The right to deduct VAT is one of the essential elements of the principle of VAT neutrality. However, where expenses incurred by companies in connection with their employees are concerned, the answer to whether VAT is deductible is far from automatic.
Expenses relating to employee transport, business travel, accommodation, meals, vehicles or participation in certain events are frequent examples of business costs in respect of which doubts may arise as to whether the VAT incurred may be deducted.
A recent decision of the Administrative Arbitration Centre (“CAAD”), issued on 11 September 2026 in Case No. 939/2025-T, has once again brought this issue to the fore, specifically addressing the right to deduct VAT incurred by a company on the acquisition of collective transport services for its employees.
The general principle of the right to deduct VAT
In general terms, the Portuguese VAT Code provides that VAT incurred on the acquisition of goods and services used by a taxable person for the purposes of carrying out taxable transactions may be deducted.
Accordingly, the existence of a connection between the expense incurred and the economic activity carried on by the company is one of the fundamental requirements for exercising the right to deduct.
However, this general rule must be read together with Article 21 of the Portuguese VAT Code, which establishes several exclusions from the right to deduct. These include certain expenses relating to vehicles, transport and business travel, accommodation, food, beverages, hospitality, entertainment and luxury expenses.
The fact that a particular expense is necessary or appropriate for the company’s activity does not therefore necessarily mean that the corresponding VAT is fully deductible.
In practice, it is precisely this circumstance that can create difficulties in determining the correct tax treatment of expenses incurred by companies in connection with their employees.
Employee transport: a recent decision favourable to the right to deduct
In Case No. 939/2025-T, the Arbitral Tribunal considered a situation in which a company incurred expenses for collective transport services for its employees.
The issue was particularly relevant because Article 21(1)(c) of the Portuguese VAT Code establishes an exclusion in respect of transport and business travel expenses of the taxable person and its staff.
In its decision, the Arbitral Tribunal held, in particular, that the exclusions from the right to deduct provided for in Article 21 of the Portuguese VAT Code must be interpreted restrictively.
This conclusion is particularly important for companies, as it demonstrates that the mere fact that an expense is related to employees does not, without further analysis, mean that the VAT incurred is necessarily excluded from the right to deduct.
The specific nature of the expense, the manner in which the service is provided, its connection with the company’s economic activity and the particular circumstances in which the cost is incurred may be decisive in determining its VAT treatment.
Not all employee-related expenses have the same VAT treatment
In business practice, very different situations may arise.
For example, a company may contract a collective transport service to ensure that employees can travel to industrial facilities located in an area that is difficult to access. In other situations, it may incur individual travel or accommodation expenses for employees attending a meeting, training course, conference or project away from their usual place of work.
Other examples may include meals provided to employees, expenses associated with company vehicles or costs relating to corporate events.
Although all these expenses may have a business justification, their VAT treatment is not necessarily the same.
Article 21 of the Portuguese VAT Code contains not only exclusions but also various exceptions to those exclusions, including situations relating to the provision of accommodation and meals to company staff or expenses associated with organising and participating in congresses, trade fairs, exhibitions, seminars and conferences, provided that the statutory requirements are met.
Consequently, the analysis of the right to deduct must take into account the specific nature of each expense and not merely the fact that its immediate beneficiary is an employee.
The importance of the connection between the expense and the company’s activity
One of the essential elements of this analysis is determining whether there is a sufficiently direct connection between the acquisition of the goods or services and the economic activity carried on by the company.
This may be particularly relevant where an expense, although directly benefiting an employee, is incurred essentially in the company’s own interest.
It is precisely in this respect that apparently similar situations may lead to different tax conclusions.
For example, a transport service organised by a company to enable a production facility to operate does not necessarily have the same characteristics as an individual journey paid for for the benefit of an employee.
Likewise, accommodation or meal expenses incurred in the context of certain business activities must be analysed in light of the specific rules laid down in the Portuguese VAT Code.
This distinction is also relevant in the context of tax inspections, where the Portuguese Tax and Customs Authority may question not only the nature of the expense but also the existence of the necessary connection with transactions giving rise to a right to deduct.
Documentation and evidence are also essential
The ability to deduct VAT does not depend solely on the substantive classification of the expense.
Companies must also ensure compliance with the formal requirements for exercising the right to deduct, particularly the existence of invoices issued in accordance with the applicable legal requirements and in the name of the taxable person.
In less straightforward situations, it is also advisable to retain documentation demonstrating the business rationale underlying the expense and its connection with the company’s activity.
This may be particularly important where the nature of the expense means that it may also involve an element of personal use or benefit.
The existence of internal policies governing travel, use of vehicles, meals, employee transport or participation in events may therefore contribute to greater certainty in the application of VAT rules and to defending the position adopted by the company in the event of subsequent scrutiny by the Portuguese Tax and Customs Authority.
Should companies review the VAT treatment of these expenses?
The recent arbitral case law provides an opportunity for companies to review the tax treatment they have been applying to expenses related to their employees.
Such a review may identify situations in which VAT has been incurred and a right to deduct may exist, as well as situations in which VAT is being deducted without all the statutory requirements being met.
A preventive review may be particularly relevant for companies with significant volumes of expenses relating to employee transport, business travel, accommodation, meals, vehicle fleets or participation in events.
It should also be borne in mind that any changes to the treatment previously adopted should be analysed in light of the rules applicable to VAT adjustments, the relevant time limits and the specific circumstances of each taxable person.
How can Belzuz Abogados, S.L.P. assist?
The Tax Law team at Belzuz Abogados, S.L.P. regularly advises Portuguese and international companies on VAT matters and on the correct tax treatment of expenses incurred in the course of their business activities.
Our team’s experience includes analysing the right to deduct VAT, reviewing the tax treatment of different categories of business expenses, assessing cross-border transactions and assisting companies before the Portuguese Tax and Customs Authority, including in tax inspection procedures and tax litigation.
In the specific case of employee-related expenses, the analysis must take into account not only the formal classification of the expense, but also the substance of the transaction, its connection with the company’s economic activity and the documentation available to support the tax treatment adopted.
The recent case law concerning collective employee transport demonstrates precisely the importance of analysing each situation individually and of not assuming that all employee-related expenses are, by their nature, excluded from the right to deduct.
The Tax Law team at Belzuz Abogados, S.L.P. is available to assist companies in reviewing their VAT policies and procedures, identifying opportunities to recover VAT and assessing the tax risks associated with the positions adopted.