Following the judgment of the European Court of Justice (ECJ) in Case C-94/19 issued on March 11 2020, it would be expected that any uncertainties regarding the VAT treatment of staff secondment would be dissipated and that it would be a matter of time until the Portuguese Tax and Customs Authority (TCA) adopts the ECJ ruling. However, the TCA seems to have disregarded this case law, having recently reinforced its long-held conflicting stance on staff secondment.
The TCA’s understanding
Over the years, and particularly since issuing Circular Letter No. 30019 in May 2000, the TCA has persistently held that when the consideration for the secondment of staff corresponds to an exact reimbursement of expenses for wages or salaries, social security contributions, and any other amounts that must be necessarily borne by the company to which the staff belongs, then staff secondment should not be subject to VAT.
According to the TCA’s view, staff secondment should only be considered as a supply of services, subject to VAT, when the respective consideration includes a markup that is added to the reimbursement of costs of the seconded staff.
The ECJ’s judgment in Case C-94/19Case C-94/19 concerned a situation in which an Italian company (Avir) seconded one of its directors to its subsidiary (San Domenico Vetraria) in return for the reimbursement of costs incurred for the seconded staff. The ECJ addressed the question of whether Article 2 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive) must be interpreted as precluding national legislation under which the lending or secondment of staff by a parent company in respect of which the subsidiary merely reimburses the related costs is regarded as irrelevant for VAT purposes.
In view of this case, and as stated in several previous decisions, the ECJ pointed out the following:
A supply of services is effected for consideration if there is a legal relationship between the supplier of the service and the recipient pursuant to which there is reciprocal performance; that being the case if there is a direct link between the service supplied and the consideration received;
There is a direct link where two supplies are mutually dependent on each other, meaning that one is made only on condition that the other is also made, and vice versa; and
The amount of the consideration being equal to, greater than, or less than the costs incurred by the taxable person in providing a service is irrelevant in assessing whether a transaction is to be regarded as having been effected for consideration and does not affect the direct link between the services provided and the consideration received.
Accordingly, the ECJ stressed that if it were to be established that the payment, by San Domenico Vetraria, of the amounts invoiced to it by Avir was a condition for the latter to second the director and that the subsidiary paid those amounts only in return for the secondment, it would have to be held that there is a direct link between the two supplies, and the transaction should be regarded as having been carried out for consideration and subject to VAT.
Therefore, the ECJ held that Article 2(1) of the VAT Directive must be interpreted as precluding national legislation under which the lending or secondment of staff of a parent company to a subsidiary, carried out in return for only the reimbursement of the related costs, is irrelevant for the purposes of VAT, provided that the amounts paid by the subsidiary to the parent company and the lending or secondment are interdependent.
The VAT treatment concerning the secondment of staff in PortugalEven though the ECJ’s decision has recently been followed by the Portuguese Arbitral Tribunal, within the scope of Case No. 49/2024-T, issued in August 2024, the TCA still seems to be completely disregarding the ECJ case law. This observation is supported by its most recent responses to three binding ruling requests (Nos. 25902, 26392, and 26520), all disclosed in November 2024, in which it maintained the understanding that staff secondment should only be subject to VAT when a markup is added to the reimbursement costs.
The above context leads to greater uncertainty in situations in which the consideration of the secondment of staff corresponds to the reimbursement of costs, with the taxpayers having to choose between:
Following the understanding of the ECJ and consider that staff secondment is subject to VAT, with the associated risk of the TCA, in the context of a tax audit, challenging input VAT deducted at the level of the recipient, by considering that such VAT was unduly assessed by the supplier and therefore it cannot be deducted by the recipient; or
Following the understanding of the TCA and consider that staff secondment is not subject to VAT, facing the risk of the TCA, at a later stage and within the statute of limitation, adopting the position taken by the ECJ in Case C-94/19, and issuing additional assessments at the level of the supplier by considering that there is VAT missing.
The uncertainty would be eliminated in the secondment of staff between companies belonging to the same group if Portugal had in place a VAT group regime under which such companies would be regarded as a single taxable person (meaning, in practical terms, that intragroup transactions would not be relevant for VAT purposes), but so far this is not the case.
Considering that Portuguese taxpayers are at risk of facing litigation regardless of their stance on the VAT treatment of staff secondment, the situation may well discourage the secondment of staff and lead to the recurrent use of other contractual models (e.g., multiple employers scheme agreements).
