Flashback on ECJ Cases – C-210/11 & C-211/11 (Medicom and Maison Patrice Alard) – Provision of part of the business premises as a residence free of charge does not constitute VAT-exempt rental

On July 18, 2013, the ECJ issued its decision in the case C-210/11 (Medicom and Maison Patrice Alard).

Context: Requests for a preliminary ruling – Sixth VAT Directive – Article 6(2), first paragraph, point (a) and Article 13(B)(b) – Right to deduction – Capital goods belonging to legal persons made partly available to their managers for private use – No rent payable in money, but taking into account of a benefit in kind for income tax purposes

Article in the EU VAT Directive

Article 6(2), first paragraph, point (a) and Article 13(B)(b) of the Sixth Directive (Art. 26 and 135(1)(l) and 135(2) of the EU VAT Directive 2006/112/EC)

The first paragraph of Article 6(2) of the Sixth Directive provides:

‘The following shall be treated as supplies of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;

(b) supplies of services carried out free of charge by the taxable person for his own private use or that of his staff or more generally for purposes other than those of his business.’

Under Article 13(B)(b) of the Sixth Directive, the Member States are to exempt from tax ‘the leasing or letting of immovable property’.

Facts

Case C‑210/11

In Case C‑210/11, it is apparent from the order for reference that Medicom is a company having legal personality, subject to VAT for the provision of research, organisation and advisory services relating to the typing, translating and publishing of medical reports for pharmaceutical companies, and horse livery. Medicom had a building constructed to be used specifically for its activities, which was also used rent-free for residential purposes by its managers and their family. In its VAT returns, Medicom deducted all the VAT relating to the construction costs of the building.
In their report of 3 September 1997, the competent tax authorities found that the building was being used at a rate of 50% for private use by the managers of Medicom and that ‘a benefit in kind was claimed’ for them for that use. Considering that only half of the VAT on the construction of that building could be deducted, it issued an order to Medicom for payment of the VAT unduly deducted in the return relating to the second quarter of 1997.
Subsequently, the managers of Medicom acknowledged that, in the tax years 1997 and 1998, they had used two thirds of the building in question for private use. In those circumstances, on 16 November 2000 the competent tax authorities rejected the application for the VAT deduction for 1996 and, on 15 January 2001, issued a fresh order to Medicom.
As the action brought by Medicom against those orders was dismissed at first instance, Medicom appealed to the Cour d’appel de Liège (Court of Appeal, Liège) (Belgium). By judgment of 24 March 2006 that court annulled the contested decisions, applying the interpretation of the Sixth Directive endorsed by the Court of Justice in Case C‑269/00 Seeling [2003] ECR I‑4101 to the case before it.

Case C‑211/11

In Case C‑211/11, it is apparent from the order for reference that MPA is a company having legal personality, subject to VAT for activities relating to catering and the organisation of receptions. In 1991, it had a building constructed to be used specifically for its activities and in which its manager also resided with his family, rent-free. In its VAT returns, MPA deducted all the VAT relating to the construction costs of the building.
Considering that only part of the VAT could be deducted since part of the building was being used for residential purposes for the manager, on 6 November 1995 the competent tax authorities issued an order in respect of MPA.
The court at first instance before which MPA had brought an action for annulment of that order upheld the action. The appeal brought by the competent tax authorities against the judgment at first instance was dismissed by the Cour d’appel de Bruxelles (Court of Appeal, Brussels) (Belgium) by judgment of 4 January 2006, on the grounds, inter alia, that the making available of part of the building free of charge to the manager for residential purposes was primarily in the interests of the taxable business carried on in the building by the taxable person, with the result that that part of the building could be regarded as constituting capital goods in respect of which VAT could thus be deducted for construction, maintenance, repair or improvement.
In both sets of proceedings, the competent tax authorities appealed to the Cour de cassation (Court of Cassation) (Belgium), arguing, inter alia, first of all, that Seeling could not be applied to situations such as those at issue in those proceedings. Next, the making available of part of a building for the private use of a company manager falls to be treated as a benefit in kind for income tax purposes, with the result that it cannot be considered to be a ‘free of charge’ making available or a ‘rent-free’ situation. Lastly, the direct and immediate link required under Article 17(2) and (5) of the Sixth Directive between an input transaction and a taxed output transaction for the entitlement to a deduction to occur is not a function of the purpose pursued by the taxable person and is lacking in the present case. Moreover, it is for the taxable person to demonstrate that he is entitled to the deduction, which proof has not been made out.

Questions

Are Articles 6(2)(a) and 13B(b) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment to be interpreted as precluding the private use by the mangers, administrators or members and their families of a company with legal personality that is liable to tax of all or part of a property forming part of the assets of the company and thus treated as forming, in its entirety, part of the assets of the business, from being treated as an exempt supply of services, on the basis that it constitutes a leasing or letting of immovable property within the meaning of Article 13B(b), where there is no provision for payment of rent in money as consideration for that use, which amounts to a benefit in kind that is taxed as such for the purpose of the managers’ income tax and such use is therefore regarded for tax purposes as the consideration for a proportion of the work performed by the managers, administrators or members?

Are those provisions to be interpreted as meaning that that exemption applies in such circumstances where the company fails to prove that there is an essential link between the operation of the business and the making available of all or part of the property to the managers, administrators or members and, if so, is an indirect link sufficient?

AG Opinion

None

Decision

1. Point (a) of the first paragraph of Article 6(2) and Article 13(B)(b) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as precluding the making available of part of immovable property belonging to a legal person to its manager for his private use, without there being provision for the beneficiaries of that arrangement to pay a rent in money by way of consideration for the use of that property, from constituting an exempted letting of immovable property within the meaning of that directive; the fact that the making available of that property is deemed, under the relevant national income tax legislation, to be a benefit in kind stemming from the beneficiaries’ performance of their corporate duties or under their contract of employment is of no import in that regard.

2. Point (a) of the first paragraph of Article 6(2) and Article 13(B)(b) of the Sixth Directive 77/388, as amended by Directive 95/7, must be interpreted as meaning that, in situations such as those at issue in the main proceedings, the issue whether or not the making available of all or part of the property in its entirety forming part of the assets of the business to managers, administrators or members of that business is directly linked to the operation of the business is of no relevance for the determination of whether that making available comes within the exemption provided for in the latter provision.

Summary

The CJEU has ruled that the making available of part of real estate belonging to a legal person for private purposes, without the users paying a consideration, cannot be regarded as a tax-exempt rental of real estate.

Medicom SPRL and Maison Patrice Alard SPRL have a building built. They operate their businesses in the buildings. The administrators and their families also live in the buildings. They do not pay rent for this. Medicom and MPA fully deduct the VAT related to the construction of the buildings. However, the Belgian tax authorities state that the VAT is not fully deductible. The tax authorities state in this regard that there is no question of a case in which a good is made available “free of charge” or “without rent”, because the provision is regarded as a benefit in kind in the Belgian IT. The Belgian court has referred questions for a preliminary ruling in this case.

The CJEU has ruled that it is contrary to EU law for the making available of part of real estate belonging to a legal person, for the private purposes of its manager, without the users paying a rent for the use of that real estate. payment in cash as consideration, as a tax-exempt rental of immovable property. According to the CJEU, it is irrelevant here that under the Belgian IT, the posting is regarded as a benefit in kind that arises from the performance by the users of their statutory assignment or their employment contract.

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