Process: 794/2014-T

Date: May 8, 2015

Tax Type: Valor do pedido:

Source: Original CAAD Decision

Summary

CAAD Process 794/2014-T addressed a VAT deduction dispute involving €135,383.00 in contested tax assessments. The claimant, a Portuguese real estate company (A…, S.A.), challenged VAT liquidation acts from June 2009 after deducting €116,292.00 in VAT related to construction costs of leased property units. The company resulted from a corporate division inheriting real estate units from project 'C…' and leased these units for the first time after waiving VAT exemption under article 9(29) of the VAT Code and Decree-Law 21/2007. The central legal issue concerned when the right to VAT deduction arises and the applicable deadline for exercising that right. The claimant argued that the right to deduct arose when the waiver of exemption became effective, triggering a four-year period under article 98(2) of the VAT Code to exercise deduction rights. The claimant maintained that waiving VAT exemption constitutes an 'alteration of activity' under article 12(2) of the VAT Code, making the regularization regime of Decree-Law 21/2007 applicable. The Tax Authority contested this interpretation, arguing that the right to deduction arises when the deductible tax becomes due, not upon waiver acceptance, and alleged violations of articles 19 and 98(2) of the VAT Code and the Sixth Community Directive. The collective arbitral tribunal, constituted on February 13, 2015, comprised three arbitrators appointed by CAAD's Deontological Council under Decree-Law 10/2011. The case illustrates the complexity of VAT deduction timing in real estate transactions involving exemption waivers and the application of community jurisprudence principles to Portuguese tax law.

Full Decision

ARBITRAL AWARD

The arbitrator José Pedro Carvalho (President), the arbitrator Paulo Ferreira Alves and the arbitrator António Nunes dos Reis (arbitrators-assessors), designated by the Deontological Council of the Administrative Arbitration Centre (CAAD) to form the Arbitral Tribunal, constituted on 13 February 2015, agree as follows:

I – REPORT

A – PARTIES

On 28 November 2014 A…, S.A., legal person no. …, with registered office at Rua …, Lot …………., 3rd, … …-… Lisbon, hereinafter referred to as Claimant or taxpayer, requested, under the terms and for the purposes of the provisions of articles 2 and 10, both of Decree-Law no. 10/2011, of 20 January, the constitution of this Collective Arbitral Tribunal, with the Respondent being the Tax and Customs Authority (AT) (which succeeded the General Directorate of Taxes, through Decree-Law no. 118/2011, of 15 December), hereinafter referred to as Respondent or AT.

The request for constitution of the arbitral tribunal was accepted by the President of CAAD, on 01-12-2014, to appraise and decide the object of the present proceedings, and automatically notified to the Tax and Customs Authority on 16-02-2014, as appears from the respective minutes.

The Claimant did not proceed with the appointment of an arbitrator, whereby, under the provisions of no. 1 of article 6 and of paragraph b) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the Deontological Council designated as arbitrators His Excellency Dr. José Pedro Carvalho (President), His Excellency Dr. Paulo Ferreira Alves and His Excellency Dr. António Nunes dos Reis, the appointment being accepted under the legally provided terms.

On 28-01-2015 the parties were duly notified of such designation, having manifested no will to refuse the appointment of the arbitrators, under the terms of article 11 no. 1, paragraphs a) and b), of the Arbitral Tribunal Rules and Articles 6 and 7 of the Code of Ethics.

In accordance with the provision of paragraph c) of no. 1 of article 11 of Decree-Law no. 10/2011, of 20 January, with the wording introduced by article 228 of Law no. 66-B/2012, of 31 December, the collective arbitral tribunal was regularly constituted on 13-02-2015.

Thus, the arbitral tribunal is regularly constituted, being materially competent, under the terms of articles 2, no. 1, paragraph a), and 30, no. 1, of Decree-Law no. 10/2011, of 20 January.

Both parties agree with the waiver of the meeting provided for in article 18 of the Arbitral Tribunal Rules.

The parties possess legal personality and capacity, are legitimate and are legally represented (articles 4 and 10, no. 2, of the same instrument and article 1 of Ordinance no. 112-A/2011, of 22 March).

The proceedings do not suffer from defects that would render it invalid.

B – CLAIM

The Claimant seeks the declaration of illegality of the tax assessment acts for Value Added Tax nos. … and …, which set a total tax to be paid of €135,383.00 (one hundred thirty-five thousand three hundred eighty-three euros).

C – GROUNDS FOR CLAIM

To support its request for arbitral award, the Claimant alleges, with a view to declaring the illegality of the tax assessment acts for Value Added Tax (VAT), in summary, the following:

The Claimant maintains that it was notified, by letter no. …, of 26 September 2014, of the decision rejecting the voluntary claim filed against the tax assessment act embodied in the additional Value Added Tax assessment no. … and in the compensatory interest assessment no. …, both dated 22 October 2013, with reference to period 0906T.

The Claimant alleges that it is a limited company of Portuguese law which, at the date to which the facts relate, the year 2009, carried out its activities in the area of realization, promotion and management of real estate investments, including the purchase and sale of real property, for itself or for resale, and also the exercise of the activity of exploitation, management and leasing of real property, owned or third-party owned, as well as the exercise of activities related or similar to its purpose, being registered with the CAE no. 68100.

The Claimant maintains that as a result of the division of company B…, SA, resulted, among others, the separation of the assets constituted by the set of autonomous units that make up the project "C…" or C… was constituted the present Claimant, the share capital of which being constituted by the said assets.

From the project "B…" the Claimant alleges that it entered into a leasing contract for the units BE, BH, AWA, AWB, AWD, AWE, KW, KX, KY, KZ, LA, LB, LC, LD, OP, OQ, OR, OS, OT, OU, OV, KF, KV, LU, LW, LV, JL, JM, FZ, GA and GB, GC, and that with the exception of units JL and JM, none of the units had been leased since the construction of that project and that such leasing contract was entered into after the acceptance of the waiver of the VAT exemption, provided for in no. 29) of article 9 of the VAT Code, of article 5 of the regime of waiver of VAT Exemption in operations relating to real property, approved by Decree-Law no. 21/2007, of 29 January.

Furthermore, the Claimant submits that the units were for the first time leased, and indicated in the periodic statement relating to the period of June 2009, and deducted the VAT supported by its construction, in the total amount of €116,292.00.

The Claimant maintains the illegality of the tax assessment act by violation of the deadline for exercising the right to deduction, and under the applicable legislation the relevant date to assess the birth of such right in the sphere of the taxpayer is the moment in which the waiver of exemption is accomplished.

The Claimant maintains that once the right to deduct the tax supported by the acquisition of goods and services for the exercise of the economic activity developed by the taxpayer is acquired, the latter has four years to deduct it, from the moment the waiver of exemption takes effect.

The Respondent defends that the tax assessment act claimed here is illegal, by violation of articles 19 and 98, no. 2, of the VAT Code, as well as of the Sixth Community Directive.

It maintains that it is settled matter in doctrine and, above all, in community jurisprudence that the determining moment for the acquisition of the right to deduction of VAT is the moment in which the deductible tax becomes due.

As a subsidiary claim the Respondent alleges, should it be understood by this collective tribunal, that the provision of no. 2 of article 98 of the VAT Code, is not applicable in the case, it should always be considered that the Claimant was in time to deduce partially the tax supported, since it was within the deadline provided for in paragraph b) of no. 1 of article 25 of the VAT Code.

Furthermore, it defends in its argument of the subsidiary claim, that by virtue of the provision of no. 1 of article 8 and of article 13, both of Decree-Law no. 21/2007, the regime of regularization of VAT relating to goods of fixed assets by reason of alteration of activity, being the legislator makes the deduction of VAT supported by the construction of the leased units depend on the following conditions: a) Alteration of activity, that is, passing to exercise an activity subject and not exempt from VAT; and b) The units having been completed in the 19 civil years following the alteration of activity.

In these terms, the Claimant maintains the, alteration of activity, for purposes of VAT, occurred in compliance with the provision of no. 2 of article 12 of the VAT Code, and in this way, it results clear from the applicable legislation and from community jurisprudence that the concept "alteration of activity" has from this resulted that the exercise of the option of waiver of VAT exemption configures, for purposes of this tax, an effective alteration of activity. to be interpreted within the principles governing the tax.

Thus, once the provision of the regime provided for the waiver of exemption of VAT in operations relating to real goods is complied with, the Claimant proceeded to the respective submission of the declaration of alterations, exercising the option to waive the VAT exemption.

The Claimant maintains that by granting a differentiated treatment, based on the impediment of access to the regime of regularization of VAT supported by the construction of fixed assets, the AT exceeds the limits of its power of appraisal and distorts the provision of articles 22 to 25 of the VAT Code, and proceeds to a violation of the principle of neutrality and the general principle of equality of treatment.

Furthermore, it submits that the AT violated the requirement of correct, simple and uniform application of the right to deduction of tax supported in the exercise of its activity by the present Claimant, in its capacity as a taxpayer, maintaining that no objective reason or of law imposes or permits a differentiation in access to the right of option for taxation in VAT of the leasing operations of real property between: (i) a company that could deduct in full the VAT supported by the construction of the leased units and whose exemption from taxation it waived, as long as no more than 4 years have elapsed; and (ii) A company cannot make the partial deduction of the VAT supported by the construction of the leased units and whose exemption from taxation it waived, by the fact that more than 4 years and less than 20 years have elapsed.

The Claimant argues that by admitting as valid the understanding of the AT, in the second case, the company cannot deduct the VAT supported by, between the period that elapsed between the construction of the units and the birth of the right to deduction, having elapsed more than 4 years.

What constitutes in the understanding of the Claimant, a gross violation of the principle of neutrality and the general principle of equality of treatment, corollary of that, and a serious violation of the constitutional principle of equality provided for in article 13 of the CRP, applicable to the Claimant by virtue of no. 2 of article 12 of the CRP.

With regard to the second requirement, the Claimant understands that proves in the case that the project was completed in 2001, whereby, having the Claimant deducted the VAT supported by the construction of the units above identified in 2009, the said deadline of 19 years is widely complied with.

Thus, in accordance with the provision of article 25 of the VAT Code, with respect to real property, the right to deduction of the tax supported upstream must be proportional to the number of years remaining to complete twenty years counted from the year of occupation of the properties.

Furthermore, it states that according to this method, and in accordance with the provision of article 19 of the VAT Code, through an arithmetic operation of subtraction from the tax calculated in sales and provision of services (outputs) and identifiable in the respective invoices, the tax supported in purchases and other expenses (inputs) can be deducted.

Maintaining, that it is not, therefore, a tax benefit that can be limited, but, rather, a constitutive element of the principle of taxation under VAT.

Furthermore, the Claimant submits with respect to article 25 of the VAT Code, the aforementioned rule consecrates the cases of tax contained in goods of fixed assets with a durable character whose VAT was not deducted, by virtue of the taxpayer practicing exempt operations at the date of acquisition, and that the rule in question allows the deduction relating to the goods of fixed assets, as, a contrario, the taxpayer would be collecting VAT with relation to active operations in whose amount would be included part of the value of the aforementioned durable goods with portions of undeducted tax.

The Claimant alleges that in these terms, one should proceed pro rata temporis, which means, in the case of real property acquired or completed in the year of the change of tax regime and in the nineteen civil years preceding, determine the portion of tax not initially deducted in proportion to the time of use of the good remaining to complete the period of twenty years from the year of occupation of the goods.

It submits that having elapsed 8 years from the completion of the construction of C… and the date in which the VAT supported by the construction of the units in question was deducted, the amount of €69,775.20 should always be accepted as deductible VAT, as it corresponds to the portion of tax proportional to the 12 years that remain to complete the period of 20 years.

The Claimant concludes its argument, maintaining the groundlessness of the arguments raised by the AT in the scope of tax inspection, given that no reasons subsist to justify the limitation of the right to deduct the tax supported by the construction of the units in question, by force of the waiver of VAT exemption.

D - RESPONSE OF THE RESPONDENT

The Respondent, duly notified for that purpose, timely submitted its response in which, in summary abbreviated, alleged the following:

The Respondent maintains, that the present request for arbitral award deduced following the notification to the Claimant of the decision rejecting, of 25-09-2014, of the voluntary claim which it had submitted on 17-04-2014, against the additional VAT assessment no. …, relating to the period of June 2009 and respective compensatory interest assessment.

The Respondent alleges, that in the said request for arbitral award, the Claimant formulates the express request for declaration of illegality of the said assessment, it being, however, apparent, from everything it exposes throughout the said request, that what it in fact intends is the regularization of the tax supported during the construction of the real property and completed in 2001, leased in favor of other taxpayers, having, with respect to the same, exercised the waiver of the exemption provided for in no. 4 of article 12 of the VAT Code.

Thus, it appears that the request (immediate) formulated by the Claimant is directed to the condemnation of the Tax Administration to the recognition of the right to regularization of the VAT supported in the construction of the autonomous units leased and object of waiver of exemption.

The Respondent submits that the factuality underlying the request stems from the fact that, in the taxation period relating to June 2009, the latter deducted the allegedly supported tax in the construction of the real property, construction whose completion took place in the year 2001.

The Respondent alleges that the Claimant initiated its activity on 28-12-2004, following the division of B… which occurred on 24-12-2004 and which consisted in the separation of part of the assets of the latter, to constitute with it three new companies, one of which the Claimant itself, and at the date of the division, were in force leasing contracts entered into by company B… in which the waiver of exemption operated, and the respective waiver certificates were issued.

Furthermore, it alleges that the said contracts were maintained by the present Claimant in their precise terms, occurring, only, the change of the new owner of the real property, although, some autonomous units that became the property of the Claimant had not yet been subject to any leasing contract.

Thus, the first contracts relating to those properties came to be entered into by the present Claimant, in the year 2009.

It indicates the Claimant that taxpayers who enter into leasing contracts, of urban real property or autonomous units thereof, with lessees who have the quality of subjects of the tax who use them, totally or predominantly, in activities that confer upon them the right to deduction, may waive the exemption established in nos. 29 and 30 of article 9 of the VAT Code, in accordance with the provision of nos. 4 and 5 of article 12 of the same code.

Furthermore, it submits that no. 6 of article 12 determines that the terms and conditions under which the waiver is processed are established in special legislation, regulation carried out by Decree-Law no. 21/2007, of 29 January (Regime of Waiver of VAT Exemption in Operations Relating to Real Property), and in accordance with the provision of the Regime of Waiver of Exemption, for it to occur it is necessary that all the conditions and conditions provided for in nos. 2 and 3 of its article 5 be fulfilled.

The Respondent maintains that under the terms of no. 2 of article 8 of the Regime of Waiver of Exemption defines that lessors may deduct the VAT relating to the real property in the statement of the tax period subsequent to that in which the waiver operated, taking into account the limitation period of the said right established in no. 2 of article 98 of the VAT Code.

And thus in the case of the present case, the right to deduction of the tax supported in the construction of the real property, object of leasing, could only have occurred if the waiver had taken place up to 2005, which did not happen.

Furthermore, it submits that the Regime of Waiver of Exemption, consecrated in 2007, establishes that the said right of waiver can only be carried out at the time of entering into the leasing contract.

The Respondent maintains that certificates of occupancy nos. …/2001 and …/2001 were issued by the Municipal Chamber of Sintra, from which it is concluded that the project is completed since the year 2001, and the building permit was issued in the year 1999, whereby the construction of the real property comprised of the said units would have taken place over two years.

To support its position the Respondent in the scope of the present case, alleges that the right to deduction was born at the time of entering into the leasing contract – 2009 – and, with respect to the VAT supported in the construction of the said properties, which did not have lapsed within the deadline of four years established in no. 2 of article 91 of the VAT Code, whereby, the said limitation period of the right to deduction would have as its limit the tax incurred from the year 2005.

Furthermore, it states, if the entry into force of the said regime is taken into account, such deadline could never be situated below the year 2003.

The Claimant understands that the Respondent has no right to deduct the tax supported in the construction of the said units by lapse of the said right since, the deadline of four years would be counted from one of the following moments: a) issuance of the invoice relating to the construction service provision; b) if the legal deadline for issuance of the invoice was not respected, until the fifth business day following the moment when the tax is shown to be due under the terms of article 7 of the VAT Code (article 36, no.), or c) if the provision of services gives rise to payment, even if partial, prior to the issuance of an invoice, at the moment of receipt of that payment, for the amount received.

It submits that in any of the cases referred to, the right to deduction of the VAT supported in the construction of the units to which the present case relates, had long since lapsed.

The Claimant concludes defending that neither should the subsidiary request of the present Claimant be accepted and which relates to the partial regularization of the tax petitioned under the terms of paragraph a) of no. 1 of article 25 of the VAT Code, by the right of waiver of the exemption provided for in no. 4 of article 12 of the VAT Code does not constitute an alteration of activity that enables the deduction of tax under the terms provided for in paragraph b) of no. 1 of article 25 of the VAT Code, and the Respondent submits that it will always have to conclude that there is a legal impossibility to proceed to the said regularization given the provision of article 4 of Decree-Law no. 21/2007, of 29 January.

The Respondent concludes its substantiation concluded in the sense that the present request for arbitral award should be judged unfounded, all with the due and legal consequences.

E - STATEMENT OF FACTS

Before entering into the appraisal of these issues, it is necessary to present that the factual matter relevant to its understanding and decision was carried out on the basis of documentary evidence and taking into account the facts alleged.

In matters of relevant fact, this tribunal establishes the following facts as established:

The Claimant was notified of the tax assessment acts for additional Value Added Tax and compensatory interest nos. … in the amount of €116,292.00 of 22-10-2013 relating to the period 2009/06T with payment deadline on 31/12/2013 and no. … in the amount of €19,091.00 of 22-10-2013 relating to the period 2009/06T with payment deadline on 31/12/2013 which set a total tax to be paid of €135,383.00.

The Claimant was notified of the Service Order no. OI …, of the Tax Inspection Services, which, after the inspection procedure, and under the terms contained in the respective report which is here fully reproduced[1], considered that the Claimant improperly deducted the VAT supported by the construction of "C…", in the amount of €116,292.00.

The Claimant filed a voluntary claim on 17-04-2014, to which was assigned the number … 2014 …., and exercised its right to be heard.

The AT rejected the voluntary claim by letter no. …, of 26 September 2014.

The Claimant is a limited company of Portuguese law whose corporate purpose consists of the realization, promotion and management of real estate investments, including the purchase and sale of real property, for itself or to be subject to resale, and also the exercise of the activity of exploitation, management and leasing of real property, owned or third-party owned, as well as the exercise of activities related or similar to its purpose, being registered with the CAE no. 68100.

Following the division of company B…, SA, (NIF:…) on 24-12-2004 resulted in the creation of the present Claimant, which initiated its activity on 28-12-2004, and in which its assets were constituted by the set of autonomous units that make up the project "C…".

At the time of the division, were in force in some of the units leasing contracts entered into by company B… in which the waiver of exemption operated.

The Claimant entered into a leasing contract in 2009 over the units BE, BH, AWA, AWB, AWD, AWE, KW, KX, KY, KZ, LA, LB, LC, LD, OP, OQ, OR, OS, OT, OU, OV, KF, KV, LU, LW, LV, JL, JM, FZ, GA and GB, GC.

With the exception of units JL and JM, none of the aforementioned units had been leased since the construction of the project to which they belonged.

Such leasing contract was entered into after the acceptance of the waiver of VAT exemption, provided for in no. 29) of article 9 of the VAT Code.

With regard to the units leased for the first time, the Claimant, in the periodic statement relating to the period of June 2009, deducted the VAT supported by its construction, in the total amount of €116,292.00.

The construction of the units in question was completed, at least, in the year 2001.

For purposes of VAT, the Claimant is registered as a mixed taxpayer, on a monthly basis, as of 01-01-2007.

Certificates of occupancy nos. …/2001 and …/2001 were issued by the Municipal Chamber of Sintra, regarding the project "C…".

F - UNPROVEN FACTS

Of the facts with interest for the decision of the cause, contained in the challenge, all objects of concrete analysis, those not contained in the factuality described above were not proved.

G - ISSUES TO BE DECIDED

Considering the positions of the parties assumed in the arguments presented, the central issue to be decided constitutes the following, which must, therefore, be examined and decided:

The request of the Claimant, which is the issue previously submitted to the Court of Justice of the European Union, through the mechanism of the preliminary ruling provided for in paragraph b) of article 234 of the Treaty of Rome.

The declaration of illegality of the tax assessment acts on Value Added Tax nos. … and …, alleged by the Claimant.

The subsidiary request presented by the Claimant, to partially deduct the VAT tax supported in the amount of €69,775.20.

H - LEGAL MATTER

Notwithstanding understanding "it to be a matter sufficiently conclusive in light of community law and jurisprudence" the Claimant formulates a request for preliminary ruling, in order to know whether:

"The faculty granted to the Member States to establish the rules for the exercise of the right to option for taxation of the leasing of real property and of restriction of the scope of such right provided for in no. 2 of article 137 of Directive 2006/112/EC, of 28 November 2006, can be interpreted in the sense that – in case of exercise of the option for taxation – exclude the application of the regime of regularization of VAT supported with the acquisition or construction of goods (real property) of fixed assets, which is provided for in articles 184 to 192 of the aforementioned Community Directive.".

For the interpellation of the CJEU to be relevant in the scope of a preliminary ruling, it is, evidently, necessary, first and foremost, that the question to be formulated has relevance in the matter to be decided in the case.

Now, with due respect, this is not what occurs, in the case sub iudice.

In fact, it would only make sense to formulate the question raised by the Claimant if it were previously concluded that national legislation excludes "the application of the regime of regularization of VAT supported with the acquisition or construction of goods (real property) of fixed assets, which is provided for in articles 184 to 192 of the aforementioned Community Directive.".

Now, this not being the case, as will be seen below, the requested preliminary ruling will make no sense whatsoever.

Effectively, even in the interpretation sustained by the AT, the questioned exclusion "of the regime of regularization of VAT supported with the acquisition or construction of goods (real property) of fixed assets" is not verified. In fact, the interpretation proposed by the AT does not exclude the application of such a regime, but, solely, focuses on the limitations and conditionings (deadline and other conditions) of the regularization, which are integral to the regime in question.

That is: there will be no sustainable reasonable doubts that Community Law comprises, with respect to the regime of regularization in question, the admissibility of limitations and conditionings, linked to deadlines for deductibility, to the framework of activities, among others. And what is at issue in the case, is, solely, the interpretation and delimitation of the extent of these conditionings, and not, in any case, the possibility of exclusion, pure and simple, of the faculty of "application of the regime of regularization of VAT supported with the acquisition or construction of goods (real property) of fixed assets", in the case "of the exercise of the right to option for taxation of the leasing of real property".

Thus, and in view of the above, the requested preliminary ruling is rejected.

Given this, the Claimant requests the declaration of illegality of the tax assessment acts on Value Added Tax nos. … and …, as in its opinion, "that once the right to deduct the tax supported by the acquisition of goods and services for the exercise of the economic activity developed by the taxpayer is acquired, the latter has four years to deduct it, from the moment the waiver of exemption takes effect", whereby "the tax assessment act claimed here is illegal, by violation of articles 19 and 98, no. 2, of the VAT Code, as well as of the Sixth Community Directive.".

Let us see.

Article 98/2 of the VAT Code, in the applicable wording[2], provides that:

"Without prejudice to special provisions, the right to deduction or reimbursement of the tax paid in excess can only be exercised up to the lapse of four years after the birth of the right to deduction or payment in excess of the tax, respectively."

The Claimant intends that, since the right to deduction only formed in its legal sphere, with the waiver of the exemption regime, accomplished on 01-01-2007, the latter would have 4 years, counted from that date, to deduct the VAT supported, previously, by the construction of the buildings it leased.

With due respect reserved, it is not in agreement with the reading of the normative framework in question, presented by the Claimant.

In fact, and first and foremost, the rule of article 98/2 of the VAT Code, mentioned by the Claimant, relates to the official revision of the tax – a situation that is not at issue in the present case – and not to the exercise of the right to deduction.

On the other hand, and precisely because of this, the rule in question does not provide an answer to the question of knowing at what moment the right to deduction is born, from which the 4-year deadline, fixed therein, will be counted.

The answer to that question is not found, equally, in article 19 of the VAT Code, but, rather, in article 22 of the same, which provides in its no. 1 that "The right to deduction is born at the moment in which the deductible tax becomes due." That is, the right to deduction is born at the moment the deductible tax becomes due.

From this it follows that – in principle – the tax that became due at a moment prior to the acquisition of the quality of VAT taxpayer, or, for what the case matters, at a moment when a taxpayer of that tax is under an exemption regime, will not be deductible, even if, in the future, the entity that supported the tax in question acquires the quality of VAT taxpayer or waives the exemption regime.

Corroborating what has just been said, and with direct relevance to the appraisal to be made in the case sub iudice, is, for example, the regime established in article 25 of the VAT Code, in the applicable wording[3]. In fact, if, as the Claimant intends, passing from the exemption regime to a subjection regime, one could deduct, all the tax deducted in the past, unlimitedly, with repercussion on the activity exercised, it would not be necessary, as it would be redundant, the regime (among others) of the article referred to.

On the other hand, no violation of the community directive is perceived in this normative framework.

In this way, and in view of the above, it is considered that, contrary to what is argued by the Claimant, the tax assessment act here in dispute is not illegal, by violation of articles 19 and 98, no. 2, of the VAT Code, as well as of the Sixth Community Directive, the Claimant's main request therefore being without merit.

Subsidiarily, and for the "hypothesis of (...) it being considered (...) that the provision of no. 2 of article 98 of the VAT Code, is not applicable to the case in question", the Claimant understands that it should be considered that the latter "was in time to partially deduct the tax supported, since it was within the deadline provided for in paragraph b) of no. 1 of article 25 of the VAT Code".

Let us see.

Article 25 of the VAT Code, in the applicable wording, provided that:

"1 - If, by reason of alteration of activity or by legal requirement, taxpayers pass to practice operations subject that confer the right to deduction, they may still deduct the tax relating to goods of fixed assets, as follows:

a) When it is a question of non-real property goods acquired in the year of the alteration of the taxation regime and in the four civil years preceding, the deductible tax is proportional to the number of years remaining to complete the period of five years from the year in which the use of the goods commenced;

b) In the case of real property goods acquired or completed in the year of the alteration of the taxation regime and in the 19 civil years preceding, the deductible tax is proportional to the number of years remaining to complete the period of 20 years from the year of occupation of the goods;

c) The deduction can be made in the tax period in which the alteration occurs."

First and foremost, it should be noted that, reprise of the above put forward, the regime in question corroborates what was said, regarding the rule of non-deductibility of tax supported under an exemption regime, in so far as if this were not so, this special regime would not be justified.

Moving to the concrete issue now at issue, the AT maintains that "the right of waiver of the exemption provided for in no. 4 of article 12 of the VAT Code does not constitute an alteration of activity that enables the deduction of tax under the terms provided for in paragraph b) of no. 1 of article 25 of the VAT Code".

With due respect reserved, it is understood that the AT is not right, in this part.

In fact, duly interpreted, it should be understood that, when the rule in question refers to the "alteration of activity" it will not refer to an alteration of activity (in the activity exercised), but to the "alteration of the activity" exercised by the taxpayer, from exempt to subject, independently of the occurrence, or not, of an alteration of activity. That is, it will not presuppose that rule an alteration, in the activity exercised, but an alteration in the taxation regime of the activity of the taxpayer.

The interpretation which has just been initiated will, first and foremost, find acceptance in the literal element, in so far as the Law employs the expression "alteration of the activity", and not "alteration of activity". In fact, if it were intended to condition the possibility of exercising the right to deduction under the terms it regulates to cases in which there was a passage from one type of activity to another distinct type of activity, the legal text should have the following tenor: "...by reason of alteration of activity...".

No correspondence is detected, in this way, at the literal level, between the terminology employed in the rule being interpreted, and the concept of "alteration of activity", in VAT, as it is usually employed[4].

The interpretation followed is also in conformity with the literal argument of interpretation, first and foremost in so far as no rational basis is perceived to limit the regime in question to situations in which the practice of operations subject that confer the right to deduction, stems from a material change of the activity exercised, and not to cases in which, for other reasons, the activity exercised changes in what concerns its status from non-subject to subject.

Furthermore, this is confirmed by the tenor of nos. 3 and 4 of the same article, which denote the concern of the legislator underlying the global regime at issue in that rule, of assuring, in all its extent, the neutrality of the tax.

The absence of a provision analogous to those referred to in nos. 3 and 4, which relates more clearly to the situation at issue in the case – alteration of the activity exercised from exempt to subject – can only have one of two meanings:

either that it was intended to exclude that situation from the regime in question, as the AT maintains;

or that such situation is already encompassed by the tenor of no. 1.

Now, lacking any rationality to the first of the hypotheses which has just been enunciated, and, by contrast, as has been seen, everything indicating that the disposition of the legislator presupposed by article 9 would be that of non-restriction, unjustified, of the fiscal neutrality of the tax in question, it should be concluded for the second.

Thus, understanding that article 25/1/b) of the applicable VAT Code encompasses the alteration of the activity exercised by the taxpayer, from exempt to subject to VAT, the subsidiary request formulated by the Claimant should proceed, whereby, having elapsed 8 years between the completion of the construction of the real property and the date in which the VAT supported by the construction of the units in question was deducted, the amount of €69,775.20 should be accepted as deductible VAT, corresponding to the portion of tax proportional to the 12 years lacking to complete the period of 20 years.

J - DECISION

Therefore, considering all the above, this Arbitral Tribunal decides:

To judge the arbitral request partially founded and to partially annul the assessments object of the present arbitral case, accepting as deductible VAT the amount of €69,775.20, absolving the Respondent in the remaining part.

To condemn the parties in the costs of the case, in the amount of €3,060.00, in proportion to their respective default, which is fixed at 51.5% for the Respondent and 48.5% for the Claimant, in accordance with article 12, no. 2 of the Regime of Tax Arbitration, of article 4 of the Arbitration and Procedural Rules, and of Table I annexed to the latter. – no. 10 of art. 35, and no. 1, 4 and 5 of art. 43 of the General Tax Law, arts. 5, no. 1, al. a) of the Tax Procedure Rules, 97-A, no. 1, al. a) of the Code of Tax Procedure and 559 of the Code of Civil Procedure), taking into account the amount already paid.

The value of the case is fixed at €135,383.00 taking into account the economic value of the case assessed by the value of the tax assessments challenged.

Notify.

Lisbon, 8 May 2015.

The Arbitrators

José Pedro Carvalho

(arbitrator-president),

Paulo Ferreira Alves

(arbitrator-assessor)

António Nunes dos Reis

(arbitrator-assessor)

[1] Which should accompany all legally mandatory notifications of this decision, with the exception of those directed to the parties, who have personal knowledge of it.

[2] Given by Decree-Law 102/2008.

[3] Although article 2 of Decree-Law 102/2008 renumbered it as article 24-A, the fact is that in the republication of the VAT Code effected in the same Decree-Law it appears as article 25.

[4] See, for example, the forms and manuals relating to the matter, at: http://info.portaldasfinancas.gov.pt/NR/rdonlyres/982B3F68-04BD-4750-9384-9C45A6A0186B/0/MANUAL_D_ALTERACOES_PF.pdf

Frequently Asked Questions

Automatically Created

What is the right to VAT deduction under Portuguese tax law?
The right to VAT deduction under Portuguese tax law is governed by articles 19, 20, and 98 of the VAT Code (Código do IVA). Taxpayers engaged in taxable economic activities have the right to deduct input VAT paid on goods and services used for their business operations. The critical issue is determining when this right arises. According to Tax Authority interpretation and EU jurisprudence, the right to deduction generally arises when the deductible tax becomes due. However, article 98(2) of the VAT Code establishes a four-year period for exercising deduction rights. In cases involving waiver of VAT exemption on real property (regulated by Decree-Law 21/2007), the timing becomes more complex, as taxpayers argue the right arises upon effective waiver of exemption, while authorities may contend it arises at the moment of tax due. The Sixth Community Directive principles also apply to interpretation of Portuguese VAT deduction rights.
How does the CAAD arbitral tribunal process work for VAT disputes in Portugal?
The CAAD (Centro de Arbitragem Administrativa) arbitral tribunal process for VAT disputes in Portugal operates under Decree-Law 10/2011 of January 20. Taxpayers can request constitution of an arbitral tribunal to challenge tax acts, including VAT assessments. The process begins with filing a request for arbitration, which is reviewed by the CAAD President for acceptance. Arbitrators are designated by the Deontological Council if parties don't appoint them. In collective tribunals, three arbitrators serve (one president and two assessor-arbitrators). The tribunal must be constituted within specific timeframes, and parties are notified of arbitrator appointments with the right to refuse. Both parties can waive the hearing meeting under article 18 of the Arbitral Tribunal Rules. The tribunal has material competence under articles 2(1)(a) and 30(1) of Decree-Law 10/2011 to decide tax disputes, including VAT deduction controversies. The process provides an alternative to traditional administrative courts for resolving tax disputes efficiently.
Can a taxpayer challenge VAT liquidation acts through tax arbitration?
Yes, taxpayers in Portugal can challenge VAT liquidation acts through tax arbitration at CAAD. Article 2(1)(a) of Decree-Law 10/2011 grants material competence to arbitral tribunals to appraise and decide challenges against tax assessment acts, including VAT liquidations and compensatory interest assessments. This includes both original assessments and additional VAT assessments resulting from tax inspections. Taxpayers must first exhaust the voluntary claim procedure (reclamação graciosa) before the Tax Authority. If the claim is rejected or there is no response within the statutory period, taxpayers can then request constitution of an arbitral tribunal. The arbitration request must be filed within specified deadlines and accepted by the CAAD President. Tax arbitration provides an alternative dispute resolution mechanism that is generally faster than traditional judicial proceedings, allowing taxpayers to obtain binding decisions on the legality of VAT assessments, deduction denials, and other VAT-related administrative acts.
What are the legal grounds for contesting IVA (VAT) assessments before the CAAD?
Legal grounds for contesting IVA (VAT) assessments before CAAD include violations of substantive VAT law provisions and procedural irregularities. Common substantive grounds include: (1) incorrect application of articles 19 and 20 of the VAT Code regarding deduction rights; (2) violations of article 98 concerning deadlines for exercising deduction; (3) misapplication of exemption regimes under article 9 of the VAT Code; (4) improper denial of exemption waivers under Decree-Law 21/2007 for real property transactions; (5) incorrect calculation of deductible amounts or regularizations; (6) violations of EU VAT Directives, particularly the Sixth Directive principles as interpreted by Court of Justice jurisprudence. Procedural grounds may include lack of proper notification, insufficient reasoning in tax decisions, violations of rights of defense, and errors in fact-finding during tax inspections. Taxpayers can also invoke the principle of legitimate expectations, proportionality, and other general administrative law principles. The challenge must demonstrate illegality of the contested act, with burden of proof varying depending on whether the assessment is based on direct or indirect methods.
What was the outcome of CAAD arbitral decision 794/2014-T on VAT deduction rights?
The provided excerpt of CAAD arbitral decision 794/2014-T does not include the final outcome or ruling. The document presents the procedural history and parties' arguments but is incomplete, cutting off mid-sentence during the claimant's legal reasoning. From the arguments presented, the dispute centered on whether the claimant properly exercised its right to deduct €116,292.00 in construction-related VAT after waiving exemption on leased real estate units. The claimant argued the four-year deduction period under article 98(2) began when the waiver of exemption became effective, making the deduction timely. The Tax Authority argued the right arose when tax became due and that articles 19 and 98(2) were violated. The tribunal would need to determine: (1) when the right to deduction arose; (2) whether the waiver constitutes an 'alteration of activity' triggering Decree-Law 21/2007's regularization regime; (3) whether the deduction was exercised within applicable deadlines. Without the complete decision, the actual ruling and its reasoning cannot be definitively stated.