Flashback on ECJ Cases C-455/05 (Velvet & Steel Immobilien) – No exemption Credit Guarantees for obligations which are non-pecuniary, such as the obligation to renovate a property

On April 19, 2007, the ECJ issued its decision in the case C-455/05 (Velvet & Steel Immobilien und Handels GmbH).

Context: Sixth VAT Directive – Exemptions – Article 13B(d)(2) – Concept of assumption of obligations – Assumption of the obligation to renovate a property – Refusal of exemption

Article in the EU VAT Directive

Article 13B(d)(2) of Sixth Council Directive 77/388/EEC (Article 135(1)(c) of the EU VAT Directive 2006/112/EC)

Article 135
1. Member States shall exempt the following transactions:
(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

Facts

In September 1998, Burmeister Immobilien GmbH (‘Burmeister’) sold a piece of land with a rented apartment building on it. In July 1999, two individuals executed a similar sale. In the two contracts of sale relating to those transactions, the vendors undertook to carry out the renovation work needed on the buildings concerned. The two individuals also assumed a rent guarantee.
Following the sales, the vendors concluded, on 25 September 1998 and 12 July 1999 respectively, contracts with Velvet & Steel entitled ‘assignment of a part of the purchase price in return for assumption of obligations’.
By those contracts, Velvet & Steel assumed responsibility for the vendors’ obligation to renovate the buildings as well as for the rent guarantee in return for a part of the purchase price of those buildings, namely DEM 200 000 for the contract concluded with Burmeister and DEM 250 000 for the contract concluded with the individuals. Under those contracts, Velvet & Steel undertook to indemnify the vendors against all costs and claims to which the purchasers of the buildings were entitled in respect of the renovation works and the rent guarantee.
The two purchasers of the buildings subsequently agreed to release Velvet & Steel from its obligations in return for payment to them of part of that fraction of the purchase price ceded to it. The profit resulting from that transaction, namely DEM 11 000 and DEM 13 750 respectively with regard to the contracts concluded with Burmeister and with the individuals concerned, was to remain with Velvet & Steel as ‘payment or lump‑sum compensation/indemnity in respect of any loss of profit’. Velvet & Steel declared that profit for VAT purposes.
Following an inspection, the Finanzamt deemed the assumption by Velvet & Steel of the obligation to renovate to be a provision of services and necessarily subject to VAT pursuant to the first sentence of Paragraph 1(1)(1) of the UStG. Velvet & Steel lodged a complaint against the decision by the Finanzamt to charge tax, which the latter dismissed on 10 June 2003.
On 14 July 2003, Velvet & Steel challenged that decision before the Finanzgericht (Finance Court) Hamburg (Germany). Basing itself on the argument that neither of the two obligations which it had assumed had actually been carried out, it maintained before that court that the transactions at issue should be classed as an ‘assumption of obligations’ within the meaning of Paragraph 4(8)(g) of the UStG, which is the transposition into national law of Article 13B(d)(2) of the Sixth Directive. The Finanzamt contended, conversely, that the provision of Community law relied on refers exclusively to the assumption of pecuniary obligations, whereas the assumption of the obligation to renovate a building comes within the category of service obligations.

Questions

Is Article 13B(d)(2) 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 to be interpreted, with respect to the concept of ‘Übernahme von Verbindlichkeiten’ (assumption of obligations), as meaning that only pecuniary obligations are to be subsumed under that concept or does that provision also include the assumption of other obligations, for example, service obligations?

AG Opinion

None

Decision

Article 13B(d)(2) 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 must be interpreted as meaning that the concept of assumption of obligations excludes from the scope of that provision obligations which are non-pecuniary, such as the obligation to renovate a property.

Summary

The concept of ‘contracting’ in Article 13B(d)(2) of the Sixth Directive must be interpreted as meaning that non-financial commitments, such as the undertaking to renovate immovable property, are excluded from the scope of this provision.

Source