VAT Deduction Rights for Holding Companies (SGPS) – CAAD Ruling 759/2016-T

CAAD TAX ARBITRATION DECISION - ENGLISH TRANSLATION

The arbitrators Counselor Dr. José Baeta de Queiroz (presiding arbitrator), Dr. Ricardo Rodrigues Pereira and Dr. Daniel Taborda, designated by the Deontological Council of the Administrative Arbitration Centre to form the Arbitral Tribunal, hereby agree as follows:

I. REPORT

1. On 28 December 2016, the commercial company A…, S. A., NIPC …, with registered office at Rua …, no. …, Lisbon (hereinafter, Claimant), filed a request for constitution of an arbitral tribunal, pursuant to the combined provisions of articles 2.º, no. 1, paragraph a), and 10.º, nos. 1, paragraph a), and 2, of Decree-Law no. 10/2011, of 20 January, which approved the Legal Regime of Arbitration in Tax Matters, as amended by article 228.º of Law no. 66-B/2012, of 31 December (hereinafter, briefly designated RJAT), seeking:

• The declaration of illegality and annulment of the act of additional VAT assessment no. 2016…, of the act of assessment of compensatory interest no. 2016 … and corresponding statements of account adjustment nos. 2016 … and 2016 …, from which resulted the total amount payable (tax and interest) of € 335.394,52; and

• The declaration of illegality and annulment of the act of dismissal of the voluntary review claim no. …2016…, which was processed by the Large Taxpayers Unit, filed against the aforementioned acts.

The Claimant submitted 11 (eleven) documents and listed one witness, having not requested the production of any other evidence.

The Respondent is AT – Tax and Customs Authority (hereinafter, Respondent or AT).

1.1. In essence and in brief summary, the Claimant alleged the following:

It is a company managing equity interests, its corporate purpose consisting of "management of equity interests in other companies, as an indirect form of carrying out economic activities", and by virtue of holding equity interests, it derives dividends distributed to it by its investee companies.

In addition to holding equity interests, it develops a set of service provision activities for the benefit of the companies in which it holds interests, with particular emphasis on the areas of financial planning, fiscal and legal advice, control systems, information reporting and accounting.

This activity, in contrast to the mere holding of equity interests, requires a significant set of resources (technical and human) which the Claimant has at its disposal or, in cases where it does not have an adequate physical and human structure to meet the needs of its subsidiary companies, it resorts to third-party entities (to which it subcontracts the provision of specialized services), at its own indication and risk, for the same purpose, concentrating in itself all the Group's expertise in these areas.

In situations where the Claimant does not have sufficient or adequate means, it subcontracts specialized third-party entities that charge VAT.

VAT is also charged on the services that the Claimant provides to the investee companies.

Additionally, as an ancillary activity, the Claimant grants credit to the investee companies whenever necessary, in return for remuneration through a market interest rate; these financing operations are exempt from VAT and do not confer the right to deduction.

Given the characteristics of the activity it develops and the distinct VAT framework applicable to operations carried out during the year 2013, the Claimant adopted a VAT deduction methodology for the VAT incurred in its acquisitions/expenses that separates the VAT incurred in acquisitions of goods and services entirely allocated to taxable operations – the Claimant having proceeded with the full deduction of the tax – from the VAT incurred in inputs that are allocated simultaneously to operations that confer the right to deduction and to operations that do not confer such right. With respect to these mixed-use inputs, the Claimant used ratios (resulting from objective and suitable indicators) constructed on the basis of activities that do not confer the right to deduction, namely financing activity and dividends, so as to allocate them to the total VAT supported, and determining the corresponding VAT allocated to activities that confer the right to deduction, ensuring a fair VAT deduction key.

The Claimant's starting point was based on management information, which allows various costs and the respective VAT incurred to be allocated to each of its Corporate Units/Departments, based on allocation by cost centres. With costs and VAT incurred determined by each Department, and taking into account the nature of the specific contribution of each to the areas of activity, the Claimant used objective criteria which, for each type of operation, allowed it to determine the effective level of consumption of mixed resources and the inherent VAT.

The objective criteria used were, in general, those which the AT recommends as adequate in the administrative understandings it has issued on this matter, namely the criterion of the number of persons or person-hours allocated to the operations or areas in question (Circular Memorandum no. 30103/2008, of 23 April).

The VAT was deducted during the year 2013 on the basis of a provisional indicator, under article 23.º, no. 6, of the VAT Code, having been adjusted at year-end, already including all operations of that year; the mentioned provisional indicator was 70%. As a result of the final application of the mentioned objective allocation criteria, the deduction level was fixed, with reference to 31 December 2013, at 95.34% of VAT deductible in mixed-use resources.

Having the Claimant deducted VAT during the year 2013 in a lower percentage (70% instead of 95.34%), it made a year-end adjustment – VAT regularization – in the corresponding amount of € 494.154,95, in field 40 of the periodic VAT return for the period of December 2013, in accordance with article 23.º, no. 6, of the VAT Code.

The vast majority of expenses incurred by the Claimant and consumed in the activity of provision of technical services and management and administration to its investees have a highly diverse nature, encompassing communications, document management and filing, studies and opinions, surveillance and security, cleaning, condominium expenses, office supplies, among others, and are unequivocally expenses of the Claimant allocated to its economic activity.

The Claimant was subject to an external tax inspection procedure of general scope, having been notified of the Tax Inspection Report, through which VAT adjustments were proposed in the amount of € 304.711,07, on the grounds that tax was deducted in excess by means of the regularization carried out; that is, the AT refuses the regularization carried out by the Claimant, with reference to the year 2013, in the amount of € 304.711,07, which concerns mixed-use resources.

Subsequently, the disputed tax acts were issued and notified to the Claimant, which presented a voluntary review claim, arguing for the illegality of those acts; that voluntary review claim was subject to a dismissal order.

From the Claimant's perspective, the principles on which the dismissal of the claim presented is based are unacceptable – since neither the deduction method that was used in 2013, which forms the basis of the disputed assessments, nor the nature of the expenses incurred and consumed in the activity of provision of technical services and management to its investees was called into question –, which is why it requests the present arbitral decision.

1.2. The Claimant concludes its initial statement by petitioning the following:

"In view of which it is requested of Your Excellency the admission of the present request for arbitral decision, in accordance with and for the purposes of Decree-Law no. 10/2011, of 20 January, applying the effects mentioned in article 13.º and following the procedure provided for in articles 17.0 and et seq. of the said diploma, all with the due legal consequences, concluding ultimately by the annulment of the order dismissing the voluntary review claim presented and, likewise, by the declaration of full illegality of the tax acts now in question – of the tax act of VAT assessment with the number 2016…, of the consequent act of assessment of interest with the number 2016… and act of statement of account adjustment with the numbers 2016… and 2016… –, with the consequent refund of the amount improperly paid by the Claimant – should this occur in the meantime pending in these proceedings –, all with the due legal consequences, in particular with regard to payment of compensatory interest.

Further requested is, from now, the indemnification provided for in article 171.º of the CPPT and in article 53.º of the LGT, should the guarantee presented by the Claimant with a view to the suspension of the fiscal execution proceedings instituted by virtue of the debt whose legality is now being contested be judged improper (see document no. 11, which is attached and whose contents are hereby fully incorporated for all legal purposes)."

1. The request for constitution of an arbitral tribunal was accepted and automatically notified to the AT on 30 December 2016.

2. The Claimant did not proceed with the appointment of an arbitrator, wherefore, under the provisions of paragraph a) of no. 2 of article 6.º and paragraph a) of no. 1 of article 11.º of the RJAT, the President of the Deontological Council of the CAAD designated as arbitrators of the collective Arbitral Tribunal Counselor Dr. José Baeta de Queiroz, Dr. Ricardo Rodrigues Pereira and Dr. Daniel Taborda, who communicated acceptance of the appointment within the applicable timeframe.

3.1. On 13 February 2017, the Parties were duly notified of this designation, having expressed no intention to refuse the designation of the arbitrators, in accordance with the combined terms of article 11.º, no. 1, paragraphs b) and c), of the RJAT and articles 6.º and 7.º of the Code of Ethics of the CAAD.

3.2. Thus, in accordance with the provision of paragraph c) of no. 1 of article 11.º of the RJAT, the collective Arbitral Tribunal was constituted on 7 March 2017.

1. On 7 April 2017, the Respondent, duly notified for this purpose, presented its Response in which it specifically contested the arguments put forward by the Claimant, having concluded for the lack of merit of the present action.

4.1. In essence and also briefly, it is important to extract the most relevant arguments on which the Respondent based its Response:

Within the scope of the external inspection procedure of general scope relating to the year 2013, to which the Claimant was subject, it was concluded that there was improper deduction of VAT in the amount of € 304.711,07, by express violation of the provisions of articles 19.º and 20.º of the VAT Code; specifically, that improper deduction concerns the part of the tax supported with the acquisition of specialized services, which was concluded not to have been used in the activity of provision of technical administration and management services, subject to VAT and not exempt from it, which results in the violation of the mentioned provisions of the VAT Code.

The inspection procedure aimed at the definition of an objective criterion that would enable the allocation of expenses incurred to the different activities carried out by the Claimant, allowing the proportional deduction of tax based on the application of an allocation key.

When invited to demonstrate which expenses supported it incorporates in the value of services rendered and invoiced to its investees, the Claimant sent the table transcribed on page 35 of the Tax Inspection Report without, however, demonstrating a direct nexus between inputs and outputs, revealing only that the expenses identified there constitute general expenses of the Claimant and become constitutive elements of the price of the services provided by it.

According to the Claimant, the total of expenses incurred was € 18.472.445,02 and refer to operational costs resulting from the exercise of the activity of provision of support services to some of its investees. Such expenses were passed on to each of the companies to which the Claimant provides services in the proportion corresponding to a ratio constructed on the basis of human resources of the Claimant, to which is added a margin of 8.5%, mentioned in the transfer pricing file. Thus, being expenses incurred in the exercise of an activity subject and not exempt from VAT, according to such criterion, the total amount invoiced to the investees should have corresponded to € 20.042.602,84 (18.472.445,02x1,085).

However, this did not happen, because from the data provided by the Claimant it was possible to ascertain that in the total of such expenses (€18.472.445,02) a part (€ 4.552.051,81) had been included that should not be passed on in the value of services provided to investee companies, as management fees, having it only invoiced the amount of € 15.103.628,00 [(€ 18.472.445,02-€ 4.552.051,81)x1,085].

In that circumstance a ratio of 24.64% was found which corresponds to the relative weight of the Claimant's current expenses not passed on to the investee companies, in the total of € 4.552.051,81. The ratio thus determined corresponds to the part of VAT that was deducted by the Claimant, but which does not have a direct and immediate relationship with the totality of its economic activity (downstream operations), since, although such inputs form part of general expenses, they were not passed on in the prices of services provided to investee companies.

In this way, the correction made and which is at the basis of the present arbitral request corresponds to the difference between the VAT deducted by the Claimant and the VAT supported which does not confer the right to deduction (determined by application of the 24.64% ratio to the total of tax supported), with no reason whatsoever favouring the Claimant.

Not discerning the existence of any direct and immediate relationship with the taxed activity, even if merely reflexively, it does not appear that one can understand that we are dealing with a general expense.

In that measure, it is concluded that the services contracted by the Claimant were in its exclusive interest and not for the benefit of any of its investees, being related to the activity of shareholder, management of equity interests (not economic), therefore not subject to VAT, and which by definition cannot be allocated to the investees.

In sum, we are dealing with expenses that concern the company itself and are carried out in its exclusive interest, with it being impossible to establish any relationship of use between these resources and the taxed activity, which would always be incurred, regardless of the fact that the Claimant provides any ancillary services to its investees, not presenting a direct, immediate or unequivocal nexus, or even reflexive, with those same taxed activities, and which did not burden the price of operations carried out downstream.

The Respondent thus concludes its statement:

"In view of which the present request for arbitral decision should be judged without merit, as not proven, and, consequently, the Respondent absolved of all requests with the legal consequences."

4.2. Subsequently, the Respondent attached to the proceedings its respective administrative file (hereinafter, briefly designated PA).

1. On 17 March 2017, the meeting referred to in article 18.º of the RJAT took place – in which the contents of the respective minutes, which are hereby fully incorporated, were discussed and 20 July 2017 was set as the deadline for the issuance of the arbitral decision – and the witness listed by the Claimant was also examined.

2. Both Parties presented written submissions, in which they reiterated the positions previously assumed in their respective statements.

II. THRESHOLD ISSUES

The Arbitral Tribunal was regularly constituted and is competent.

The proceedings do not suffer from any nullities.

The parties have legal standing and capacity, are duly represented and are legitimate.

There are no exceptions or preliminary issues that prevent consideration of the merits and which must be addressed.

III. GROUNDS

III.1. MATTERS OF FACT

§1. PROVEN FACTS

The following facts are considered proven:

a) The Claimant is a Portuguese joint-stock company whose corporate purpose is the management of equity interests in other companies, as an indirect form of carrying out economic activities, acting as an Equity Interest Management Company (SGPS) (CAE 70100).

b) For VAT purposes, the Claimant is classified under the normal regime of monthly periodicity.

c) In the year 2013, the Claimant was named "B…, SGPS, S. A.", being a company resulting from the merger by incorporation of "C… SGPS, S. A." into "D… SGPS, S. A.".

d) In addition to the exercise of the activity of management of equity interests, from which it derives dividends distributed to it by its investees, the Claimant develops the activity of provision of technical administration and management services to the companies in which it holds interests, with special emphasis on the areas of financial planning, fiscal and legal advice, control systems, information reporting and accounting.

e) The mentioned activity of service provision requires a significant set of resources (technical and human) which the Claimant has at its disposal or, in cases where it does not have an adequate physical and human structure to meet the needs of its subsidiary companies, to which it resorts from third-party entities (to which it subcontracts the provision of specialized services), at its own indication and risk, for the same purpose, concentrating in itself all the expertise of the Group in these areas.

f) In situations where the Claimant does not have sufficient or adequate means and subcontracts specialized third-party entities, these charge VAT to the Claimant.

g) VAT is also charged on the services that the Claimant provides to the investee companies.

h) As an ancillary activity, the Claimant grants credit to the investee companies whenever necessary, in return for remuneration through a market interest rate.

i) Given the characteristics of the activity it develops and the distinct VAT framework applicable to operations carried out during the year 2013, the Claimant adopted the following methodology for deduction of VAT incurred in its acquisitions/expenses [cf. document no. 6 attached to the Initial Statement]:

• Exclusive resources – Full actual allocation or direct allocation:

        - With reference to tax incurred in acquisitions of goods and services (inputs) entirely allocated to taxable operations, specifically in costs exclusively attributable to technical service provision, the Claimant proceeded with the full deduction of the tax (direct allocation, which it also designates as "actual allocation" [at 100%]), under paragraph a) of no. 1 of article 20.º of the VAT Code.
  
        - In 2013, the VAT deducted by this method amounted to € 39.625,22.
  

• Mixed-use resources – Partial actual allocation:

        - With regard to VAT incurred in inputs that are allocated simultaneously to operations that confer the right to deduction (i.e., taxed in VAT) and to operations that do not confer such right (not arising from an economic activity or operations exempt from VAT), the Claimant used the method of actual allocation, in accordance with the provisions of no. 2 of article 23.º of the VAT Code, having determined the measure of deductible VAT based on objective criteria.
  

j) Concretely, with respect to the so-called mixed-use inputs, the Claimant used ratios (arising from objective indicators) constructed on the basis of activities that do not confer the right to deduction, namely financing activity and dividends, so as to allocate them to the total VAT supported, and determining the corresponding VAT allocated to activities that confer the right to deduction.

k) The Claimant's starting point was based on management information, which allows the various costs and the respective VAT to be allocated to each of its Corporate Units / Departments, based on allocation by cost centres, such Departments being the following: Board of Directors/Executive Committee; General Secretariat; Central Planning and Control Directorate; Central Financial and Administrative Directorate; Human Resources Directorate; Central Legal Directorate; Internal Audit Unit; Communications and Multimedia Contents Directorate; Central Business Development Directorate; Operators, Regulation and Competition Directorate; Investor Relations Directorate; and Common Centre.

l) With costs and VAT incurred determined by each of the Claimant's Departments, and taking into account the nature of the specific contribution of each to the areas of activity, the Claimant used objective criteria which, for each type of operation, allowed it to determine the level of consumption of mixed resources and the inherent VAT, in the following manner [cf. document no. 6 attached to the Initial Statement]:

a) Without right to deduction

        i. Dividends – consumption (insignificant) of VAT relating to mixed resources in the amount of € 17,86;

        ii. Financing to investees – consumption of VAT relating to mixed resources in the amount of € 95.679,97;

b) With right to deduction

i. Provision of technical services and management to investee companies – consumption of VAT relating to mixed resources in the value of € 1.957.691,66.

        m) The objective criteria used by the Claimant were, in general, those which the AT recommends as adequate in the administrative understandings it has issued on this matter, namely the criterion of the number of persons or person-hours allocated to the operations or areas in question (Circular Memorandum no. 30103/2008, of 23 April).

        n) In the particular case of the Board of Directors, since its contribution was manifested in management resolutions, the said resolutions were further analysed and those which had a connection with financing operations, with the holding of equity interests and, finally, with technical services and management to the investees were identified, a ratio being determined in accordance therewith.

o) The Claimant, during the year 2013, deducted the VAT value on the basis of a provisional indicator, under article 23.º, no. 6, of the VAT Code, having been adjusted at year-end, already including all operations of that year.

p) In 2013, the mentioned provisional indicator was 70%, and as a result of the final application of the mentioned objective allocation criteria, the deduction level was fixed, with reference to 31 December 2013, at 95.34% of VAT deductible in mixed-use resources.

q) Having the Claimant deducted VAT, during the year 2013, in a lower percentage (70% instead of 95.34%), it made a year-end adjustment in its favour – VAT regularization – in the corresponding amount of € 494.154,95, in field 40 of the periodic VAT return for the period of December 2013.

r) The expenses incurred by the Claimant and consumed in the activity of provision of technical services and management and administration to its investees have a highly diverse nature, encompassing, among others, communications, document management and filing, studies and opinions, surveillance and security, cleaning, condominium expenses and office supplies.

s) In compliance with Service Order no. OI2015…, an external inspection procedure of general scope was carried out, covering the year 2013, on the Claimant. [cf. document no. 7 attached to the Initial Statement and PA attached to the proceedings]

t) Following that inspection action, the respective Tax Inspection Report was prepared – a copy of which constitutes document no. 7 attached with the request for arbitral decision and is hereby fully incorporated –, which was notified to the Claimant, by means of memorandum no. …, of 29 December 2015, from the Large Taxpayers Unit, delivered by hand, and, furthermore, the following correction was made in respect of VAT [cf. document no. 7 attached to the Initial Statement and PA attached to the proceedings]:

[information regarding the VAT adjustment amount]

u) Subsequently, by virtue of the mentioned correction, the Claimant was notified of the additional VAT assessment no. 2016…, of the assessment of compensatory interest no. 2016 … and corresponding statements of account adjustment nos. 2016 … and 2016…, from which resulted the total amount payable (tax and interest) of € 335.394,52, with a voluntary payment deadline of 07/03/2016. [cf. documents nos. 2, 3, 4 and 5 attached to the Initial Statement]

v) The Claimant did not make the payment of the said amount of € 335.394,52.

w) As a result of that failure to pay, the following fiscal execution proceedings were instituted at the Lisbon Finance Service-… [cf. document no. 11 attached to the Initial Statement]:

(i) proceeding no. …2016…, in the amount of € 305.805,72; and

(ii) proceeding no. …2016…, in the amount of € 30.866,90.

x) The Claimant, with a view to obtaining the suspension of those fiscal execution proceedings, provided the following bank guarantees, issued by E… [cf. document no. 11 attached to the Initial Statement]:

(i) in the scope of the first of the two proceedings mentioned in the previous proven fact, guarantee no. …, in the amount of € 385.469,29; and

(ii) in the scope of the second of the two proceedings mentioned in the previous proven fact, guarantee no. …, in the amount of € 39.032,54.

y) On 4 May 2016, the Claimant filed a voluntary review claim – a copy of whose initial statement constitutes document no. 9 attached with the request for arbitral decision and is hereby fully incorporated –, petitioning the annulment of the additional VAT assessment no. 2016…, of the assessment of compensatory interest no. 2016 …and corresponding statements of account adjustment nos. 2016… and 2016…, as well as compensation for improper guarantee provision. [cf. PA attached to the proceedings]

z) The said voluntary review claim was registered under no. …2016… at the Lisbon Finance Service-… and subsequently referred to the Large Taxpayers Unit, having been, on 2 September 2016, issued an order, by the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit, agreeing with the draft decision, to the effect of its dismissal, in accordance with Information no. …-… /2016 [cf. PA attached to the proceedings].

aa) By order of 29 September 2016, from the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit, the said voluntary review claim was dismissed, in accordance with Information no. …-ADP/2016 – a copy of which is included in document no. 1 attached with the request for arbitral decision and is hereby fully incorporated –, which contains, furthermore, the following [cf. PA attached to the proceedings]:

[detailed information regarding the AT's reasoning in the dismissal order]

bb) The Claimant was notified, by means of memorandum no…., dated 29/09/2016, from the Management and Tax Assistance Division of the Large Taxpayers Unit, of the decision to dismiss the mentioned voluntary review claim. [cf. document no. 1 attached to the Initial Statement and PA attached to the proceedings]

cc) On 28 December 2016, the request for constitution of an arbitral tribunal was filed that gave rise to the present proceedings. [cf. processing management system of the CAAD]

§2. UNPROVEN FACTS

With relevance to the appraisal and decision of the case, there are no facts that have not been proven.

§3. GROUNDS AS TO MATTERS OF FACT

With respect to the proven matters of fact, the conviction of the Tribunal was founded on the facts alleged by the Parties, whose adherence to reality was not called into question, on the documents and the respective administrative file attached to the proceedings and, furthermore, on the testimonial evidence produced.

Regarding the statement given by the witness listed by the Claimant –N…, Planning and Control Director of "O…, S. A.", having previously and until 2015 held those functions in the Claimant, who testified in a clear, objective and impartial manner about the facts to which he was examined (matter of fact contained in articles 1.º to 22.º of the Initial Statement), with direct knowledge thereof, which was revealed and proven by the detailed manner in which he explained them, wherefore his testimony received full credibility –, the same corroborated, in essence, the factuality alleged by the Claimant, about which he testified.

III.2. MATTERS OF LAW

As was proven, the Claimant is an SGPS that, in addition to the exercise of the activity of management of equity interests – from which it derives dividends distributed to it by its investees –, develops the activity of provision of technical administration and management services to the companies in which it holds interests, with special emphasis on the areas of financial planning, fiscal and legal advice, control systems, information reporting and accounting.

The mentioned activity of service provision requires a significant set of resources (technical and human) which the Claimant has at its disposal or, in cases where it does not have an adequate physical and human structure to meet the needs of its subsidiary companies, to which it resorts from third-party entities (to which it subcontracts the provision of specialized services), at its own indication and risk, for the same purpose, concentrating in itself all the expertise of the Group A… in these areas.

In situations where the Claimant does not have sufficient or adequate means and subcontracts specialized third-party entities, these charge VAT to the Claimant.

VAT is also charged on the services that the Claimant provides to the investee companies.

It is precisely as a result of the active and direct intervention that the Claimant has in the management of its investees that the present dispute arises as to the possibility of deducting or not – and, if so, in what terms – the VAT supported by the Claimant in the upstream inputs.

In proceeding then to the resolution of this disagreement, we can already state that the reason is on the side of the Claimant, given the proven factuality and what is set out below regarding the legal regimes of equity interest management companies (SGPS) and the right to VAT deduction.

§1. THE LEGAL REGIME OF SGPS

The concept of a holding company is generically used to refer either to companies that limit themselves to managing securities portfolios passively, in a logic of risk distribution, or to companies that hold controlling interests and that actively intervene in the management of their investees, providing them or not with paid services.

It is usual to distinguish, among other modalities, between a pure holding and a mixed holding and between a financial holding and a management holding. In the first case, the distinguishing criterion lies in the exclusive nature of its corporate purpose, with the pure holding dedicating itself solely to the holding of equity interests and the mixed holding also having commercial and industrial activities as its corporate purpose. In the second case, the distinguishing criterion lies in the purpose to which the management of equity interests is directed, with the management holding aiming, more than the mere holding of equity interests, at the framing and direction of the investee companies, whereas the financial holding is aimed solely at the return on investment concentrated in the equity interests.

With respect to SGPS, we find its legal regime defined in Decree-Law no. 495/88, of 30 December – successively amended by Decree-Law no. 318/94, of 24 December, by Decree-Law no. 378/98, of 27 November and by Law no. 109-B/2001, of 27 December –, which provides in its article 1.º that SGPS "have as their sole corporate purpose the management of equity interests in other companies as an indirect form of carrying out economic activities" (no. 1), with "participation in a company being considered an indirect form of carrying out this company's economic activity when it does not have an occasional character and reaches at least 10% of the capital with voting rights of the investee company, whether by itself or through participations of other companies in which the SGPS is dominant" (no. 2), "participation being considered not to have an occasional character when it is held by the SGPS for a period exceeding one year" (no. 3).

Under article 4.º of the same legal instrument, SGPS are permitted "the provision of technical services of administration and management to all or some of the companies in which they hold participations or with which they have entered into subordination contracts" (no. 1), with such service provision being required to "be the subject of a written contract, in which the corresponding remuneration must be identified" (no. 2).

Within this framework, it is usual to qualify the SGPS as a pure holding – to the extent that it is limited as to its corporate purpose, in the terms referred to above, which prevents it from directly carrying out economic activities of a commercial, industrial or other nature other than the mentioned service provisions – and as a management holding – since its activity goes beyond the mere acquisition, holding and disposal of equity interests, being able, as a complement to its main activity, to provide, in certain circumstances, technical administration and management services to all or some of the companies in which it holds interests or with which it has entered into subordination contracts.

In summary, it follows from the legal regime of SGPS that the management of equity interests in other companies, as an indirect form of carrying out an economic activity, constitutes the sole corporate purpose which, legally, any SGPS may have and pursue; this without prejudice to the fact that, as we have said, its activity goes beyond the simple acquisition, holding and disposal of equity interests.

§2. THE RIGHT TO VAT DEDUCTION

The mechanism of the tax credit is one of the pillars of VAT, probably the most important; indeed, "what makes VAT a tax on value added is the faculty granted to each economic operator to deduct from the tax it charges on its sales the tax incurred in its purchases, delivering to the State only the difference, when the balance is positive."[1]

This has been emphasized by the CJEU in various decisions, such as the Petroma judgment (delivered on 8 May 2013 in case C-271/12): "the right to deduction is a fundamental principle of the common VAT system which cannot, in principle, be limited and which is exercised immediately in relation to all taxes that have burdened upstream operations (…). The deduction regime thus established aims to relieve the entrepreneur entirely of the burden of VAT due or paid in the context of all his economic activities. The common VAT system thus ensures neutrality as regards the fiscal burden of all economic activities, regardless of their purpose or result, provided that such activities are themselves, in principle, subject to VAT".

The mechanism of the tax credit thus serves to ensure the neutrality characteristic of VAT, avoiding the cumulative effect and ensuring that the tax is borne ultimately by the final consumer. The right to deduction of VAT supported upstream thus has special significance in the system of this tax[2].

The mechanism of the tax credit and the right to deduction are regulated in articles 167.º to 192.º of the VAT Directive (Directive no. 2006/112/EC of the Council, of 28 November 2006) which, essentially, provides that taxable persons have the right to deduct from the tax charged in a Member State the tax that in that same Member State they have supported in the acquisition of goods or services, provided that these are intended exclusively for the realization of taxed operations or of operations with complete exemption. In cases where goods and services acquired by VAT taxable persons are intended exclusively for the realization of those operations the right to deduction of the tax supported upstream is integral; if they are intended indistinctly for the realization of these operations and of others that do not confer the right to deduction, the tax supported upstream is only partly deductible, with the VAT Directive establishing different calculation methods for this purpose.

From a subjective perspective, article 168.º of the VAT Directive provides that the right to deduction can only be exercised by those who are VAT taxable persons, as the Directive itself defines them; thus, holders of the right to deduction are the taxable persons referred to in article 9.º of the VAT Directive – persons who independently undertake a continuous economic activity, whatever its nature – as well as those who carry out isolated acts, whenever the Member States decide to consider them as taxable persons under article 12.º of the VAT Directive. Also covered by the right to deduction are those who become debtors of the tax through the reverse charge mechanism provided for in articles 194.º to 199.º of the VAT Directive.

From an objective perspective, article 168.º, paragraph a), of the VAT Directive establishes that in principle taxable persons may deduct the tax supported in the acquisition of all and any goods and services from other taxable persons, provided that these are used for their taxed operations. Also in principle, only those goods or services that give rise to confusion between the personal sphere and the business sphere are excluded from the right to deduction, which article 176.º of the VAT Directive addresses.

As Sérgio Vasques clarifies, the "reference to 'taxed operations' serves to make clear that only when there is effective application of the tax in upstream operations does the deduction of tax incurred in downstream operations become possible. On the other hand, when upstream operations benefit from simple exemption, the right to deduction is excluded in principle and the taxable person comes to occupy a position similar to that of a final consumer, supporting in its sphere the tax relating to its acquisitions. Only when the upstream operations benefit from complete exemption does the right to deduction remain untouched, and it is to those exemptions that article 169.º refers, in its paragraphs b) and c)."[3]

The existence of a direct and immediate relationship between the goods and services acquired and one or more activities of supply of goods or provision of services that confer the right to deduction is, therefore, in principle, indispensable for the right to deduction of VAT incurred in the goods and services acquired to be recognized to the taxable person and for determining the extent of that right.

However, the CJEU has clarified that such direct and immediate relationship is not required with respect to each output considered individually, admitting that such connection is verified with respect to the activity of the taxable person globally considered[4].

Thus, in the absence of an operation-to-operation nexus, the right to deduction subsists if there is a direct and immediate link with the totality of the economic activity developed, to the extent that this confers that right, that is, provided that there is that relationship between the upstream acquisitions and the taxable activities of the taxable person[5].

More recently, the CJEU went even further in addressing this question of the direct and immediate nexus between acquisitions and taxable operations downstream, having in the Sveda judgment[6] downplayed the requirement for direct use of the acquisition of goods or services, concluding that only by looking to the ultimate purpose of the acquisition will the rationality and neutrality of the VAT system be achieved. By disregarding the immediate allocation of the input, attending to its final connection, the CJEU considers therefore sufficient an indirect nexus, provided that it is demonstrated that the inputs integrate the ultimate objective of pursuing an activity that confers the right to deduction or to the extent that it confers it.

The CJEU has thus been accompanying the interpretive tendency that gives precedence to neutrality in the VAT system, moving away from restrictive formulas in its concrete application and, therefore, has emphasized, on various occasions, that the norms of the VAT Directive that provide for limitations of the right to deduction – articles 176.º and 177.º – have an exceptional character within the VAT system, derogating from the principle of neutrality, wherefore they must always be subject to strict interpretation[7].

In the national legal system, the VAT Code defines that taxable persons are, among others, "natural or legal persons who, in an independent manner and with a character of habitual exercise, carry out activities of production, commerce or provision of services, including extractive, agricultural activities and those of free professions, and, likewise, those who, in the same independent manner, practice a single taxable operation, provided that such operation is connected with the exercise of the mentioned activities, wherever it occurs, or when, regardless of such connection, such operation fulfils the conditions for the actual incidence of tax on income of natural persons (IRS) or corporate income tax (IRC)" (article 2.º, no. 1, paragraph a)).

On the other hand, we find the right to VAT deduction regulated in articles 19.º to 26.º of the VAT Code, with the following provisions being important to highlight (wording in force at the time of the facts):

"Article 19.º

Right to deduction

1 - For the determination of tax due, taxable persons deduct, in accordance with the following articles, from the tax charged on the taxable operations they carried out:

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

(…)"

"Article 20.º

Operations conferring the right to deduction

1 - Tax can only be deducted which has been charged on goods or services acquired, imported or used by the taxable person for the realization of the following operations:

a) Transfer of goods and provision of services subject to tax and not exempt from it;"

"Article 23.º

Methods of deduction relating to goods of mixed use

1 - When the taxable person, in the exercise of its activity, carries out operations that confer the right to deduction and operations that do not confer that right, in accordance with article 20.º, the deduction of tax supported in the acquisition of goods and services that are used in the realization of both types of operations is determined as follows:

a) Being it a good or service partially allocated to the realization of operations not arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2.º, the non-deductible tax as a result of that partial allocation is determined in accordance with no. 2;

b) Without prejudice to the provision of the preceding paragraph, being it a good or service allocated to the realization of operations arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2.º, part of which does not confer the right to deduction, the tax is deductible in the percentage corresponding to the amount of annual operations that give rise to deduction.

2 - Notwithstanding the provision of paragraph b) of the preceding number, the taxable person may effect deduction according to the actual allocation of all or part of the goods and services used, on the basis of objective criteria that allow determining the degree of use of such goods and services in operations that confer the right to deduction and in operations that do not confer that right, without prejudice to the General Tax Directorate being able to impose special conditions on it or bring about the cessation of such procedure in the case it is ascertained that they cause or may cause significant distortions in taxation.

3 - The tax administration may require the taxable person to proceed in accordance with the provision of the preceding number:

a) When the taxable person carries out distinct economic activities;

b) When the application of the procedure referred to in no. 1 leads to significant distortions in taxation.

4 - The deduction percentage referred to in paragraph b) of no. 1 results from a fraction which has in the numerator the annual amount, tax excluded, of operations that give rise to deduction in accordance with no. 1 of article 20.º and in the denominator the annual amount, tax excluded, of all operations carried out by the taxable person arising from the exercise of an economic activity provided for in paragraph a) of no. 1 of article 2.º, as well as non-taxed subsidies that are not equipment subsidies.

(…)

6 - The deduction percentage referred to in paragraph b) of no. 1, calculated provisionally on the basis of the amount of operations carried out in the previous year, as well as the deduction effected in accordance with no. 2, calculated provisionally on the basis of the objective criteria initially used for application of the actual allocation method, are corrected according to the final values relating to the year to which they refer, giving rise to the corresponding regularization of deductions effected, which should appear in the return for the last period of the year to which it relates."

§2.1. THE CONCEPT OF ECONOMIC ACTIVITY FOR VAT PURPOSES

As referred to above, it follows from article 9.º of the VAT Directive that those who independently develop an economic activity, whatever its purpose or result, are generically considered VAT taxable persons. Thus, the quality of tax taxable person arises from the realization of operations within the scope of the objective incidence of the tax, which, above all – that is, before being qualified as transfers of goods or provision of services – must constitute an economic activity.

The exercise of an economic activity constitutes, in this manner, the presupposition on which the subjective and objective incidence of VAT rests. Effectively, no one can be said to be a "taxable person" who does not carry out an economic activity nor when this is lacking can we be in the presence of transfers of goods or provision of taxable services. The delimitation of the notion of economic activity thus becomes an exercise of the greatest importance in the application of the tax and a particularly delicate one to the extent that VAT, as a general consumption tax, has a vocation of universality. Whatever constitutes economic activity has to be defined in the broadest possible terms, if we are to ensure neutrality and equality in the tax"[8].

Article 9.º of the VAT Directive provides that economic activity should be understood as "any activity of production, commercialization or provision of services, including extractive, agricultural activities and those of liberal or equivalent professions".

This is a notion of economic activity that generically encompasses all production and commerce of goods and all provision of services, whatever their nature. Given such a broad notion of economic activity, the CJEU has been called upon to establish the limits of what should be considered to have or not to have economic content.

One type of operation whose economic content proves controversial within the VAT system is that concerning operations relating to equity interests, which are of particular complexity.

The qualification of these operations as economic or not has important consequences in the application of VAT, the most relevant being to condition the right to deduction.

§2.2. SGPS AND OPERATIONS RELATING TO EQUITY INTERESTS

"The starting point for the framing of equity interests in respect of VAT is in the Polysar judgment, of 1991 [delivered on 20 June 1991 in case C-60/90], in which the CJEU establishes the principle that the acquisition and holding of equity interests does not represent true economic activity. A company that merely acquires and manages equity interests does not carry out genuine transfers of goods nor provision of services but merely applications of capital. (…)

In the eyes of the CJEU, the acquisition and holding of equity interests can only be said to be economic activity if it involves "direct or indirect interference" in the management of the investees. Whenever a holding actively intervenes in the management of the investees can we say that through them it exercises an economic activity, justifying recognition of its quality as a taxable person and the right to deduction of VAT that it bears upstream.

The conditions under which the management of equity interests can give rise to economic activity would be summarized somewhat further in the Harnas & Helm judgment, of 1997 [delivered on 6 February 1997 in case C-80/95]. In this judgment, the CJEU ruled that these operations give rise to economic activity when one of three conditions is met: (a) being carried out within the scope of a commercial activity of negotiating securities; (b) being carried out with a view to ensuring direct or indirect interference in the management of the company in which the participation was taken; or (c) constituting the direct, permanent and necessary extension of a taxable activity. (…)

As to the holding of equity interests, we should consider it always an operation devoid of economic content and, for that very reason, outside the field of application of the tax [in this sense, the Sofitam judgment (delivered on 22 June 1993 in case C-333/91) of the CJEU]. (…)

As to the acquisition of equity interests, the CJEU is of the understanding that this does not give rise to economic activity for VAT purposes, except for the three conditions we have already referred to. It is certainly also here that one could say there is economic activity when the acquisition aims at "direct or indirect interference" in the management of the investee. However, as far as we can see, the scope of the qualification is in this case limited, to the extent that the acquisition of equity interests is a passive operation and not an active operation. The costs incurred with an acquisition of equity interests – costs with legal or financial consulting, for instance – cannot therefore be associated with a concrete downstream operation, being able only to be associated with the general activity that the company develops. These costs never constitute direct costs but general expenses, similar to expenses that a company incurs with a view to the acquisition of so many other assets.

Thus, the VAT supported in expenses necessary to an acquisition of equity interests will be deductible under the general terms, which means that it will be fully deductible when the taxable person only carries out taxed operations and partially deductible when the taxable person, in addition to taxed operations, carries out exempt operations [in this sense, the Cibo judgment (delivered on 27 September 2001 in case C-16/00) of the CJEU]. (…)

The notion that a holding only exercises economic activity when in some way it intervenes in the life of the investees is reasonably intuitive. The criterion which the CJEU has used [to assess direct or indirect interference in the management of the investees], however, is that there is intervention only when the parent company carries out taxable services for the benefit of the affiliates, as occurs when it provides them with financing, consulting or computer services."[9]

Having, then, as a reference holding companies in general, the first question to be clarified in this respect is whether a holding is or is not a VAT taxable person, that is, whether it develops or not an economic activity, with it being important for this to analyse whether, beyond the mere holding of equity interests, any activity of provision of services is or is not practised, in particular, to its investees.

In the case of its action being merely passive, it will be a company that does not exercise an economic activity for VAT purposes, since the dividends and interest it derives constitute mere fruits resulting from the ownership of an asset and not the proceeds resulting from its economic exploitation, wherefore such company cannot be considered a taxable person for VAT purposes.

If it is a holding company that has active intervention in the management of its investees, having as a result the realization of taxable outputs, it should be considered as an entity that exercises an economic activity, assuming the quality of a VAT taxable person[10].

With respect specifically to SGPS, it is important to emphasize that it follows from their legal regime that their sole corporate purpose is the management – and not the mere holding – of equity interests, which added to the fact that the law itself recognizes them as competent for the provision of administration and management services to the investees, results in the exercise of an economic activity for VAT purposes. Such conclusion does not prevent the fact that its sole corporate purpose is "the management of equity interests in other companies as an indirect form of carrying out economic activities"; which also does not matter, therefore, for purposes of assessing the right to VAT deduction, which should therefore be determined in accordance with the general criteria.

This very matter was decided by the CJEU in the Portugal Telecom judgment (delivered on 6 September 2012 in case C-496/11), in which it concludes that if it is "to be considered that all services acquired upstream have a direct and immediate nexus with downstream economic operations conferring the right to deduction, the taxable person in question [an SGPS which, in the context of the provision of technical administration services to its investees, refactors to them, with VAT, the costs incurred with the acquisition of consulting services and others] would have the right, under article 17.º, no. 2, of the Sixth Directive, to deduct the totality of VAT that has burdened the upstream acquisition of such services in the main proceedings. This right to deduction cannot be limited by the mere fact that the national regulation, by reason of the corporate purpose of the said company or its general activity, qualifies the taxed operations as accessory to its main activity."

Refining further our analysis, it is now important to discern whether an SGPS that actively intervenes in the management of its investees, realizing taxable operations in respect of VAT, nonetheless carries out operations outside the field of incidence of the tax, with respect to those same equity interests.

It is peacefully accepted that holding companies may have a dual status for VAT purposes, that is, they may be both taxable persons and final consumers, since they may be involved in taxable activities – in particular the provision of services to the investees – and in non-economic and therefore non-taxable activity – the mere holding and enjoyment of equity interests.

Therefore, it is important to define the terms under which the assessment of the right to VAT deduction should be made, for which there are three possible tests, namely:

(1) Is the VAT supported in inputs directly related to outputs conferring the right to deduction?

This test results directly from no. 2 (second paragraph) of article 1.º of the VAT Directive, which provides that "in each transaction, the value added tax, calculated on the price of the good or service at the rate applicable to that good or service, shall be charged with a right of deduction of the amount of value added tax that has directly burdened the cost of the various elements making up the price".

By way of example, Mariana Gouveia de Oliveira refers that this would be the "case of an SGPS that incurred costs directly related to the provision of services to one of its investees, for example, with the contracting of a service provider that was strictly allocated to an investee and whose costs were invoiced with VAT to that same investee.

In such cases, it seems to us there is a direct link between the VAT supported in the inputs and the taxed outputs of the SGPS. The VAT thus supported should be entirely deducted."[11]

(2) Is the VAT supported in inputs directly related to one of the economic activities pursued?

Even in cases where there is no direct relationship between the inputs and the taxed outputs, full VAT deduction may nonetheless be recognized if that direct link is established between the inputs and a delimited set of taxable economic activities.

This very matter was decided by the CJEU in the Abbey National judgment (delivered on 22 February 2001 in case C-408/98), in which it was considered that "if the various services acquired by the transmitter in order to carry out the transmission present a direct and immediate relationship with a clearly delimited part of its economic activities, such that the costs of the said services form part of the general expenses inherent to the said part of the company, and that all operations included in that part of the company are subject to value added tax, that taxable person may deduct all the value added tax that has burdened the expenses that it has incurred in order to acquire the said services".

Thus, in these cases, VAT may be deducted if there is a direct and immediate relationship with the economic activity developed, with the right to deduction being excluded when the tax in question was supported in the exercise of an activity not subject to VAT.

(3) Is the VAT supported in general costs of the economic activity?

In the case of the absence of the mentioned direct relationship between inputs and taxed outputs, it is still important to verify whether the right to VAT deduction should be recognized whenever the expenses effected with the acquisition of goods and services qualify as general expenses of the activity and integrate the constitutive elements of the price of operations carried out by the taxable person that confer the right to deduction.

The CJEU pronounced on this question, specifically regarding services acquired by a holding company (audit services of companies, intervention in the context of negotiating the price of acquisition of shares and assembly of the takeover of companies in legal and fiscal matters), in the Cibo Participations SA judgment (delivered on 27 September 2001 in case C-16/00), in which it was considered that despite the absence of a direct and immediate relationship between the various services acquired by a holding in the context of taking a participation in a subsidiary and one or more downstream operations conferring the right to deduction, the costs of the services acquired fall within the general expenses of the taxable person and are, as such, constitutive elements of the price of products of a company; in that measure, concludes the judgment, those services have a direct and immediate relationship with the totality of the activity of the taxable person[12].

In this respect, as Mariana Gouveia de Oliveira emphasizes, the verification of this criterion "must imply a double analysis: on the one hand the analysis of a functional relationship, i.e., the existence of a functional/causal link between the input and the taxable activity of the taxable person and, on the other, an economic relationship, i.e., a reflection at the level of the price of outputs", aiming with that analysis both functional and economic to assess "whether the inputs are related to the 'maintenance of the source producing' the taxable activity, similar to the criterion used for the purpose of assessing deductible expenses for IRC purposes and whether such costs are susceptible to being reflected in the formation of prices of taxable outputs (even if in the concrete case, by external vicissitudes, they ultimately are not actually reflected)."[13]

Sérgio Vasques refers that the "CJEU hesitates between a functional criterion, which looks to the reason for being of the costs, and an economic criterion, which attends to the reflection of the costs on the prices that the taxable person practices. The CJEU's decisions on equity interests show, however, that an economic criterion proves largely inoperative, as it is generally impossible to prove the integration of a cost in the price of goods and services transacted by economic operators, dependent on a very varied set of circumstances. The reflection of the cost on the prices may, at best, be presumed. And therefore the recourse to a functional criterion ends up proving always determining in the fixing of the nexus with a given passive operation or with the totality of taxable activities."[14]

In conclusive summary, we thus have that an SGPS that dedicates itself to the active management of its investees is an economic operator and a VAT taxable person.

In the development of its taxable activity, the SGPS may incur VAT in inputs directly connected with its activity of management of the investees, as well as with general operating costs.

With respect to the first, given the taxable nature of the output, there is no doubt as to the existence of the right to deduction.

As to expenses not found in a direct and immediate relationship with taxed outputs, constituting, however, general expenses of the SGPS activity, the right to deduction of VAT should also be recognized.

Where mixed inputs subsist, which are used indistinctly and simultaneously in activities conferring the right to deduction and in others that do not, one moves to the apportionment of residual tax, applying the rules of article 23.º of the VAT Code[15].

As the standard method, there emerges the method of actual allocation, based on criteria or apportionment keys that allow VAT deduction supported in the acquisition of goods and services in the proportion of its use in the taxable activity conferring the right to deduction (article 23.º, no. 2, of the VAT Code).

The criterion followed by the Claimant was the number of persons allocated to the various operations. Note that the VAT Code does not specify which criteria to apply, but in Circular Memorandum no. 30103 of 23-04-2008, the AT gives as an example, precisely, the number of personnel elements allocated (section V, no. 2, paragraph b)).

This is an objective method that represents the intensity of the use of inputs common to the various activities pursued. Furthermore, it proves adequate to the economic reality of the Claimant, since the different activities it pursues require the involvement of a significant set of human resources with different functions, performed in the areas of financial planning, fiscal and legal advice, control systems, information reporting and accounting; this plurality of functions sometimes requires the subcontracting of specialized services.

To the extent that this criterion does not lead to distortions of taxation, no valid reasons are discerned that justify the AT questioning its suitability.

Finally, the deduction percentage calculated provisionally according to that objective criterion, estimating what part of mixed inputs is allocated to the activity subject and not exempt, was corrected by the Claimant according to the final values relating to the year to which they relate, giving rise to the regularization of the deductible tax value; this is what results from no. 6 of article 23.º of the VAT Code, a provision that was observed by the Claimant.

Given the foregoing and without need for further considerations, it is evidenced that the corrections made suffer from the defect of violation of law, by error as to the factual and legal presuppositions, rooted in the erroneous interpretation and application of the provisions of articles 19.º, no. 1, paragraph a), 20.º, no. 1, paragraph a) and 23.º, nos. 1, 2, 4 and 6, of the VAT Code, which justifies the annulment of the act of additional VAT assessment no. 2016…, of the act of assessment of compensatory interest no. 2016… and corresponding statements of account adjustment nos. 2016… and 2016 …, from which resulted the total amount payable (tax and interest) of € 335.394,52.

The order of the Head of the Management and Tax Assistance Division of the Large Taxpayers Unit, of 29 September 2016, issued in the voluntary review claim proceeding no. …2016…, which maintained the mentioned tax acts with the same grounds, suffers from an identical defect, wherefore its annulment is also justified.

§3. REFUND OF AMOUNT PAID AND PAYMENT OF COMPENSATORY INTEREST

The Claimant also petitions, in addition, the following: "refund of the amount improperly paid by the Claimant – should this occur in the meantime pending in these proceedings – all with the due legal consequences, in particular with regard to payment of compensatory interest".

It so happens that, upon examination of the proceedings, we verify that the Claimant, at no moment, made proof of the payment of any amount with a view to the assessment, partial or total, of the amount of € 335.394,52, resulting from the said statements of account adjustment nos. 2016 … and 2016 … .

In that exact measure, the said request for refund cannot, therefore, but be judged without merit.

§4. INDEMNIFICATION FOR IMPROPER GUARANTEE

The Claimant also petitions the following: "Further requested is, from now, the indemnification provided for in article 171.º of the CPPT and in article 53.º of the LGT, should the guarantee presented by the Claimant with a view to the suspension of the fiscal execution proceedings instituted by virtue of the debt whose legality is now being contested be judged improper (…)."

As is proven, the Claimant did not proceed with voluntary payment of the amount of € 335.394,52 (tax and interest), resulting from the said statements of account adjustment nos. 2016 … and 2016 … .

Consequently, as also appears in the proven facts, fiscal execution proceedings no. …2016…, in the amount of € 305.805,72, and no. …2016…, in the amount of € 30.866,90, were instituted, the Claimant, with a view to the suspension of those fiscal execution proceedings, providing two bank guarantees, issued by E…, one in the amount of € 385.469,29 and another in the amount of € 39.032,54.

By understanding that, in the concrete case, there was error attributable to the AT, the Claimant formulates a request for indemnification for improperly provided guarantee, in order to be indemnified for the losses resulting from the provision of those guarantees, without dependence on the period for which these may be maintained.

It must be appreciated.

In accordance with the provision of paragraph b) of article 24.º of the RJAT, the arbitral decision on the merits of the claim for which no appeal or challenge is possible binds the tax administration from the end of the period provided for appeal or challenge, with the latter, in the exact terms of the merits of the arbitral decision in favour of the taxable person and until the end of the period provided for the spontaneous execution of sentences of tax court judgments, being required to "restore the situation that would exist if the tax act that is the object of the arbitral decision had not been carried out, adopting the acts and operations necessary for this purpose".

In the legislative authorization on which the Government based itself to approve the RJAT, granted by article 124.º of Law no. 3-B/2010, of 28 April, it is proclaimed, as a primary directive of the establishment of arbitration as an alternative form of jurisdictional resolution of conflicts in tax matters, that "the tax arbitration process must constitute an alternative procedural means to the judicial challenge process and to the action for recognition of a right or legitimate interest in tax matters".

Although article 2.º, no. 1, paragraphs a) and b), of the RJAT uses the expression "declaration of illegality" to define the competence of the arbitral tribunals functioning in the CAAD and does not refer to constitutive (annulment) and condemnatory decisions, it should be understood, in harmony with the mentioned legislative authorization, that the powers which in a judicial challenge process are attributed to tax courts in relation to acts whose assessment of legality falls within its competences are comprised in its competences.

The judicial challenge process is a procedural means which has as its object an act in tax matters, aiming to assess its legality and decide whether it should be annulled or its nullity or non-existence declared, as results from article 124.º of the CPPT.

By the analysis of articles 2.º and 10.º of the RJAT, it is verified that only questions of the legality of acts of assessment or acts of determination of taxable matter and second-degree acts having as their object the assessment of the legality of acts of those types were included in the competences of the arbitral tribunals functioning in the CAAD, acts whose assessment is included in the scope of judicial challenge processes, as results from paragraphs a) to d) of no. 1 of article 97.º of the CPPT.

That is, it is ascertained that the legislator did not implement in the legislative authorization with respect to the part where it provided for the extension of the competences of the arbitral tribunals to questions that are assessed in tax courts through an action for recognition of a right or legitimate interest.

But, in harmony with the intention underlying the legislative authorization to create an alternative means to the judicial challenge process, it should be understood that, as to claims for declaration of illegality of acts of the types referred to in its article 2.º, the arbitral tribunals functioning in the CAAD have the same competences as those that they have in a judicial challenge process, within the limits defined by the commitment which the Tax and Customs Authority came to make by means of Order no. 112-A/2011, of 22 March, under article 4.º, no. 1, of the RJAT.

Although the judicial challenge process has as its primary object the declaration of nullity or non-existence or annulment of acts of the referred types, it has been peacefully understood that therein condemnations of the Tax Administration to pay compensatory interest and indemnification for improper guarantee can be issued.

Indeed, despite the non-existence of any express provision to that effect, it has been peacefully understood in tax courts, since the entry into force of the codes of the fiscal reform of 1958-1965, that a claim for condemnation to pay compensatory interest can be cumulated in a judicial challenge process with the claim for annulment or declaration of nullity or non-existence of the act, for in those codes it is referred that the right to compensatory interest arises when, in voluntary review or judicial process, the administration is convinced that there was error of fact attributable to the services. This regime was, subsequently, generalized in the Tax Procedure Code, which established in no. 1 of its article 24.º that "there shall be a right to compensatory interest in favour of the taxpayer when, in voluntary review or judicial process, it is determined that there was error attributable to the services", then in the LGT, in whose article 43.º, no. 1, is established that "compensatory interest is due when it is determined, in voluntary review or judicial challenge, that there was error attributable to the services resulting in payment of the tax debt in an amount greater than legally due" and, finally, in the CPPT where it was established, in no. 2 of article 61.º (to which corresponds no. 4 in the wording given by Law no. 55-A/2010, of 31 December), that "if the decision recognizing the right to compensatory interest is judicial, the payment period is counted from the beginning of the period of its spontaneous execution".

Thus, similarly to what occurs with tax courts in a judicial challenge process, this Arbitral Tribunal is competent to assess claims for refund of the amount paid and for payment of compensatory interest.

Regarding the claim for condemnation to payment of indemnification for provision of guarantee, article 171.º of the CPPT establishes that "indemnification in case of bank guarantee or equivalent improperly provided shall be requested in the proceeding in which the legality of the debt to be executed is contested" and that "indemnification must be requested in the claim, challenge or appeal or in case its grounds are subsequent within 30 days of its occurrence".

Thus, it is unequivocal that the judicial challenge process encompasses the possibility of condemnation to payment of improper guarantee and is even, in principle, the appropriate procedural means to formulate such claim, which is justified by evident reasons of procedural economy, as the right to indemnification for improper guarantee depends on what is decided on the legality or illegality of the assessment act.

The request for constitution of the arbitral tribunal has as its corollary that it will be in the arbitral proceeding that the "legality of the debt to be executed" will be discussed, wherefore, as results from the express content of that no. 1 of the mentioned article 171.º of the CPPT, the arbitral proceeding is also the appropriate one to assess the claim for indemnification for improper guarantee.

Moreover, the cumulation of claims relating to the same tax act is implicitly assumed in article 3.º of the RJAT, when it speaks of "cumulation of claims even if relating to different acts", which makes it apparent that cumulation of claims is also possible with respect to the same tax act and claims for indemnification for compensatory interest and condemnation for improper guarantee are susceptible to being encompassed by that formula, wherefore an interpretation in this sense has, at least, the minimum verbal correspondence required by no. 2 of article 9.º of the Civil Code.

The regime of the right to indemnification for improper guarantee is set out in article 53.º of the LGT, which establishes the following:

"Article 53.º

Guarantee in case of improper provision

1. The debtor who, to suspend execution, offers a bank guarantee or equivalent shall be indemnified totally or partially for the losses resulting from its provision, should it have been maintained for a period exceeding three years in proportion to the success in administrative review, challenge or opposition to execution which have as their object the guaranteed debt.

2. The period referred to in the preceding number does not apply when it is ascertained, in voluntary review or judicial challenge, that there was error attributable to the services in the assessment of the tax.

3. The indemnification referred to in number 1 has as its maximum limit the amount resulting from the application to the guaranteed value of the rate of compensatory interest provided for in the present law and may be requested in the voluntary review or judicial challenge proceeding itself, or autonomously.

4. Indemnification for improper guarantee provision shall be paid by deduction from the tax revenue of the year in which the payment was made."

In the case at hand, the acts of additional VAT assessment and compensatory interest assessment that are contested suffer, as we have seen, from the defect of violation of law, by error as to the factual and legal presuppositions, which invalidates entirely those tax acts.

Furthermore, the mentioned acts of additional tax assessment and compensatory interest assessment were of the exclusive initiative of the Tax Administration, with the Claimant in no way contributing to their being carried out and, much less, in the terms in which they were.

In this framework, the provision of the mentioned bank guarantees by the Claimant, with a view to obtaining the suspension of the mentioned fiscal execution proceedings, appears improper, wherefore the Claimant has the right to be indemnified for the losses which it has effectively suffered with the provision of those bank guarantees, which can only, evidently, be determined at the moment when it becomes possible to lift the guarantees, since its amount is dependent on the period of duration/maintenance of the guarantees; that is, it will be in the execution of sentence that such losses are determined and the indemnification due to the Claimant is fixed.

IV. DECISION

In the terms set out, this Arbitral Tribunal decides:

a) To judge the claim for declaration of illegality well-founded, by error as to the factual and legal presuppositions:

• of the act of dismissal of the voluntary review claim no. …2016…, with its consequent annulment;

• of the act of additional VAT assessment no. 2016…, of the act of assessment of compensatory interest no. 2016… and of the corresponding statements of account adjustment nos. 2016… and 2016…, from which resulted the total amount payable (tax and interest) of € 335.394,52, with its consequent annulment;

b) To condemn the Tax and Customs Authority to payment of indemnification to the Claimant for improper provision of guarantees, in the amount to be fixed in execution of sentence;

c) To absolve the Tax and Customs Authority of the remaining claims formulated;

d) To condemn the Tax and Customs Authority to payment of the costs of the proceeding.

VALUE OF PROCEEDING

In accordance with the provisions of articles 306.º, no. 2, of the CPC, 97.º-A, no. 1, paragraph a), of the CPPT and 3.º, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the proceeding is valued at € 335.394,52.

COSTS

In accordance with the provisions of articles 12.º, no. 2, and 22.º, no. 4, of the RJAT and article 4.º, no. 4, and Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, the amount of costs is fixed at € 5.814,00 (five thousand eight hundred and fourteen euros), under Table I attached to the Regulation of Costs in Tax Arbitration Proceedings, charged to the Tax and Customs Authority.

Lisbon, 14 June 2017.

The Arbitrators,

(José Baeta de Queiroz)

(Ricardo Rodrigues Pereira)

(Daniel Taborda)