On September 14, 2017, the ECJ issued its decision in the case C-132/16 (Iberdrola Inmobiliaria Real Estate Investments).
Context: Reference for a preliminary ruling — Taxation — Common system of value added tax — Directive 2006/112/EC — Article 26(1)(b) and Articles 168 and 176 — Deduction of input tax — Services relating to construction or improvement of a property belonging to a third party — Use of services by the third party and by the taxable person — Service supplied free of charge to the third party — Entry of costs incurred for services carried out in the accounts as part of the taxable person’s general costs — Determination of the existence of a direct and immediate link with the economic activity of the third party or the economic activity of the taxable person
- VAT deduction of entrepreneurs not limited in case of use by other party
- ‘Direct and immediate link’ between public works and taxable holiday accommodation
- Supply of services for free (art. 26 (1)(b)) and art. 168(a) of the EU VAT Directive 2006/112/EU
Articles in the EU VAT Directive
Artciles 26(1)(b), 168(a), 176 of the EU VAT Directive 2006/112/EC.
Article 26 (Taxable transaction – Supply of services)
1. Each of the following transactions shall be treated as a supply of services for consideration:
(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.
Article 168 (Origin and Scope of Right of Deduction)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;
Article 176 (Restrictions on the Right of Deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.
Facts
- Iberdrola owns land on which it plans to construct a holiday village.
- The holiday village needs to be connected to the existing municipal waste-water pump station. The pump station had to be extensively renovated to collect waste water from the planned holiday houses.
- Iberdrola and the Bulgarian municipality involved agreed that Iberdrola would repair the waste-water pump and would bear the costs for the repair.
- Iberdrola deducted the VAT on the repair costs.
- The Bulgarian tax authorities challenged the VAT deduction on these costs. They stated that Iberdrola had supplied the municipality a service free of charge
Question
Do Article 26(1)(b), Article 168(a) and Article 176 of Council Directive 2006/112/EC 1 of 28 November 2006 on the common system of value added tax preclude a provision of national law such as Article 70(1)(2) of the Zakon za danak varhu dobavenata stoynost (Law on value added tax), which restricts the right to deduct input VAT in respect of the supply of services relating to construction or improvement of a property owned by a third party, which are used both by the recipient of the supply and by the third party, for the sole reason that the third party enjoys the result of those services free of charge, without taking into account the fact that the services are to be used in the context of the economic activity of the taxable recipient? Do Article 26(1)(b), Article 168(a) and Article 176 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax preclude a tax practice consisting of refusing to recognise the right to deduct the input VAT in respect of the supply of services, where the expenditure corresponding to those services is counted among the taxable person’s general costs, on the ground that it was incurred in order to construct or improve a property owned by another person, without taking into account the fact that that property is also to be used by the recipient of the supply of building services in the context of its economic activity?
AG Opinion
Article 26(1)(b), Article 168(a) and Article 176 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax are to be interpreted to the effect that they do not permit the deduction of input tax for services which are supplied free of charge directly to a third party for its own purposes, even if they are motivated by business reasons. This holds irrespective of the manner of entry in the accounts under national law chosen by the taxable person. Consequently, the abovementioned provisions do not preclude a national rule such as Article 70(1)(2) of the ZDDS or national administrative practice to that effect.
- For VAT to be deductible costs must have a direct and immediate link with output transactions of Iberdrola.
- In her opinion Kokott stated that the crucial factor is who actually uses the repairs and whether this gives rise to untaxed final consumption.
- In this case only the municipality directly uses the construction services for waste-water disposal.
- Kokott therefore sees no direct and immediate link between the output transactions of Iberdrola and the repair costs.
Decision
Article 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that a taxable person has the right to deduct input value added tax in respect of a supply of services consisting of the construction or improvement of a property owned by a third party when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party in the context of their economic activity, in so far as those services do not exceed that which is necessary to allow that taxable person to carry out the taxable output transactions and where their cost is included in the price of those transactions.
Source
Summary
Conclusion
If the taxpayer makes an investment in a communal pumping station, which is partly necessary for running his business, and partly serves the commune, then the VAT deduction is partial. The issue of whether VAT is taxed for free provision of services was not resolved by the Court.
- The CJEU judgment has a favorable outcome for entrepreneurs compared to the Advocate-general’s opinion.
- VAT will not be a cost to the entrepreneur as long as costs made are necessary for the economic activities of the entrepreneur.
- The mere fact that another party (also) benefits, is in that respect not relevant.
- However, the VAT deduction is limited when more is done than is necessary for the entrepreneur to carry out his taxable activities.
Decision (AG opinion NOT followed)
- Unlike AG, CJEU rules that there is a direct and immediate link between the repair costs and Iberdrola’s output transactions. According to the CJEU it would be impossible to connect the holiday village to the pump station without the repairs.
- Without the repairs Iberdrola would thus not have been able to carry out its taxable transactions.
- VAT deduction may however be limited, according to the CJEU, when the repairs go further than necessary to ensure the connection of the holiday village to the pump station. It is up to the referring court to check this.
ECJ rehearsed the principles concerning VAT deduction
- VAT deduction is a fundamental principle of the system of VAT which, in principle, may not be limited and is exercisable immediately
- in order to relieve the taxpayer entirely of the burden of the VAT payable on supplies received from another taxable person to be used in the course of his economic activities,
- [taxable persons]provided that they are themselves subject to VAT and used for the purposes of his taxed transactions.
- There must be a direct and immediate link between a particular input transaction and a particular output transaction,
- or the costs may be general business costs which are components of the price of the overall goods or services which the taxpayer supplies.
- But where costs of a taxable person are used for purposes of transactions that are exempt or outside the scope of VAT, no output tax can be collected and so no input tax can be deducted.
Similar ECJ Cases
Reference to the case in the EU Member States
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