Portugal: VAT exemption on intra-EU supply of goods – state of play

September 28, 2018

In Portugal, as in several other EU countries, VATable persons have been struggling to obtain the VAT exemption provided for the intra-EU supply of goods (ICS). Such limitations mainly result from wording of Portuguese domestic provisions equivalent to Article 138(1) of the VAT Directive (Article 14(a), of the RITI), which back the restrictive approach normally taken by the Portuguese VAT Authorities (PTA) when auditing the fulfilment in practice of the legal conditions for this VAT exemption.

However, recent decisions by the Court of Justice of the European Union (CJEU) – e.g. the Euro Tyre II case (C-21/16) – and Portuguese tax courts (notably the Supreme Administrative Court, or SAC), mean this trend may be about to change.

Background

As a rule, the PTA have been challenging the exemption applied to ICS, mainly for the following reasons: (i) lack of proof of the expedition of the goods to a EU country other than Portugal (notably in takeaway transactions ie the goods transportation is dealt with by a non-established acquirer); (ii) the acquirer’s VAT number is not registered in the VAT Information Exchange System (VIES); and (iii) the acquirer is not registered for the purpose of carrying out intra-EU acquisitions of goods in the EU country that issued its VAT number. More recently, however, the PTA has been refusing to exempt ICS on the grounds that the acquirer is not registered for VAT purposes in the country of destination of the goods.

Under this context, several judicial disputes have arisen between the PTA and Portuguese VATable persons; in the majority of these, the non-established VATable person failed to register in VIES despite having VATable person status for domestic transactions. In this regard, Euro Tyre II (case C-21/16) constitutes a landmark case for Portugal. In this case, the CJEU was called upon to rule on the conformity of the domestic rules setting the conditions for ICS exemptions to apply with Article 138(1) of the VAT directive.

In a nutshell, when answering questions, the CJEU referred to its past decisions on Mecseck-Gabona, VSTR and Plöckl; it said that where material conditions for VAT exemption are met and there is no evidence of the VATable person intentionally participating in tax fraud (ie there is no reason not to qualify the acquirer as a legitimate trader), or that it knows or should have known that it is participating in tax fraud, the tax authorities of a member state cannot refuse said exemption due to the failure to comply with formal requirements, in particular solely on the grounds that the acquirer does not hold a VAT number for the purposes of ICS and is not registered in the VIES.

Recent developments

As stated above, notwithstanding the path that has been pursued by the CJEU when analysing the legal requirements for the ICS, with Euro Tyre II being the most recent example, the PTA has failed to fall back on its understanding of the application of the aforementioned exemption. This is mainly because the domestic VAT provision ruling on the legal requirements for the VAT exemption to apply remains unaltered [see Article 14(a) of the RITI].

Nevertheless, the Portuguese Tax Arbitration Tribunal, when faced with disputes identical to that portrayed in the Euro Tyre II case (C-21/16), in which the PTA denied the application of a VAT exemption for ICS due to the acquirer failing to register in time in the VIES, it has not shied away from replicating the main findings developed by the CJEU in this decision, thereby ruling against the PTA.

Additionally, the SAC has been confronted with similar disputes, between the PTA and Portuguese VATable persons, in granting exemptions in the ICS.

In this regard, the PTA recently refused to grant an exemption in an ICS on the grounds that although the goods had been dispatched outside Portugal (to a Latvian VATable entity that used its VAT number issued by Latvian authorities for the acquisition), the goods were delivered in France to a French representative of the acquirer, where the latter was not registered for VAT purposes (notably, it was not registered for the purpose of performing intra-EU acquisitions of goods therein). As a result, the PTA decided to reject the application for VAT exemption, accounting for the Portuguese VAT due.

Furthermore, in an awkward application of the safety net principle (please see Article 40 and 41 of the VAT Directive), to further support this line of reasoning, the PTA argued that the Portuguese supplier had failed to demonstrate that the transactions at issue had been liable to VAT in the country of destination and in the country that issued the VAT number used for the acquisition of the goods.

Once more, the Euro Tyre II case (C-21/16) doctrine was advocated to conclude that the VAT registration of the acquirer of goods represents a mere formality that cannot justify, per se, the denial of the benefits of the VAT exemption for an ICS. As such, should the substantive conditions of an ICS be satisfied, that is to say, the delivery of goods in another member state to a taxable person acting as such, as established in Article 138 (1) of the VAT directive, the supplier cannot be deprived of the right to apply the VAT exemption on such operations.

In this context, the PTA has yet to fully comply with the CJEU’s understanding of the application of the VAT exemption provided for by the ICS, mainly because the relevant domestic provisions have not yet been revised; nonetheless, the recent rulings by Portuguese courts offer reassurance and are a testimony that we may be on the brink of a paradigm shift in what concerns the practical application of the legal requirements for the VAT exemption at issue.

This article was written by Mário Silva Costa, senior associate lawyer, and João Garrinhas, tax, at Cuatrecasas, Gonçalves Pereira & Associados in Portugal.