Flashback on ECJ Cases – C-153/11 (Klub) – VAT Deduction even if capital good is not immediately used for business purposes

On March 22, 2012, the ECJ issued its decision inthe case C-153/11 (Klub).

Context: VAT — Directive 2006/112/EC — Article 168 — Right of deduction — Origin of the right of deduction — Right of a company to deduct the input VAT paid for the acquisition of capital goods not yet brought into use for the company’s business activities

Article in the EU VAT Directive

Article 168(a) in the EU VAT Directive

Article 168(a) – Right to deduct VAT

Article 168
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;

Facts

Klub operates a hotel in the Bulgarian seaside resort of Varna.
In May 2009 Klub purchased a maisonette for residential use in Sofia. The VAT on that purchase was deducted, but no tax declaration concerning the payment of local taxes for the maisonette was submitted to the tax authorities.
Klub did not alter the use of the property and did not open accounts in its own name for the supply of water and electricity.
The tax authorities concluded that the maisonette at issue in the main proceedings was intended for residential use, not for business use. Since they considered that the maisonette was not being used for the activity of the business, they took the view that its acquisition had not given rise to a right to deduct the input VAT, and consequently issued Klub with an adjusted tax notice.
Klub contested the tax notice before the Direktor na Direktsia ‘Obzhalvane i upravlenie na izpalnenieto’ — Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite, who upheld the notice.
Klub brought proceedings before the Administrativen sad Varna (Administrative Court, Varna).
Before that court, Klub submitted that the immovable property at issue in the main proceedings was intended for business use, since it intended to use it for meetings for negotiations with tour operators.
A tax declaration in respect of local taxes mentioning the use of the maisonette as business premises was subsequently submitted.
The tax authorities considered that Klub had not shown that at the time of the tax assessment the maisonette was used for business purposes, nor that it would be in future.
A letter from the city council of Sofia stating that it had no information regarding any application for a certificate of bringing into use for that maisonette was produced in the main proceedings.
According to the referring court, Article 70(1)(2) of the ZDDS has been the subject of contradictory interpretations by the Varhoven administrativen sad (Supreme Administrative Court).
Part of the case‑law accepts that taxable persons may deduct the input VAT paid on the purchase of immovable property, on the ground that it is possible to determine the use of the property only after it has been brought into use, or that the taxable person’s business activities include future supplies.
Another part of the case‑law takes the view that, to enjoy the right to deduct the VAT on the purchase of immovable property which has not yet been brought into use, the taxable person must show that the property was used for the purposes of his economic activity before the tax assessment.

Questions

Is Article 168(1)(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax to be interpreted as meaning that – once a taxable person has exercised his option and allocated property constituting capital goods to his business assets – it must be presumed (that is to say assumed in the absence of evidence to the contrary), that these goods are used for the purposes of taxable transactions effected by the taxable person?

Is Article 168(1)(a) of Council Directive 2006/112/EC to be interpreted as meaning that the right of deduction on the purchase of an immovable property which is allocated to the business assets of a taxable person arises immediately in the tax period in which the tax became due, regardless of the fact that the property cannot be used in view of the absence of approval for its commissioning as required by law?

Is an administrative practice such as that of the Natsionalna Agentsia po Prihodite, according to which the right of deduction claimed by persons liable for value added tax on capital goods purchased by them is refused on the grounds that those goods are used for the private purposes of the owners of the companies, without value added tax being imposed on this use, consistent with the directive?

In circumstances such as those of the main proceedings does the company, namely the applicant, have a right of deduction on the purchase of an immovable property, namely a maisonette in Sofia?

AG Opinion

None

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 who has acquired capital goods while acting as such and has allocated the goods to the assets of the business is entitled to deduct the value added tax on the acquisition of those goods in the tax period in which the tax became due, regardless of the fact that the goods are not immediately used for business purposes. It is for the national court to ascertain whether the taxable person acquired the capital goods for the purposes of his economic activity and to assess, if need be, whether there is a fraudulent practice.

Summary

(Emergence of) right to deduct on the purchase of investment property that has not yet been put into use for business activities

A taxable person acting as such who has acquired an investment good and has used it for his business assets is entitled to deduct the VAT on the purchase of this good during the taxable period in which the VAT became chargeable, irrespective of the circumstance that this good is not immediately is used for business purposes.

It is the task of the national court to verify whether the taxable person has acquired the investment good for the purpose of his economic activity and, where appropriate, to determine whether there has been fraud.

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