Flashback on ECJ Cases – C-229/15 (Mateusiak) – Cessation of the taxable economic activity, Supply of goods for consideration after adjustment period

On June 16, 2016, the ECJ issued its decision in the case C-229/15 (Mateusiak).

Context: Reference for a preliminary ruling — Taxation — Value added tax — Directive 2006/112/EC — Articles 18(c), 184 and 187 — Taxable transactions — Cessation of the taxable economic activity — Retention of goods on which VAT became deductible — Adjustment of deductions — Adjustment period — Taxation pursuant to Article 18(c) of Directive 2006/112 on expiry of the adjustment period

Article in the EU VAT Directive

Article 18(c), 184, 187 of the EU VAT Directive 2006/112/EC.

Article 18 (Taxable transaction – Supply of Goods)
Member States may treat each of the following transactions as a supply of goods for consideration:
(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the VAT on such goods, had they been acquired from another taxable person, would not be wholly deductible;
(b) the application of goods by a taxable person for the purposes of a non-taxable area of activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a);
(c) with the exception of the cases referred to in Article 19, the retention of goods by a taxable person, or by his successors, when he ceases to carry out a taxable economic activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a).

Article 184 (Adjustment of deductions)
The initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled.

Article 187
1. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured.
Member States may, however, base the adjustment on a period of five full years starting from the time at which the goods are first used.
In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.
2. The annual adjustment shall be made only in respect of one-fifth of the VAT charged on the capital goods, or, if the adjustment period has been extended, in respect of the corresponding fraction thereof.
The adjustment referred to in the first subparagraph shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired, manufactured or, where applicable, used for the first time.

Facts

Between 1997 and 1999, Mr Mateusiak made an investment consisting of the construction of a residential and commercial building with a footprint area of 108.7 m² and a total usable floor space of 357.6 m² (including 87.8 m² allocated to the provision of services) (‘the part of the building allocated to services’). On 26 July 1999 he was granted permission to use the building.
Mr Mateusiak deducted the input tax contained in the original invoices for the purchases of building materials, labour and other items which were related solely to the part of the building allocated to the provision of an activity subject to VAT, namely a notary’s office.
On 10 August 1999 the part of the building allocated to the provision of services was entered in the register of fixed assets held for the purposes of income tax for natural persons, and was brought into use for the purposes of a non-agricultural economic activity. The book value of the fixed asset named the ‘Office Building’ amounted to PLN 101 525.70.
On 14 January 2013 Mr Mateusiak lodged an application for an individual tax ruling with the director of the Tax Office in Łódź (Izba Skarbowa w Łodzi), acting under the authority of the Minister for Finance (‘the tax authority’), asking whether or not a winding-up inventory drawn up with a view to winding up the economic activity carried out by a natural person, who is at the same time an active taxable person for the purposes of VAT, should include the value of that person’s fixed assets in the form of immovable property owned by that person on the date of the winding-up. Should the answer be in the affirmative, the applicant wished to know what value should be included in the taxable amount for the purposes of VAT on the date on which the economic activity in question had ceased.
According to Mr Mateusiak, the value of the fixed assets that he owned should not be taken into account since taking them into account would infringe the principle of neutrality of VAT, inasmuch as the cessation took place after the end of the adjustment period, which, in the case of immovable property, is 10 years. In the event that his point of view was not followed, Mr Mateusiak considered that it must be found that VAT was to be applied only to the part of the building which was used for the purposes of the economic activity carried out by including in the taxable amount the cost price, if it is lower than the current market price.
With reference, inter alia, to Article 14(1)(2), Article 14(4) and (8) and Article 29(10) of the Law on VAT, the tax authority concluded that taxation of the goods in connection with the cessation of taxable activity was justified by the structure of the VAT itself as a consumption tax, and that it was also an expression of the principle of neutrality of that tax. All goods on whose acquisition input tax was deducted must be subject to VAT in order to offset that deduction.
The appeal lodged by Mr Mateusiak before the Wojewódzki Sąd Administracyjny w Lublinie (Regional Administrative Court of the province of Lublin, Poland) against the individual tax ruling was upheld in a judgment of 16 October 2013. That court held that Articles 14 and 91 of the Law on VAT should be read together since the legislature had established a correlation between the taxation of fixed assets on the winding-up of activity and the right to deduct the part of the input tax on the acquisition thereof which was not deducted during the adjustment period. On expiry of the adjustment period, the taxable person’s fixed assets at the time he winds up his activity must not be subject to tax nor included in the winding-up inventory, since the time laid down by law for adjusting input tax on the acquisition thereof, which arises from the time established for consuming those fixed assets in the taxable person’s activity, has passed.
The Minister for Finance brought an appeal on a point of law before the Naczelny Sąd Administracyjny (Supreme Administrative Court, Poland). The Naczelny Sąd Administracyjny (Supreme Administrative Court) questions whether, even after expiry of the adjustment period laid down for a specific type of goods, a retained fixed asset pursuant to Article 18(c) of the VAT Directive must be subject to tax when the economic activity has ceased.
The court states that once the time laid down by law for consuming the capital goods for the purposes of the taxable person’s economic activity, expressed by the adjustment period (Article 187 of the VAT Directive), has passed, it could be assumed that during the period in which that fixed asset was used in his taxable activity, the taxable person ‘consumed’ the tax deducted in connection with its acquisition; the tax deducted is connected throughout the period of its use (adjustment) with the tax owed, generated by that fixed asset in the taxable person’s economic activity.

Questions

Must Article 18(c) of the [VAT Directive] be interpreted as meaning that, on expiry of the adjustment period referred to in Article 187 of the directive, a taxable person’s fixed assets upon the acquisition of which he deducted VAT, should not be subject to tax and included in the winding-up inventory at the time he ceases his activity, if the period laid down in law for adjusting the input tax on the acquisition thereof, which arises from the estimated period for using those assets in the taxable person’s economic activity, has passed, or as meaning that the fixed assets are subject to tax at the time the taxable person ceases his economic activity, regardless of the adjustment period?

AG Opinion

Article 18(c) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must also be applied to goods for which, under Article 187(1) of that directive, the period for the adjustment of deductions of input tax under Article 187(1) has already expired at the time of cessation of the economic activity.

Decision

Article 18(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2009/162/EU of 22 December 2009, must be interpreted as meaning that, when a taxable person ceases to carry out a taxable economic activity, the retention of goods by that taxable person, where valued added tax on such goods became deductible upon their acquisition, can be treated as a supply of goods for consideration and be subject to value added tax if the adjustment period laid down in Article 187 of Directive 2006/112, as amended by Directive 2009/162, has passed.

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