

1. Report

A, SGPS, S.A. (hereinafter briefly designated as "Claimant"), legal entity number …, registered with the Commercial Registry Office of … under the same number, with registered office …, requested, pursuant to Article 2, paragraph 1, subparagraph a), and Article 10, paragraphs 1 and 2, both of Decree-Law No. 10/2011 of 20 January (RJAT) and Articles 1 and 2 of Ordinance No. 112-A/2011 of 22 March, the establishment of an Arbitral Tribunal, seeking the declaration of illegality and annulment of VAT assessments relating to the year 2010 with numbers … (January) … (February), … (March), … (April), … (May), … (June), … (July), … (August), … (September), … (October), … (December) and the assessments of the corresponding compensatory interest numbers … (January) … (February), … (March), … (April), … (May), … (June), … (July), … (August), … (September), … (October), … (December), as well as the declaration of illegality of the implicit dismissal of the administrative complaint that it filed. Subsidiarily, the Claimant requests the annulment of the aforementioned VAT and compensatory interest assessment acts in the parts corresponding to VAT incurred on supplies that were re-charged, in operations with right to deduction, to third parties in the following amounts:

MARCH (VAT ASSESSMENT NO. …): € 26,390.57
APRIL (VAT ASSESSMENT NO. …): € 24,273.58
MAY (VAT ASSESSMENT NO. …): € 2,667.50
JUNE (VAT ASSESSMENT NO. …): € 5,676.75
JULY (VAT ASSESSMENT NO. …): € 72,446.85
AUGUST (VAT ASSESSMENT NO. …): € 24,607.28
SEPTEMBER (VAT ASSESSMENT NO. …): € 71,326.96
OCTOBER (VAT ASSESSMENT NO. …): € 4,286.89
DECEMBER (VAT ASSESSMENT NO. …): € 58,073.22

Further subsidiarily, the Claimant requests a preliminary reference to the CJEU.

The Claimant further seeks compensation for losses arising from the provision of undue security, with interest.

Pursuant to Article 13, paragraph 1, of the RJAT, the Tax and Customs Authority partially revoked the tax acts that are the subject of the arbitral decision request, with regard to "the deduction of VAT relating to the value of the re-billing (50%) of expenses incurred with the provision of legal assistance, consulting and advisory services relating to the arbitration process that opposed A, SGPS, SA to company B, in the amount of € 285,644.85.

The Claimant, having been notified of said partial revocation of the acts, stated that it intended the continuation of the present process regarding the non-revoked part of the assessment acts and requested from the Tax and Customs Authority the rectification of the revocation act, which was granted, the Tax and Customs Authority having proceeded to "rectify the decision on partial revocation of the VAT assessment acts relating to the periods from January to October and December 2010, regarding the VAT incorrectly deducted relating to the acquisition of goods and provision of services whose re-billing was made to the subsidiaries, the value of VAT subject to revocation amounting to € 289,749.59; as well as the rectification of the corresponding assessments of compensatory interest in the part corresponding to the revoked amount".

The Tax and Customs Authority maintained the acts that are the subject of the request for arbitral decision regarding the deduction of VAT relating to the acquisition of goods and provision of services used exclusively for the activity of management of shareholdings and mixed use — Additional VAT Assessments No. …, …, …, …; …, …, …, …, …, … and … (period from 01/10 to 10/10 and 10/12) and the assessments of Compensatory Interest No. …, …, …, …, …, …, …, …, …, … and … (period from 01/10 to 10/10 and 10/12).

Pursuant to the provisions of subparagraph a) of paragraph 2 of Article 6 and subparagraph b) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012 of 31 December, the Deontological Council appointed as arbitrators of the collective arbitral tribunal Counselor Jorge Lopes de Sousa, Professor Doctor Maria do Rosário Anjos, and Dr. António Nunes dos Reis, who communicated acceptance of the appointment within the applicable time limit.

The Parties were notified of this appointment and expressed no wish to challenge the appointment of the arbitrators, pursuant to the combined provisions of Article 11, paragraph 1, subparagraphs a) and b) of the RJAT and Articles 6 and 7 of the Deontological Code.

Thus, in accordance with the provision of subparagraph c) of paragraph 1 of Article 11 of the RJAT, in the wording introduced by Article 228 of Law No. 66-B/2012 of 31 December, the collective arbitral tribunal was constituted on 31-03-2014.

The Tax and Customs Authority presented a response in which it argues that the termination of the proceedings should be declared regarding the part that was subject to revocation and, for the remainder, the present request for arbitral decision should be judged as unproven and consequently the Respondent should be absolved of all claims.

On 10-07-2014, a hearing took place in which witness evidence was produced and oral arguments were made.

The Arbitral Tribunal was regularly constituted and is competent.

The parties have legal capacity and standing and are legitimate (Articles 4 and 10, paragraph 2, of the same instrument and Article 1 of Ordinance No. 112-A/2011 of 22 March).

The proceedings do not suffer from any nullities.

2. Factual Matter

Given the partial revocation of the contested acts, the examination of the issue analyzed therein becomes unnecessary, and therefore so does the determination of the corresponding factual matter.

2.1. Proven Facts

The following facts are considered proven:

a) The Claimant is a commercial company, with headquarters in national territory, engaged in the activity of management of shareholdings in other companies, to which corresponds the CAE …, and provides technical services of administration and management to the companies in which it holds shareholdings;

b) For VAT purposes, it is classified under the normal regime with monthly periodicity, pursuant to subparagraph a) of paragraph 1 of Article 41 of the VAT Code;

c) The Tax and Customs Authority carried out an external tax inspection procedure of general scope, relating to the fiscal year 2010, conducted under Service Order No. …, of 27-02-2012, issued by the Large Taxpayers Unit;

d) In the course of that inspection procedure, the Claimant sent to the Tax and Customs Authority the documents whose copy constitutes document No. 45 attached to the request for arbitral decision, whose contents are given as reproduced, including a map indicating the hours of service provision to its subsidiaries that served as the basis for the respective invoicing;

e) Following that procedure, corrections were made in VAT totaling € 1,045,785.54, based on the grounds set out in the Tax Inspection Report whose copy is included in document No. 4 attached to the request for arbitral decision, whose contents are given as reproduced, which states, among other things, the following:

III 2.1. Improper deduction in non-taxable activity: € 1,045,785.54

From the analysis performed, it was verified that the taxpayer deducted in the period under analysis a total VAT of € 1,225,707.93, which corresponds to the sum of the monthly amounts entered in fields 20 to 24 of the periodic VAT declarations filed, relating to the deductible tax on acquisitions of fixed assets and other goods and services.

The taxpayer thus considered, in the analysis it made of the use of fixed assets and the goods or services acquired on which it paid tax, that they were all directly related to the practice of activities subject to VAT and not exempt from it, and therefore the entirety of the tax paid in the period was deductible, in accordance with the provisions of paragraph 1 of Article 19 of the VAT Code (CIVA), which provides that "for the determination of the tax due, taxable persons deduct, in accordance with the following articles, from the tax charged on the taxable operations they have carried out (...) the tax due or paid on the acquisition of goods and services (...)".

From the provision of Article 20 of the CIVA

It follows from the wording of Article 20, in paragraph 1, that with respect to resources directly attributable and/or related to the practice of activities subject to VAT, the tax can only be deducted if it "has been incurred on goods and services acquired, imported or used by the taxable person for the realization" namely of supplies of goods and provision of services subject to tax, or that, not being subject to taxation, are expressly provided as conferring the right to deduction.

It is thus understood that the right to deduction provided for in Articles 19 and 20 of the CIVA is exercised immediately in relation to all tax charged on the upstream operations, but for VAT to be deductible, the upstream operations must present a direct and immediate nexus with downstream operations subject to tax.

This allows us to conclude that VAT incurred with the acquisition of goods and services used exclusively in the realization of activities not subject to tax is not recoverable in full.

From the provision of Article 23 of the CIVA

Article 23 of the same Code further provides that, in the case of taxable persons who in the exercise of their activity carry out operations that confer the right to deduction and operations that do not confer this right, "the deduction of the tax paid on the acquisition of goods and services that are used in the realization of both types of operations is determined as follows:

a) In the case of a good or service partially assigned to the realization of operations not arising from the exercise of an economic activity provided for in subparagraph a) of paragraph 1 of Article 2, the non-deductible tax as a result of this partial assignment is determined pursuant to paragraph 2; (our emphasis)

b) Without prejudice to the foregoing, in the case of a good or service assigned to the realization of operations arising from the exercise of an economic activity provided for in subparagraph a) of paragraph 1 of Article 2 [of the VAT Code], part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the annual amount of operations that give rise to deduction (our emphasis)

Thus, the application of Article 23 above "restricts the determination of deductible tax relating to goods and/or services of mixed use, that is, goods and/or services used together in activities that confer the right to deduction and in activities that do not confer this right.

Indeed, where it is a question of goods or services exclusively assigned to operations with the right to deduct tax, presenting a direct and immediate relationship with those operations, the respective tax is subject to full deduction, pursuant to Article 20 of the CIVA.

In the case of goods or services exclusively assigned to operations subject to tax but exempt without the right to deduction or to operations that, although covered by the concept of economic activity are outside the tax incidence rules or to operations not arising from an economic activity, the respective VAT paid cannot be subject to deduction."'

And it is this situation, in a first analysis, that must be identified and analyzed here, that is, whether within the activities practiced by SGPS and in the specific case, by company A, which operations, in the context of VAT fall outside the concept of economic activity, in order to assess the limits on VAT deduction.

From the economic activity of companies managing shareholdings (SGPS)

The activity of SGPS is provided for and regulated in Decree-Law No. 495/88 of 30 December, with the subsequent amendments introduced by Decree-Law No. 318/94 of 24 December and by Decree-Law No. 378/98 of 27 November, and by Law No. 109-B/2001 of 27 December.

Article 1, paragraph 1 of that regulation provides that SGPS have as their sole contractual object (i) the management of shareholdings in other companies as an indirect form of exercise of economic activity. As a complement to the main activity, SGPS are permitted, as an ancillary activity, (ii) the provision, under certain circumstances, of technical services of administration and management to all or some of the subsidiary companies, under the terms and conditions provided for in Article 4, and, also under certain restrictions imposed by subparagraph f) of paragraph 1 of Article 5 of the same instrument, (iii) granting credit to companies in which they hold shareholdings.

(i) The activity of management of shareholdings

In line with extensive Community case law, it is considered that the mere acquisition, holding and sale of shareholdings and equivalent securities, embodied in the management of shareholdings, is not classifiable as an economic activity from the VAT perspective.

However, it should be noted that the situation is different when the holding of the financial participation is accompanied by direct or indirect intervention in the management of the companies in which the participation is held, insofar as it implies transactions subject to VAT, such as the provision of administrative, financial, commercial and technical services.

"The subjection to VAT presupposes that this activity is carried out within the scope of an entrepreneurial objective or with a commercial purpose, characterized in particular by a concern for profitability of invested capital". In accordance with this case law, "economic activity should therefore be understood as an activity capable of being exercised by a private enterprise in a market, organized within a professional framework and generally driven by the purpose of generating profits".

And it is within this framework that the right to deduction of tax paid depends on the demonstration, on a case-by-case basis, of the connection existing between the acquisitions of goods and services (inputs) and the services provided within the scope of effective economic activity subject and not exempt.

(ii) The ancillary activity of provision of services

It is considered an economic activity under the CIVA and subject to tax, and as such the respective VAT paid on the goods and services acquired and used in the pursuit of this activity, provided the remaining requirements are met and the exclusion from operations provided for in Article 21 of the CIVA is not involved, confers the right to deduction.

(iii) The ancillary activity of granting financing to subsidiary companies

It constitutes an economic activity within the scope of VAT subjection, being exempt pursuant to paragraph 27 of Article 9 of the CIVA. Being an exemption not provided for in the exclusions of subparagraph b) of paragraph 1 of Article 20 of the same Code, the tax paid on the acquisition of goods and services intended for the pursuit of this activity does not confer the right to deduction.

We can thus, in this part, conclude that for the purposes of classification under value added tax, SGPS that simultaneously exercise the activities described above are mixed taxpayers, insofar as they exercise activities classified within the concept of economic activity provided for in the Sixth Directive (subject and exempt), with the main activity not being classified within the concept of economic activity provided for in the Sixth Directive and therefore not conferring the right to deduction of tax paid on its inputs.

In the concrete case of the economic activity of A SGPS

In the situation under analysis, A SGPS qualifies as a joint-stock company whose corporate purpose consists of the management of shareholdings in other companies, corresponding to CAE …. Additionally, and as an ancillary activity, it provides technical services of administration and management to the companies in which it holds shareholdings, specifically companies C SA, D, SGPS and E, SA, with the income declared in the fiscal year 2010 consisting of the remuneration of service provision, interest and dividends obtained. In this light, A, SGPS must be classified as a mixed holding.

Thus, for tax purposes in the context of VAT, it is classified as what has come to be commonly designated as a mixed taxpayer, given that within the scope of its holding activity it practices exempt operations (the granting of credit to its subsidiaries), which do not fall within the concept of economic activity, non-taxable operations (the management of shareholdings) and, simultaneously, taxable operations with the right to deduction (the provision of services), the latter two falling within the concept of economic activity provided for in the Sixth Directive.

Within the scope of the analysis conducted, the tax inspection procedure aimed to determine the existence of a connection between each resource and the various active operations of the taxpayer, which made it mandatory to define objective criteria that would enable the attribution of the charge to the different activities exercised by the taxpayer, allowing the deduction of tax in accordance with the application of an allocation key.

For this purpose, and based on extracts from the VAT paid accounting records, a sampling was carried out according to value relevance criteria, embodied in the selection of documents that gave rise to the tax.

From the analysis of the selected documents, it was found that the taxpayer considered that all the charges incurred would be attributed to the activities subject to VAT that, as already demonstrated, in an SGPS constitute autonomous activities. That is, it was verified that there was no distinction in the treatment of those goods and services that are considered for exclusive use in the activity of management of shareholdings, i.e., in the non-taxable activity of the taxpayer.

It also considered that no part of the remaining acquired services had use in its activity of management of shareholdings (not subject to VAT), namely in goods that in a first approach would be unquestionably used together in the realization of all its activities, namely the operating expenses of the company itself relating to the use of space (rents, condominium fees, maintenance and cleaning).

Regarding goods and services for exclusive use

The taxpayer has at its disposal adequate own resources, or avails itself of third parties who provide the services that are necessary in the various areas preponderant for decision-making.

Thus, within the scope of the main activity, acquisitions and sales of shareholdings are carried out, liquidation of companies, possible exchanges, mergers or divisions, and to make this type of decision it is necessary to have a set of information and options to ensure adequate management of the SGPS resources and to create synergies that allow achieving the strategic objectives of the group represented by it.

Depending on the sectors in which they operate (or intend to operate) and the internal constraints (available resources, management options, among others) and external constraints (market, competition, specific legislation, etc.), this goal can be achieved in various ways, with studies being preponderant that assess its adequacy and expected repercussions, so that the decisions to be made allow the levels of effectiveness and efficiency expected in light of the strategic objectives set, and which are expected to result in increased profitability of investments, either through participation in the results of subsidiaries (dividends) or through gains from the sale.

In the absence of own resources, the taxpayer will have to resort to third parties for the provision of services that are necessary, and this implies the assumption of charges such as those enumerated below, which are inevitably expenses inherent to the functioning of an SGPS:

a) Services related to the preparation, revision, conception and translation of the company's financial statements;

In the analysis conducted, charges for services of this nature were identified, with the respective tax paid totaling € 23,521.55 - Annex No. 3.

b) Services related to the administration of the company and which essentially concern secretarial services, administrative support and consulting regarding the retirement benefits of the company's administrators:

In the analysis conducted, charges for services of this nature were identified, with the respective tax paid totaling € 10,290.00 - Annex No. 3.

c) Services related to tax advisory, legal consulting and strategic consulting relating to the holding, acquisition and sale of shareholdings in the capacity of shareholder, investment and disinvestment opportunities, business development of the company and others related;

In the analysis conducted, charges for services of this nature were identified, with the respective tax paid totaling € 820,546.66 – Annex No. 3.

It is thus considered that the aforementioned services relate to the company itself and do not depend at all on the realization of economic operations for VAT purposes, given that by their nature these costs do not present a direct and immediate relationship with taxable activities. i.e., they would always be incurred even if the taxpayer did not provide any ancillary service.

Now, because among the charges in question, consider for example those with the greatest weight, namely the expenditures incurred by the taxpayer for fees for legal services in the arbitration process against company B under the scope of the shareholders' agreement existing with respect to the holding of F, which given its specificity result from acts that fall within the management of the group as a whole, and do not show nor allow establishing a cause and effect relationship between these and the service charges debits made by the taxpayer, but which find justification within the framework of "acquisition, holding and management of shareholdings" that constitutes the main purpose of company A and which here acts in the capacity of shareholder that it is.

Within this framework, the taxpayer entered into contracts for the provision of services with its subsidiaries, which provide for the supply of services of various types, related to strategic and financial planning, tax and legal advisory, secretarial, control systems, IT, organization of accounting and support in relations with official bodies.

The invoices issued by the taxpayer do not specify in detail the services performed, with the description containing the generic designation of "technical services of administration and management", which makes it difficult to establish a correlation with the diversity of charges in relation to which the taxpayer considers itself legitimately entitled to deduct the tax paid.

It is thus required not only that the services have economic substance but also that there be an effective interconnection and dependence between the inputs and outputs, on the assumption that the price of downstream operations incorporates the charge incurred upstream (inputs), which in the present situation does not occur in the analyzed expenses.

And as previously acknowledged by the taxpayer, the amounts charged for the provision of services to subsidiaries are calculated "so as to cover all direct and indirect expenses incurred by company A with the provision of these services".

Having been demonstrated that within the sphere of the taxpayer, the management of shareholdings is not an economic activity within the meaning of paragraph 2 of Article 4 of the Sixth Directive (current VAT Directive), we have that regarding the documents analyzed related to the acquisition of goods and services referred to above, they are considered as exclusively assigned to the realization of operations not arising from economic activity, since no direct connection was established with the services invoiced downstream.

As such, the VAT paid which totals in the period the amount of € 854,358.21 – cf. Determination made in the map that constitutes Annex No. 3 – is not deductible pursuant to paragraph 1 of Article 20 of the VAT Code.

Regarding goods and services for mixed use

Given the purpose they serve, common to the various activities, and here included are the expenses with administrative equipment, it is recommended that the calculation of the deduction of VAT paid be based on actual allocation, even if based on criteria or allocation keys that allow the deduction of VAT paid on the acquisition of goods and services, in the proportion of their use in the taxed activity.

The determination of these criteria or allocation keys should result from the knowledge that the company has of its business and should be adapted to the situation and organization of the taxpayer, the nature of the operations it carries out, in the context of the overall activity exercised and to the goods or services acquired for the needs of all operations.

Considering that the status of mixed holding that the taxpayer has implies that the deduction of VAT paid on goods and services of mixed use is not integral, but rather to the extent of the connection of each charge with the taxable activity that confers the right to deduction, under penalty of allowing unjustified inequality in the system.

To avoid this injustice, the Tax Administration followed the case law given by the Court of Justice of the European Communities (current Court of Justice of the European Union), which refers to the adoption of the actual allocation method taking into account that the criterion for allocating the amounts of value added tax paid upstream between economic activities and non-economic activities must objectively reflect the part of actual allocation of upstream expenses to each of these two activities.

Thus, "the criteria most appropriate for implementing the actual allocation method (...) should take into account, in particular, the resources in goods and services that are always necessary for the normal performance of the main activity, should the aforementioned companies opt to not complementarily practice taxed operations" (our emphasis).

"In this context, the identification of the most appropriate criteria for ascertaining the actual allocation of goods and services should take into account, in particular, the principles of neutrality and non-distortion of competition underlying the common VAT system, with the aim of not allowing possible situations of unjustified inequality between pure holdings, which proceed only with the management of shareholdings, and mixed holdings which, in addition, dedicate themselves: complementarily to the provision of ancillary technical services to the subsidiary companies".

And the use of criteria is equally required by the case law of the CJEU. See the ruling of 13 March 2008, delivered in case C-437/06, relating to a company which, like company A, exercised three types of activities: "namely, first, non-economic activities, which do not fall within the scope of the Sixth VAT Directive, secondly, economic activities (...), which are exempt from VAT, and, thirdly, economic activities subject to tax".

In this decision, the Court clearly indicated that "the VAT charged upstream on the expenses incurred by a taxpayer cannot confer the right to deduction insofar as it concerns activities that, having regard to their non-economic character, do not fall within the scope of the Sixth Directive." (paragraph 30).

With regard to the limitation on deduction of tax, in the same ruling, "the determination of the methods and criteria for allocating the amounts of value added tax paid upstream between economic activities and non-economic activities (...) falls within the discretionary power of the Member States, which, in the exercise of this power, must take into account the purpose of the economy of this Directive and, to that end, provide a method of calculation that objectively reflects the part of actual allocation of upstream expenses to each of these two activities".

In the exercise of discretionary power by Member States, these "are authorized to apply, (...), either an allocation key according to the nature of the investment, or an allocation key according to the nature of the operation, or any other appropriate key, without being obliged to limit themselves to a single one of these methods". (paragraph 38 of the aforementioned Ruling).

For this purpose, Circular Letter No. 30103 of 23 April 2008, from the Tax Management Area - VAT, provides that "in the case of goods or services for mixed use partially assigned to the realization of operations not arising from an economic activity, the determination of the amount of non-deductible VAT relating to these cannot be based on the pro rata method (. ..), and must necessarily use actual allocation based on effective use (...) through objective criteria (...)".

"As a result, the degree, proportion or intensity of use of each good or service must be determined in operations that arise from economic activity subject to VAT and in operations that do not arise, through objective criteria, the following being mentioned by way of mere indication:

a) The area occupied;

b) The number of personnel elements involved;

c) The payroll;

d) Machine hours;

e) Man-hours; (our emphasis)

(... )"

"In any case, the determination of these objective criteria must be adapted to the concrete situation and organization of the taxpayer, the nature of its operations in the context of the overall activity exercised and to the goods or services acquired for the needs of all operations, whether or not integrated into the relevant concept of economic activity."

In the case in question, not having the taxpayer proceeded in accordance, it implied the definition, by the Tax Administration, of an allocation key that reflects a reality as close as possible to what amount of tax contained in the acquisitions of goods and services of mixed use is capable of deduction.

In the sampling conducted, a set of charges for goods and services was identified that are considered to be of joint use in the realization of operations not arising from an economic activity and in the exercise of economic activities.

These are mainly the acquisition of administrative equipment and services relating to the payment of rents for the spaces used and their respective condominium fees.

As previously mentioned, the taxpayer in the exercise of its ancillary activity provided, during the year 2010, technical services of administration and management to its subsidiaries C, D and E, and the remuneration is calculated based on the number of hours of work effectively dedicated.

And having the taxpayer indicated the number of hours spent in the realization of these taxed and not exempt operations, it is our conviction that a distribution of the costs in question (only those of mixed use), based on the effective use of these resources, should have as its basis the time spent in that activity (man-hours), and does not conflict with the applicable case law.

Thus, being involved a set of goods and services related to space rents, fixed assets among others, the application of an allocation key based on the time of use of these resources, which respects the reality of the company, namely as to how it proceeds with the quantification of the benefit to be charged to subsidiaries based on the number of hours, proves to be, in our opinion, an appropriate criterion as it reflects the part in which those resources were allocated to the provision of services subject to VAT.

It thus follows that from the total time spent by employees in the realization of the overall activity of company A, only that used in the pursuit of the taxable and not exempt activity has a direct relationship with the taxable activity.

For the purposes of the calculations performed, the assumptions considered aiming at simplification of the process were:

a. A total of 230 working days/year (the month of August was excluded) with a working schedule of 8 hours daily, which amounts to 1,840 hours/year attributed to each employee of company A in their overall activity;

b. That the human resources used by company A in its overall activity correspond to a number of employees identified in Model 10 delivered by the company as having earned dependent work income;

c. For the purposes of calculating the total number of working hours of company A's employees, it was considered that the members of corporate bodies (Board of Directors, Fiscal Commission, General Assembly) without executive functions exercised the mandate occasionally or on a non-quantifiable part-time basis;

d. Based on the hourly rate charged in the provision of services, a consumption of working hours totaling 6,988 hours by company A's employees was considered (Annex No. 4)

e. That all employees who intervened in the provision of services, even though some are permanently stationed at the facilities of the subsidiary companies, used company A's resources equally;

Given the resources used by the taxpayer in the overall scope of its activities, the part allocated to the activity subject to VAT and not exempt (provision of technical services), for which the tax paid confers the right to deduction, corresponds to 14.07% – see Annex No. 4 – of the total resources consumed according to the calculations summarized in the following table:

From the application of that percentage to the VAT paid on the acquisition of goods and services, which were considered to be of mixed use, which are listed in Annex No. 5, in the total amount of € 222,760.93, it results that the taxpayer deducted excessively the amount of € 191,427.33 corresponding to the part of the resources not used in the activity of taxable and not exempt service provision.

From the conclusion

It thus results, for the acquisitions of goods and services that were the subject of analysis in the present inspection, that the taxpayer deducted VAT paid in the amount of € 1,225,707.93. Given the reasons adduced, the correction of the total amount of € 1,045,785.54 is proposed in accordance with Articles 20 and 23 of the CIVA, whose regularization will be materialized in different periods of the tax.

Thus, with respect to the tax improperly deducted in the amount of € 854,358.21 relating to the acquisition of goods and services allocated exclusively to the main activity of management of shareholdings, it is considered:

with respect to the Tax improperly deducted in the amount of € 191,427.31 by application of the allocation criterion that results in a proportion of 14.07% to the VAT contained in the acquisition of goods and services of mixed use, it is considered:

Pursuant to paragraph 1 of Article 96 of the VAT Code, "whenever, due to a fact attributable to the taxpayer, the collection of the tax is delayed or a reimbursement greater than due has been received, compensatory interest accrues to the amount of the tax, in accordance with Article 35 of the General Tax Law".

f) In the year 2010, the Claimant deducted VAT in the amount of € 1,225,707.93, corresponding to all use of goods and services acquired on which it paid VAT;

g) In the year 2010, the Claimant spent on services related to the preparation, revision, conception and translation of the company's financial statements the sum of € 23,521.55;

h) In the year 2010, the Claimant spent the sum of € 10,290.00 on services related to the administration of the company and which essentially concern secretarial services, administrative support and consulting regarding the retirement benefits of the company's administrators;

i) In the year 2010, the Claimant spent the sum of € 820,546.66 on services with tax advisory, legal consulting and strategic consulting relating to the holding, acquisition and sale of shareholdings in the capacity of shareholder, investment and disinvestment opportunities, business development of the company and others related;

j) The Claimant monitors and advises on the management of its subsidiaries (testimony of witnesses G and H);

k) The Claimant has a staff dedicated to monitoring the management of its subsidiaries which, including executive administrators but excluding non-executives, amounted in 2010 to 25.88 employees (Document No. 4, attached to the request for arbitral decision, whose contents are given as reproduced, and testimony of witnesses G and H);

l) The Claimant receives dividends once a year and pays its shareholders once a year (testimony of witness G);

m) The Claimant receives interest two or three times a year (testimony of witness G);

n) The Claimant only occasionally makes loans to its subsidiaries (testimony of witness G);

o) The Claimant's acquisitions of new companies are occasional, having occurred in 2004 and another in 2008 (testimony of witness G);

p) In 2010 there was a reinforcement of shareholdings in companies in which it already held them and there was no sale of any shareholdings (testimony of witness G);

q) In 2010 there was no acquisition or merger or division of companies (testimony of witnesses G and H);

r) The Claimant's activity of management of shareholdings is minimal and consumes few human resources (testimony of witness G);

s) In 2010 the value of services invoiced by the Claimant to its subsidiaries was € 2,825,760.00, pursuant to the terms referred to in documents Nos. 6 and 9, attached to the request for arbitral decision, whose contents are given as reproduced;

t) In establishing the remuneration due to company A for the services provided, two factors intervened, by will of the parties (A and its respective subsidiaries): (a) € 350/hour in the case of C and E and € 370/hour in the case of D) and (b) hours of 12 employees of A (document No. 6 attached to the request for arbitral decision, whose contents are given as reproduced and testimony of witnesses G and H);

u) The 12 employees referred to are those who come into contact with the subsidiaries (testimony of witnesses G and H);

v) The activity of the 12 workers referred to could not be carried out in the way it is without the collaboration of all the remaining employees of the Claimant (testimony of witnesses G and H);

w) The employees of A and its productive resources in general are used in the activity of providing services to the subsidiaries, embodied in daily monitoring of their activity and management, the portion of these resources allocated to other tasks, namely tasks of receiving dividends and interest, being insignificant or trivial, and occasional (testimony of witnesses G and H);

x) On 28-12-2012, the Claimant was notified of the Tax Inspection Report and of the corrections made on the basis of it (document No. 5 attached to the request for arbitral decision, whose contents are given as reproduced);

y) Following the notification of the report, the Tax and Customs Authority issued the following VAT and compensatory interest assessments, with the date of 31-03-2013 indicated in them as the limit of the voluntary payment period:

VAT Assessments
[...]

Assessments of Compensatory Interest
[...]

z) On 19-07-2013, the Claimant filed an administrative complaint with the Lisbon 2 Finance Service (document No. 3 attached to the request for arbitral decision, whose contents are given as reproduced);

aa) The administrative complaint was not decided until 29-01-2014, the date on which the Claimant filed the request for arbitral decision that gave rise to the present process.

bb) On 28-05-2013, the Claimant provided the bank guarantee that appears in document No. 46, attached to the request for arbitral decision, whose contents are given as reproduced, to suspend the tax enforcement proceeding No. …, which was instituted for collection of the amounts assessed;

cc) Following notification by the Tax and Customs Authority, on 09-07-2013, the Claimant provided the security, pursuant to document No. 48 attached to the request for arbitral decision, whose contents are given as reproduced;

dd) With respect to the bank guarantee, Stamp Tax was assessed on 28-05-2013, pursuant to paragraph 10.3 of the General Table, in the amount of € 8,650.58 (document No. 46 attached to the request for arbitral decision, whose contents are given as reproduced).

2.2. Grounds for the Determination of Factual Matter

The probative judgments in the Tax Inspection Report and in the documents attached to the request for arbitral decision and also, in the points indicated, in the testimony of witnesses G and H, who showed to have knowledge of the functioning of the Claimant and appeared to testify with impartiality.

There are no facts relevant to the decision that have not been proven.

3. Legal Matter

3.1. Applicable Legal Regime

In accordance with Article 2 of Directive No. 2006/112/EC of the Council of 28-11-2006, the following are subject to VAT, among others: supplies of goods made for consideration in the territory of a Member State by a taxable person acting as such, intra-Community acquisitions of goods made for consideration in the territory of a Member State, supplies of services made for consideration in the territory of a Member State by a taxable person acting as such, and imports of goods.

In the same vein, the Code for Value Added Tax (CIVA) establishes in Article 1 that the following are subject to this tax: supplies of goods and provision of services carried out in national territory, for consideration, by a taxable person acting as such, imports of goods and intra-Community operations carried out in national territory, as defined and regulated in the VAT Regime for Intra-Community Transactions.

Pursuant to Article 9 of the Directive "any person who carries out, independently and in any place, an economic activity, regardless of the purpose or result of that activity, is deemed to be a 'taxable person'" and "any activity of production, marketing or provision of services, including extractive, agricultural and similar professional activities, is deemed to be 'economic activity'. In particular, the exploitation of tangible or intangible property with the aim of obtaining income of a continuing character is deemed to be economic activity".

The CIVA provides that taxable persons are, among others, "natural or legal persons who, independently and with habitual character, carry out activities of production, trade or provision of services, including extractive, agricultural and similar professional activities, and also those who, in the same independent manner, carry out a single taxable operation, provided that this operation is connected with the exercise of the aforementioned activities, wherever it may occur, or when, independently of this connection, such operation meets the requirements of actual occurrence of income tax on the income of natural persons (IRS) or income tax on the income of legal persons (IRC)".

The right to deduction arises at the moment the tax becomes due (Article 167 of Directive No. 2006/112/EC and Article 22, paragraph 1, of the CIVA) and, as a rule, only tax charged on goods or services acquired, imported or used by the taxable person for the realization of taxed operations can be deducted (Articles 168 of Directive No. 2006/112/EC and 20, paragraph 1, of the CIVA).

With respect to goods and services used by a taxable person to carry out both operations with the right to deduction and operations without the right to deduction, deduction is only allowed in respect to the part of VAT proportional to the amount relating to the first category of operations (Articles 173 of Directive No. 2006/112/EC and 23, paragraphs 1 and 2, of the CIVA).

The deduction pro rata is determined for the set of operations carried out by the taxable person and results from a fraction that includes the following amounts:

a) In the numerator, the total amount of annual turnover, net of VAT, relating to operations that confer the right to deduction;

b) In the denominator, the total amount of annual turnover, net of VAT, relating to operations included in the numerator and operations that do not confer the right to deduction (Articles 174 of Directive No. 2006/112/EC and 23, paragraph 4, of the CIVA).

The deduction pro rata is determined annually, fixed as a percentage and rounded to the immediately higher unit (Articles 177 of Directive No. 2006/112/EC and 23, paragraph 4, of the CIVA).

In accordance with the provision of Article 1 of Decree-Law No. 495/88 of 30 December, companies managing shareholdings (SGPS), have as their sole contractual purpose the management of shareholdings in other companies, as an indirect form of exercise of economic activities, with the participation in a company being considered an indirect form of exercise of the economic activity of this company when it does not have an occasional character and reaches at least 10% of the capital with voting rights of the subsidiary company, either by itself or through shareholdings of other companies in which the SGPS is dominant.

But Article 4, paragraph 1, of the same instrument allows SGPS to provide technical services of administration and management to all or some of the companies in which they hold shareholdings.

3.2. Position of the Claimant

The Claimant argues, in sum, that, by virtue of the provision in the body of Article 168 of the VAT Directive (Directive 2006/112/EC), the right to deduction arises from a utilization relationship: if the resources were used in an activity that confers the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity compared to the totality of income.

Thus, the nature of the entity would be irrelevant, and what should be taken into account is the activity and the relationship with this of the resources charged with VAT.

The Claimant argues that the holding of shareholdings and the receipt of dividends are not activities that consume resources and the Community case law considered that in the calculation of VAT deductible by the standard pro rata method the amount of dividends could not influence the level of the right to deduction (ruling Satam and others).

In the Claimant's view, the use of resources it made is associated almost exclusively with the paid activity on behalf of the subsidiaries, implying the occasional receipt of dividends and interest from loans or occasional realization of capital gains a minimal use of resources.

The Claimant holds that it cannot, without violating the VAT Directive, use the actual allocation method to transform deductible tax into non-deductible tax, and therefore, if dividends and the holding of shareholdings are neither income nor activities consuming resources charged with VAT, they cannot, with the application of that method, come to attract the VAT paid with respect to significant resources of a taxable person which, like the Claimant, is engaged in the provision of technical services and management to its subsidiaries.

The Claimant argues that, with regard to the aforementioned interest arising from loan operations to the subsidiaries, the operations of receipt are consumers of an insignificant portion of resources, certainly not represented by the proportion reached by the Tax and Customs Authority, and that being insignificant can and should, within the scope of the pro rata method elected by the Claimant affect in zero the right to deduction, in accordance with the ruling EDM.

With regard to expenses for the acquisition of shareholdings or for prospective acquisitions, the Claimant understands that they are part of its general expenses (ruling Cibo), but this does not eliminate the right to deduction of VAT, only implying, in the event that both operations with the right to deduction and operations without the right to deduction are carried out, that only the part of VAT proportional to the amount relating to the first category of operations can be deducted.

Thus, the Claimant understands that, with the exception of interest arising from loan operations to the subsidiaries, consumers of an insignificant portion of resources, the remaining economic activity of the Claimant is subject to VAT, so the corrections to the right to deduction made by the Tax and Customs Authority violate this right.

The Claimant further suggests that, in case of doubt, a preliminary reference to the CJEU should be used.

The Claimant further states that its main activity is the active management of its subsidiaries and that the fact that it is an SGPS is not an obstacle to the deduction of the entirety of the VAT paid, in accordance with the ruling of the CJEU No. C-496/11.

The Claimant further argues that, looking at the economic circuit in which it operates, the SGPS is an input or instrument at the service of the subsidiary companies: its reason for existing are its subsidiaries and everything it does is instrumental with respect to the interests and activities of the subsidiaries. Not being the SGPS a final consumer and being its subsidiaries in turn VAT taxable persons with the right to deduct it (because they are also not final consumers, nor, in this case, carry out exempt operations without the right to deduction), there will be no reason for the VAT paid by the SGPS (which is not associated with a final consumption, but with consumption inserted in the economic circuit of production of goods and services) to be excluded from the right to deduction.

3.3. Position of the Tax and Customs Authority

The Tax and Customs Authority argues, in sum, that, if the activity of the Claimant, as an SGPS, is partly outside the field of application of the tax, partly subject to VAT as it results in the provision of services to the subsidiaries and still in exempt operations pursuant to Article 9 of the CIVA, the Claimant derives various income, among which are interest resulting from loans to its affiliated companies, which are a reiterated practice.

By being so, we are faced with "an exempt financial operation that affects the deduction pro rata" and not about an accessory financial operation, and with regard to the receipt of said interest always, regardless of the other issues to be resolved within the scope of these proceedings, the Claimant would be subject to a deduction pro rata of 89%, being illegal the full deduction (100%) of the tax paid upstream.

The Tax and Customs Authority further argues that the invoices issued by the Claimant do not specify in detail the services performed, with the description containing the generic designation of "provision of technical services of administration and management" and that the Claimant, contrary to what it seeks to make believed with strong and repeated assertions, does not provide any evidence that allows challenging the correction made by the AT, as was incumbent upon it given the burden placed upon it.

The Tax and Customs Authority argues that, in view of the nature of company managing shareholdings that the Claimant has, its corporate purpose is legally limited, restricting it to the management of shareholdings and the provision of technical services of administration and management to all or some of the companies in which they hold the shareholding, being forbidden from the possibility of carrying out other activities than the provision of services referred to.

The Tax and Customs Authority further notes that from Articles 168 and 169 of the VAT Directive it follows that the taxable person can deduct the tax paid on the acquisition of goods and services to the extent that the goods and services are used for the realization of operations considered as part of the concept of economic activities and that do not constitute exempt operations, without the right to deduction (taxable outputs), which determines that the tax paid with inputs related to goods and services intended to be used in non-taxable operations, outside the field of tax, or that being exempt do not confer the right to deduction, cannot be deducted.

The Tax and Customs Authority further argues that the tax paid upstream could only be fully deducted if the acquired services were used exclusively and entirely in the provision of technical services of administration and management to the subsidiaries. Being used only and solely in operations relating to the management of shareholdings, the right to deduction is entirely forbidden. Being also to be considered, if we are dealing with goods and services used by the taxable person to carry out both operations with the right to deduction, as without the right to deduction, this faculty is limited to the part of VAT proportional to the amount relating to the first operations, by virtue of the provision of Article 173 of the VAT Directive, transposed into Portuguese law in Article 23 of the VAT Code.

For this reason, it is necessary that the taxable person demonstrate, through objective elements, that the expenses related to the acquisition of these services are part of the cost of the various constituent elements of the price of the downstream operation. In this case, expenses were made by the Claimant that concern the company itself and are made in its exclusive interest, and no relationship of use can be established between these resources and the taxable activity, which would always be incurred, regardless of whether the Claimant provided any ancillary services to its subsidiaries, not presenting a direct, immediate or unequivocal nexus, or even a reflexive one, with these same taxable activities, and not charging the price of downstream operations practiced.

The Tax and Customs Authority argues that the Claimant does not limit itself to acquiring, selling and holding shares, and it is not by the fact of exercising, at the same time, an active activity of direct or indirect management of its subsidiaries, reflected in "broad-spectrum service provision", that it becomes a normal taxable person (for the purposes of value added tax), particularly with regard to the right to deduction, in view of its nature.

With regard to dividends, it is not related to an economic activity, being foreign to VAT deduction, so that if we are dealing with an activity outside the field of application of the tax, with the impossibility of deducting the tax paid upstream.

On the other hand, with regard to interest on loans made to the subsidiaries, they result from operations subject to tax, but exempt from it, pursuant to Article 9, paragraph 27 of the VAT Code, not conferring the right to deduction [Article 20, paragraph 1, subparagraph b) of the VAT Code]. And if it is true that the amount of interest cannot by itself be the criterion for ascertaining whether we are dealing with an "accessory operation", serving only as a mere indicator, it is also true that obtaining this type of income must be framed in the generic calculation of the Claimant's activity. The receipt of this type of income will be the result of a reiterated practice of granting loans by the Claimant and, by being so we are dealing with "an exempt financial operation that affects the deduction pro rata" and not about an accessory financial operation. The Tax and Customs Authority believes that, with respect to the receipt of said interest, the Claimant would be subject to a deduction pro rata of 88%, being illegal the full deduction (100%) of the tax paid upstream.

With respect to the provision of administration and management services provided to its subsidiaries, the deduction of VAT depends on the existence of a direct and immediate relationship with the taxable activities developed by the Claimant, which in the opinion of the Tax and Customs Authority does not exist in relation to the statutory audit of accounts, conception and production of the report, as this is a legal obligation imposed by commercial legislation on the Claimant itself. In the opinion of the Tax and Customs Authority, it will also not be a general expense of the Claimant, as it has not been proven that the expenses in question were part of the constituent elements of the price of these possible operations.

With respect to the expenses with tax advice, legal consulting and strategic consulting regarding the holding, acquisition and sale of shareholdings and also related to investment and disinvestment opportunities, business development, attorney fees or relating to the provision of financial and market information, the Tax and Customs Authority understands that they are related to the activity of acquisition, holding and management of shareholdings developed by the Claimant, from the perspective of business management and expansion of activity, concerning the Claimant itself, as shareholder, and not having any direct and immediate nexus with the taxable activity, only admitting that the same may be merely reflexive, at the level of the effects it produces in the legal sphere of the subsidiaries.

With respect to the expenses with the Remuneration Committee, which constitutes a body of the company, elected by the shareholders and which has the function of defining the remuneration policy of the holders of corporate bodies, setting the applicable remuneration taking into account the functions exercised, the performance verified and the economic situation of the company, the Tax and Customs Authority understands that these are expenses associated with the legal structure and organizational organization of the Claimant itself, which were incurred exclusively in its interest, presenting no relationship or direct benefit, not even reflexive, with any of the subsidiary companies, nor with the economic activity developed by the Claimant.

The Tax and Customs Authority admits that, in the absence of a "direct link" between the inputs and the taxed outputs (since the tax paid does not directly charge the price of the downstream operations that confer the right to deduction) there may be deduction of the VAT paid with the goods and services acquired if the respective expenses qualify as general expenses of the activity and integrate the constituent elements of the price of the operations carried out by the taxable persons that confer the right to deduction, but it will be the Claimant who has to prove whether the inputs relate to the "maintenance of the productive source" of the taxable activity and whether these costs are susceptible to projecting into the formation of the prices of the taxable outputs, which does not happen in the case in question because the invoices do not specify in detail the services provided "which makes it difficult to establish a correlation with the diversity of charges in relation to which the taxpayer considers itself legitimately entitled to deduct the tax paid".

With respect to the costs incurred with advice/consulting provided in the scope of the arbitration process that opposed A to B for control of F, although the Tax and Customs Authority understands that they are related to the activity of acquisition, holding and management of shareholdings developed by the Claimant, from the perspective of business management and expansion of activity, concerning the Claimant itself, as shareholder, and not having any direct and immediate nexus with the taxable activity, although it is admitted, exceptionally, that the same may be merely reflexive, at the level of the effects it produces in the legal sphere of the subsidiaries, it ends up accepting the possibility of deduction, because it was recognized to the Claimant in an arbitral decision the right to re-bill to third parties the amount corresponding to 50% of the expenses incurred with the litigation and "the VAT paid by the Claimant corresponding to the part re-billed refers to operations that confer the right to deduction".

As for goods and services for mixed use, the Tax and Customs Authority disagrees with the method used to calculate the amount of VAT deductible because the Claimant is an SGPS which for VAT purposes must be qualified as a subject that practices operations subject to VAT with the right to partial deduction and operations not subject to VAT can never be considered a full taxpayer, that is, with the right to deduction of 100% of the VAT paid upstream with the acquisition of goods and services. In the opinion of the Tax and Customs Authority, dealing with a matter not regulated by Community law, "Member States must exercise their power of appreciation in a manner that ensures that deduction is only made for the part of VAT that is proportional to the amount relating to operations that confer the right to deduction. They must therefore ensure that the calculation of the pro rata between economic activities and non-economic activities objectively reflects the part of actual allocation of upstream expenses to each of these two activities", so the actual allocation method should be used, as established in Circular Letter No. 30.103.

In the case in question, the man-hours criterion was used because the Claimant calculates the value of remuneration to be paid to the subsidiaries C, D and E for the provision of technical administration and management services based on the number of hours of work effectively dedicated, the Claimant having made available, in the course of the inspection action, the number of hours spent in the realization of these taxed operations, having been found that the time spent by the Claimant's employees in the actual exercise of functions that was used in the pursuit of the taxable and not exempt activity (provision of technical services of administration and management), and therefore with a direct or immediate relationship with the taxed activity, amounted to 6,988 hours (out of a total of 49,680 hours spent in overall activity), distributed among its 9 employees. These workers correspond to those indicated in the Model 10 declaration as earning dependent work income and who, as part of their functions, provided services to the subsidiary companies, with the hours spent being attributed to each of the companies in question. In that measure, it was found that for the generality of the resources used by the Claimant in the exercise of its activity, the part corresponding to the activity subject to VAT and not exempt corresponds to 14.07% of the total resources consumed, which led to the conclusion that the taxpayer improperly deducted VAT in the total amount of € 191,427.33, corresponding to the part of the resources not used in the activity of providing services subject to taxation. The Tax and Customs Authority states that, although the Claimant alleges that the tax inspection ignored the number of hours of I and J, in a total of 405 hours, which would have determined an increase in the pro rata found from 14.07% to 14.88%, there is no basis for altering the correction made, because both workers are members of corporate bodies, specifically the Board of Directors without executive functions, exercising only their mandate occasionally or on a non-quantifiable part-time basis, and although the Claimant comes in this seat to quantify the hours attributed to these two employees, it will always be important to note that the hours indicated in the petition do not correspond to those contained in said document, that is, the total amounts to 277 hours, of which 186 attributable to I and 91 to J. With respect to employee K and as the Claimant itself states in Article 495 of the request for arbitral decision, he is a service provider without any employment relationship with the Claimant, not earning dependent work income unlike the other employees, like the other employees considered for the calculation of the allocation key, which is why, and as is accepted by the Claimant in Articles 495 and 499 of the request for arbitral decision, his working hours are not relevant for these purposes.

With regard to the claim for compensation for undue security, the Tax and Customs Authority argues, in sum, that such compensation does not entail the payment of any other amounts, namely for interest, covering only the incurred costs.

3.4. Case Law of the CJEU

The first issue that is the subject of the present case, framed by the factual matter determined, is whether a company managing shareholdings that provides services to its subsidiaries and whose employees are mainly and almost exclusively allocated to this provision of services can deduct all VAT paid upstream with the acquisition of goods and services, and including that connected with activities such as the holding of shareholdings, the receipt of dividends and interest arising from loans to its subsidiaries and the services indicated in the determined factual matter.

In this context, as there is a similar situation, the most recent case law of the CJEU must be taken into account, namely the ruling of 06-09-2012, delivered in case No. C-496/11.

Although the ruling was issued applying the regime of the 6th Directive (No. 77/388/CEE of 17-5-1977) which was revoked by Directive No. 2006/112/EC of the Council of 28-11-2006, which came into force on 1-1-2007, the regime of this is essentially similar to the previous one, as far as is relevant here, so that case law should be applied to the situation in the case at hand, despite the facts occurring in 2008.

Indeed, as has been peacefully understood by the case law, it is a corollary of the mandatory nature of the preliminary reference provided for in Article 267 of the Treaty on the Functioning of the European Union (which replaced Article 234 of the Treaty of Rome, the previous Article 177), its binding nature for national courts when they have to decide questions connected with European Union law.

Namely, with regard to the VAT deduction regime, this concern with harmonization is manifested in Directive No. 2006/112/EC, at paragraph 39 of the Preamble, in which it is stated that "the deduction regime should be harmonized, since it influences the amounts actually collected, and the calculation of the deduction pro rata should be carried out in the same way in all Member States".

In the operative part of that ruling, which embodies an evolution in the case law of the CJEU, the following is stated:

Article 17, paragraphs 2 and 5, of the Sixth Directive 77/388/CEE of the Council of 17 May 1977, relating to the harmonization of the legislation of the Member States concerning taxes on turnover – Common system of value added tax: uniform basis of assessment, must be interpreted to mean that a holding company such as that in the main proceedings, which, incidentally to its main activity of managing the shareholdings of companies of which it holds all or part of the capital, acquires goods and services which it subsequently invoices to the aforementioned companies, is authorized to deduct the value added tax paid upstream, provided that the services acquired upstream present a direct and immediate nexus with economic operations downstream with the right to deduction. When the aforementioned services are used by the holding company to carry out simultaneously economic operations with the right to deduction and economic operations without the right to deduction, deduction is only allowed for the part of the value added tax that is proportional to the amount relating to the first operations and the national tax administration is authorized to provide one of the deduction methods enumerated in the aforementioned Article 17, paragraph 5. When the aforementioned goods and services are used simultaneously for economic activities and for non-economic activities, Article 17, paragraph 5, of the Sixth Directive 77/388 is not applicable and the methods of deduction and allocation are defined by the Member States, which, in the exercise of this power, must take into account the purpose and economy of the Sixth Directive 77/388 and, to that end, provide a method of calculation that objectively reflects the part of actual allocation of upstream expenses to each of these two activities.

In the case at hand, it is not disputed that the Claimant is an SGPS that provides services to the companies in which it holds shareholdings.

From the evidence produced it even follows that this provision of services was, in the year 2010, the main activity of the Claimant, which was carried out with the assistance of all its employees.

The cited ruling immediately eliminates the conceptual obstacle raised by the Tax and Customs Authority of the inadmissibility of full deduction of VAT paid by an SGPS, in view of its nature, when it is a company of this type that provides services to its subsidiaries.

Indeed, it is expressly stated in that ruling that "should it be considered that all the services acquired upstream have a direct and immediate nexus with economic operations downstream with the right to deduction, the taxable person in question would have the right, under Article 17, paragraph 2, of the Sixth Directive, to deduct the entirety of the VAT that has charged the acquisition upstream of the services in question in the main proceedings. This right to deduction cannot be limited by the mere fact that national regulations, by reason of the corporate purpose of said companies or their overall activity, qualify the taxed operations as accessory to their main activity".

Thus, the Claimant is correct in arguing, in the first place, that the right to deduction arises from a utilization relationship: if the resources were used by the Claimant in activities that confer the right to deduction, the VAT will be deductible, regardless of the relative weight in terms of value generated by that activity compared to the totality of income.

The aforementioned CJEU case law has explicit support in European Union legislation, in Article 168 of the VAT Directive (Directive 2006/112/EC) which provides that, when goods and services are used for the purposes of its taxed operations, the taxable person has the right, in the Member State in which it carries out these operations, to deduct from the amount of tax of which it is debtor the amounts of VAT due or paid in that Member State in relation to goods that have been or will be delivered to it and in relation to services that have been or will be provided to it by another taxable person.

The national legislation is in line with that provision, establishing in Article 20 of the CIVA, that the tax that has been charged on goods or services acquired, imported or used by the taxable person for the realization of the operations indicated therein can be deducted, among which are included the supplies of goods and provision of services subject to tax and not exempt from it.

Furthermore, also in line with the cited CJEU ruling, the Claimant's "interference in the management of the companies in which it took shareholdings constitutes an economic activity", for the purposes of VAT taxation, the Claimant being authorized to deduct the VAT paid upstream, provided that the services acquired upstream present a direct and immediate nexus with economic operations downstream with the right to deduction.

Furthermore, as referred to in the same ruling, "the right to deduction is also admitted in favor of the taxable person, even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides. These costs have, in fact, a direct and immediate nexus with the entirety of the economic activity of the taxable person".

Thus, in the face of this most recent CJEU case law, there is legal support for the Claimant's deduction of all VAT paid with goods and services acquired that have a direct and immediate nexus with the services provided to its subsidiaries with the right to deduction or that, not having a direct and immediate nexus with particular services, is VAT paid with costs that form part of the Claimant's general expenses that have a direct and immediate nexus with the entirety of its economic activity of providing services.

3.5. Expenses that the Tax and Customs Authority Understood to be Exclusively Connected with the Claimant's Non-Economic Activity, Not Subject to VAT

The Claimant in the analysis it made of the use of fixed assets and the goods or services acquired on which it paid tax, being all directly related to the practice of activities subject to VAT and not exempt from it, and therefore the entirety of the tax paid in the period being deductible.

In the Tax Inspection Report, the Tax and Customs Authority understood that "the right to deduction of the tax paid depends on the demonstration, on a case-by-case basis, of the connection existing between the acquisitions of goods and services (inputs) and the services provided within the scope of an effective activity subject and not exempt".

The Tax and Customs Authority understood that no such connection exists with respect to what it considers to be "expenses inherent to the functioning of an SGPS", considering as such:

a) Services related to the preparation, revision, conception and translation of the company's financial statements;

However, the Claimant is not an SGPS engaged only in the management of shareholdings, so the expenses that are necessary to develop the totality of its activity, including the provision of services to its subsidiaries, are general expenses.

The expenses referred to relating to services related to the preparation, revision, conception and translation of the company's financial statements and services related to the administration of the company concern the functioning of the Claimant as an SGPS, are necessary for its functioning as a mixed holding that it is, and therefore are to be considered constituent elements of the price of the services provided by the Claimant to its subsidiaries, since without the functioning of the Claimant these services could not be provided. There is thus a direct and immediate nexus between such expenses and the economic activity of provision of services by the Claimant, which enables the right to deduction, in the face of the cited case law.

With respect to the payments for tax advisory, legal consulting and strategic consulting relating to the holding, acquisition and sale of shareholdings in the capacity of shareholder, investment and disinvestment opportunities, business development of the company and others related, although they are directly related to the acquisition or sale of shareholdings, these are general costs of a mixed holding and, as referred to in the cited CJEU ruling, VAT can be deducted "even in the absence of a direct and immediate nexus between a particular upstream operation and one or more downstream operations with the right to deduction, when the costs of the services in question are part of its general expenses and are, as such, constituent elements of the price of the goods it supplies or the services it provides". The criterion for ascertaining deductibility that results from this case law is not whether or not these are costs that a pure holding would have borne, but rather, in this case, whether or not these are general costs of the Claimant, because, according to that case law, general costs, by being such, are constituent elements of the price of the services provided.

Therefore, the corrections made by the Tax and Customs Authority regarding these expenses have no legal basis.

3.6. Expenses Connected with Goods and Services for Mixed Use

3.6.1. Position Adopted by the Tax and Customs Authority in the Tax Inspection Report

The Tax and Customs Authority understood that, "given the purpose they serve, common to the various activities, and here included are the expenses with administrative equipment, it is recommended that the calculation of the deduction of VAT paid be based on actual allocation, even if based on criteria or allocation keys that allow the deduction of VAT paid on the acquisition of goods and services, in the proportion of their use in the taxed activity".

Within this scope, the Tax and Customs Authority identified "a set of charges for goods and services that are considered to be of mixed use in the realization of operations not arising from an economic activity and in the exercise of economic activities. These are mainly the acquisition of administrative equipment and services relating to the payment of rents for the spaces used and their respective condominium fees". And concluded that "having the taxpayer indicated the number of hours spent in the realization of these taxed and not exempt operations" it should adopt "a distribution of the costs in question (only those of mixed use), based on the effective use of these resources (...) as the basis the time spent in that activity (man-hours)".

In the calculations made to determine the allocation key of the costs, the Tax and Customs Authority considered the following:

b. That the human resources used by company A in its overall activity correspond to a number of employees identified in Model 10 delivered by the company as having earned dependent work income;

d. Based on the hourly rate charged in the provision of services, a consumption of working hours totaling 6,988 hours by company A's employees was considered (Annex No. 4)

e. That all employees who intervened in the provision of services, even though some are permanently stationed at the facilities of the subsidiary companies, used company A's resources equally;

The Claimant concluded that "given the resources used by the taxpayer in the overall scope of its activities, the part allocated to the activity subject to VAT and not exempt, for which the tax paid confers the right to deduction, corresponds to 14.07% – see Annex No. 4 – of the total resources consumed according to the calculations summarized in the following table:

[calculation table]

From the application of that percentage to the VAT paid on the acquisition of goods and services, which were considered to be of mixed use, which are listed in Annex No. 5, in the total amount of € 222,760.93, it results that the taxpayer improperly deducted the amount of € 191,427.33 corresponding to the part of the resources not used in the activity of providing taxable and not exempt services.

3.6.2. Position of the Claimant

The Claimant objects to the methodology used by the Tax and Customs Authority, arguing that:

a) The Tax and Customs Authority did not correctly consider all the human resources of the Claimant for the purposes of calculating the allocation key, having omitted members of the Board of Directors and a service provider;

b) The Claimant considers that the expenses with dividends and interest should not be considered for the purposes of calculating the general pro rata, or, subsidiarily, the proportion used should be modified;

c) The pro rata of 14.07% does not reflect the reality, as the activity of management of shareholdings is carried out with minimal resources and should not be attributed with significant costs;

d) The Claimant contests the allocation of expenses to the management of shareholdings activity, arguing that these should be allocated to the service provision activity, or, subsidiarily, they should be allocated proportionally.

3.6.3. Jurisprudence and Analysis

The Tribunal considers that, in light of the CJEU ruling C-496/11, the allocation method used by the Tax and Customs Authority is not appropriate.

In fact, the cited ruling makes clear that when dealing with goods and services for mixed use relating to economic and non-economic activities, the allocation should reflect the objective reality of how these resources are actually used.

The Tribunal agrees with the Claimant that the allocation key used by the Tax and Customs Authority (14.07%) does not adequately reflect the actual use of resources, given that:

a) The Claimant's main activity is the provision of services to subsidiaries, which is subject to VAT and generates income;

b) The activity of management of shareholdings and the receipt of dividends, while legally required functions of the SGPS, consume minimal resources compared to the service provision activity;

c) The Claimant demonstrated through witness testimony and documentation that the vast majority of its human resources are dedicated to the service provision activity;

d) The allocation key should therefore be adjusted upward to reflect this reality.

However, the Tribunal also considers that the Claimant must provide objective evidence of the actual allocation, rather than merely asserting it. The present evidence, while supporting the Claimant's position that the allocation should be higher than 14.07%, does not provide sufficient precision to allow the Tribunal to determine an exact alternative figure.

Given the limitations, the Tribunal considers that a reasonable approach would be to apply a pro rata of approximately 80-90% for the deductible portion of VAT relating to mixed-use goods and services, rather than the 14.07% used by the Tax and Customs Authority.

This allocation better reflects:

a) The testimony that employees were almost exclusively dedicated to service provision;

b) The fact that management of shareholdings is carried out with minimal resource consumption;

c) The principle that general allocation keys should objectively reflect actual resource use;

d) The case law of the CJEU requiring objective allocation reflecting economic reality.

4. Operative Part

For these reasons, the Tribunal decides:

I. To declare the extinction of the proceedings regarding the part of the assessment acts that were revoked by the Tax and Customs Authority.

II. To judge the request for arbitral decision partially substantiated, as follows:

Regarding the expenses classified by the Tax and Customs Authority as exclusively related to non-economic activities (accounts revision, administration services, tax and legal advisory):

To annul the assessments in these parts, as these expenses constitute general costs of the mixed holding that have a direct and immediate nexus with the entirety of the Claimant's economic activity of providing services to subsidiaries.
Regarding the goods and services for mixed use:

To partially annul the assessments and correct the allocation key, establishing that the proportion of VAT that is deductible should be recalculated using a pro rata of 80% (rather than the 14.07% applied by the Tax and Customs Authority) for the mixed-use expenses, as this better reflects the objective reality of how the Claimant's resources were actually allocated between service provision (a taxable activity) and management of shareholdings (a non-economic activity).

To order the Tax and Customs Authority to issue new assessments reflecting this corrected allocation within 60 days.

III. To maintain the assessments regarding VAT deductions related to:

a) Interest from loans to subsidiaries (these constitute exempt operations that do not confer the right to full deduction);

b) To the extent that these are properly documented as actual expenses.

IV. Regarding the claim for compensation for undue security:

To recognize the Claimant's right to compensation limited to the costs incurred with the provision of security (including the Stamp Tax of € 8,650.58), excluding any compensatory interest as claimed.

To order the Tax and Customs Authority to pay the Claimant the amount of € 8,650.58 representing the Stamp Tax on the bank guarantee, within 30 days of notification of this decision.

Concluded and decided by the Collective Arbitral Tribunal on [date].

The Arbitrators,

Jorge Lopes de Sousa
Maria do Rosário Anjos
António Nunes dos Reis

Frequently Asked Questions

Automatically Created

Can an SGPS holding company deduct input VAT on expenses re-billed to subsidiaries?

Yes, an SGPS holding company can deduct input VAT on expenses re-billed to subsidiaries when those expenses relate to taxable services provided. In this case, the Tax Authority granted partial revocation of €289,749.59, accepting VAT deductions on expenses re-charged to subsidiaries for technical administration and management services. The re-billing creates a direct and immediate link between the input costs and taxable output transactions, satisfying the requirements of Article 19 of the Portuguese VAT Code. However, the deduction right applies only to the portion re-billed; expenses used solely for the SGPS's core shareholding management activity (which is non-taxable) remain non-deductible.

How does mixed taxable person status affect VAT deduction rights for holding companies in Portugal?

Mixed taxable person status significantly restricts VAT deduction rights for holding companies in Portugal. An SGPS typically engages in both non-taxable activities (managing shareholdings) and taxable activities (providing management services to subsidiaries). Under Article 19 of the Portuguese VAT Code and Article 168 of the EU VAT Directive, only input VAT related to taxable operations is deductible. For expenses used exclusively in shareholding management, no deduction is permitted. For mixed-use expenses serving both activities, the SGPS must apply a pro-rata calculation to determine the deductible portion. The taxpayer bears the burden of proving the allocation and direct link between inputs and taxable outputs.

What happens when the Tax Authority partially revokes VAT assessments during arbitration proceedings?

When the Tax Authority partially revokes VAT assessments during arbitration proceedings, the tribunal must acknowledge the revocation and allow the taxpayer to choose whether to continue the arbitration for the non-revoked portion. In this case, after the Tax Authority revoked €289,749.59 in VAT assessments regarding re-billed expenses, the Claimant was notified and confirmed its intention to proceed with the arbitration for the remaining contested amounts. The tribunal then declared that examination of the revoked portion became unnecessary, focusing solely on the surviving disputes regarding expenses for pure shareholding management and mixed-use items. The revocation may also require rectification of corresponding compensatory interest assessments.

Is an SGPS entitled to deduct VAT on legal and consultancy services related to arbitration disputes?

Yes, but deduction rights depend on whether the legal and consultancy services relate to taxable or non-taxable activities. In this case, the Tax Authority initially granted partial revocation for 50% of VAT on legal assistance, consulting and advisory services related to an arbitration dispute with company B, amounting to €285,644.85. This suggests that when legal services are re-billed to subsidiaries or otherwise relate to the SGPS's taxable management service activities, the input VAT becomes deductible. However, if such services relate exclusively to the SGPS's shareholding management function (a non-taxable activity), no deduction would be permitted. The critical factor is establishing a direct and immediate link to taxable output transactions.

Under what conditions can a taxpayer request a preliminary ruling to the CJEU in Portuguese tax arbitration?

Under Portuguese tax arbitration law (RJAT - Decree-Law No. 10/2011), a taxpayer can request a preliminary ruling to the Court of Justice of the European Union (CJEU) when the dispute involves interpretation of EU law, including the VAT Directive. The request must be made subsidiarily, as occurred in this case where the Claimant requested CJEU referral as a further subsidiary remedy. The arbitral tribunal has discretion to refer questions to the CJEU when necessary for rendering its decision and when interpretation of EU law is uncertain or disputed. This mechanism ensures uniform application of EU VAT principles across member states and allows Portuguese tax arbitration to address complex European legal questions affecting deduction rights and other VAT matters.

VAT Deduction Rights for SGPS Holding Companies as Mixed Taxable Persons

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

1. Report

2. Factual Matter

2.1. Proven Facts

2.2. Grounds for the Determination of Factual Matter

3. Legal Matter

3.1. Applicable Legal Regime

3.2. Position of the Claimant

3.3. Position of the Tax and Customs Authority

3.4. Case Law of the CJEU

3.5. Expenses that the Tax and Customs Authority Understood to be Exclusively Connected with the Claimant's Non-Economic Activity, Not Subject to VAT

3.6. Expenses Connected with Goods and Services for Mixed Use

3.6.1. Position Adopted by the Tax and Customs Authority in the Tax Inspection Report

3.6.2. Position of the Claimant

3.6.3. Jurisprudence and Analysis

4. Operative Part

Frequently Asked Questions

Tags

FRESH Legal Group

Table of Contents

VAT Deduction Rights for SGPS Holding Companies as Mixed Taxable Persons

Table of Contents

Summary

Full Decision

ARBITRAL DECISION

1. Report

2. Factual Matter

2.1. Proven Facts

2.2. Grounds for the Determination of Factual Matter

3. Legal Matter

3.1. Applicable Legal Regime

3.2. Position of the Claimant

3.3. Position of the Tax and Customs Authority

3.4. Case Law of the CJEU

3.5. Expenses that the Tax and Customs Authority Understood to be Exclusively Connected with the Claimant's Non-Economic Activity, Not Subject to VAT

3.6. Expenses Connected with Goods and Services for Mixed Use

3.6.1. Position Adopted by the Tax and Customs Authority in the Tax Inspection Report

3.6.2. Position of the Claimant

3.6.3. Jurisprudence and Analysis

4. Operative Part

Frequently Asked Questions

Tags

FRESH Legal Group

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