Flashback on ECJ Cases – C-283/12 (Serebryannay vek) – Barter deal: Services supplied for free in return for not paying rent

On September 26, 2013, the ECJ issued its decision in the case C-283/12 (Serebryannay vek).

Context: VAT – Directive 2006/112/EC – Articles 2(1)(c), 26, 62 and 63 – Chargeable event – Reciprocal supplies of services – Transactions for consideration – Basis of assessment for a transaction in the event of consideration in the form of goods or services – Assignment by a natural person to a company of the right to use and to let to third parties immoveable property in exchange for that company’s services to improve and furnish the property

Article in the EU VAT Directive

Articles 2(1)(c), 26, 62 and 63 of the EU VAT Directive 2006/112/EC.

Article 2 (Scope of VAT)
1. The following transactions shall be subject to VAT:
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

Article 26 (Taxable transaction – Supply of services)
1. Each of the following transactions shall be treated as a supply 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) 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.
2. Member States may derogate from paragraph 1, provided that such derogation does not lead to distortion of competition.

Article 62 (Chargeable event)
For the purposes of this Directive:
(1) ‘chargeable event’ shall mean the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled;
(2) VAT shall become ‘chargeable’ when the tax authority becomes entitled under the law, at a given moment, to claim the tax from the person liable to pay, even though the time of payment may be deferred.

Article 63
The chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied.

Facts
Serebryannay vek is a one-person limited liability undertaking governed by Bulgarian law belonging to Mr Bodzuliak, who is also the director thereof. According to the register of companies, the purpose of that undertaking is, inter alia, the letting of property, tourism and the hotel business.
In June 2009, Mr Bodzuliak bought, in a personal capacity, an apartment in an apartment hotel in Varna. He also purchased a second apartment in the same city. Those apartments are declared to be co-owned by Mr Bodzuliak and his wife (‘the owners’).
On 8 April 2009, Mr Bodzuliak, in his own name, concluded two contracts of identical content with Serebryannay vek, under which he granted that undertaking a ‘right in rem to use’ the shells of his immovable property, and in particular the two apartments in question, for a period of five years, with the possibility of extension. It was envisaged that Serebryannay vek would let those apartments to third parties.
Under those contracts, Serebryannay vek does not have to pay rent to the owners during the term of the contracts. By contrast, it undertook to carry out in its own name, at its expense and according to its own assessment, fitting-out and assembly work in order to complete the apartments and put them into service for the purposes of use, inter alia the purchase and provision of floors, furniture, decoration and bathroom installations. It is envisaged that, at the end of those contracts, the owners will recover the apartments concerned with the fixtures to be found there.
The tax revenue authorities carried out an inspection on 21 October 2010 and issued a tax adjustment notice in respect of the month of July 2010. They took the view that Serebryannay vek had supplied services to the owners free of charge and that the taxable amount of that supply corresponded to the value of the expenditure incurred by that company for the purposes of that supply.
Serebryannay vek lodged an administrative objection to that notice with the Direktor. By decision of 10 June 2011, the Direktor annulled that notice and referred the matter back to the tax revenue authorities for reassessment. He took the view, in essence, that there had been an exchange of services because the apartments concerned had been let to Serebryannay vek as remuneration for its services of fitting them out and furnishing them. Having regard to that interpretation, the Direktor found, on the basis of Article 26(7) of the ZDDS, that the taxable amount of the services of fitting out and furnishing those apartments was the open market value of those services and had to be determined in the course of a reassessment.
The tax revenue authorities therefore carried out a second inspection and found that there had been an exchange of services, namely fitting‑out and furnishing services on the part of Serebryannay vek and a letting service on the part of the owners, for the purposes of Article 130 of the ZDDS, on the grounds that Mr Bodzuliak co-owns the apartments in question with his wife, that he is the sole owner of the capital in Serebryannay vek and that no rent was agreed on.
The tax revenue authorities took the view that the date of the approval for use of the hotel in which the first apartment referred to in paragraph 20 of the present judgment is situated, namely 29 June 2010, was the date on which the fitting-out and furnishing services were rendered. As regards the second apartment referred to in that paragraph, the date of the final acceptance certificate, namely 30 June 2010, was found to be the date on which those services were supplied.
Having regard to those dates, the tax revenue authorities found that Serebryannay vek should have issued, by 5 July 2010 at the latest, an invoice relating to the fitting-out and furnishing services which it had rendered.
As the transactions were carried out between associated persons, it was found that the taxable amount of the services provided by Serebryannay vek should be the open market value of those goods and services. The overall value of the two apartments in question was, at the time of an expert’s report, determined to be 558 000 Bulgarian leva (BGN). On that basis, the tax revenue authorities, on 14 December 2011, issued a new tax adjustment notice stating that Serebryannay vek was, in respect of the month of July 2010, liable for a VAT debt of BGN 111 600 together with default interest in the amount of BGN 6 341.55.
Serebryannay vek lodged an administrative objection to that notice with the Direktor who, by decision of 12 March 2012, dismissed that objection. It brought an action against that decision before the national court. In support of that action, that company submits that there was no exchange of services, but that it provided a supply of services free of charge for the purposes of Article 9(2)(4) of the ZDDS. It takes the view that the chargeable event in respect of the VAT on that supply will occur on the date of the actual return of the asset in an improved condition on the expiry of the contract or on its use coming to an end, in accordance with Article 25(3)(6) of the ZDDS.
In the alternative, Serebryannay vek submits that the VAT should have been levied in respect of the month of June 2010, that is to say for the period during which the services in question are deemed to have been rendered, and not in respect of the month of July 2010. That company also takes the view that the taxable amount should have been the value of the service received and not that of the services rendered.
Furthermore, according to Serebryannay vek, the Bulgarian legislation is incompatible with Articles 2(1)(c) and 26 of the VAT Directive on the ground that only transactions for consideration may be subject to tax.
The national court takes the view that, in order to dispose of the case before it, it is for it to ascertain whether there has been an exchange of supplies of services and, if so, which are the applicable rules for the purpose of determining the taxable amount of the two supplies. By contrast, if what is involved is not an exchange, the national court wonders whether the services provided by Serebryannay vek constitute a taxable supply and, in that case, at what time the chargeable event in respect of the VAT on those services occurred and how to determine the taxable amount of that supply.
The national court is of the opinion that the tax revenue authorities erred in categorising the making available of the apartments in question by the owners to Serebryannay vek as a let. A let is a transaction for consideration, which, according to that court, is not the case in the main proceedings because the contracts at issue expressly provide that no rent is payable. Consequently, what is involved is a transaction free of charge which is a loan for use. To regard the services provided by Serebryannay vek as equivalent to the payment of rent would, for that court, be contrary to the intention of the parties.
The national court, taking the view that Serebryannay vek acquired an intangible fixed asset as consideration for the expenditure which it incurred in improving the apartments in question, wonders whether the acquisition of such an asset may be regarded as payment for the services of improvement. If that is so, what is in issue is, according to that court, a transaction for consideration in respect of which the determination of the date of the chargeable event and the taxable amount for VAT purposes does not present any difficulty. If that is not so, what is in issue is a supply of services free of charge which, in the circumstances of the present case, may not be treated in the same way as a supply for consideration because that supply has been carried out for the purposes of Serebryannay vek’s business activities. However, the national court has doubts as regards the compatibility with Articles 2(1)(c), 26, 62 and 63 of the VAT Directive of the national provisions relating inter alia to whether such supplies carried out free of charge are taxable, the taxable amount in respect of those supplies and the time at which the chargeable event in respect of those supplies occurs.

Questions

(1) Can Article 2(1)(c) of [the VAT] be interpreted as meaning that the acquisition of a fixed intangible asset in exchange for assumption of the costs involved in improving a leased asset or an asset the use of which has been assigned in some other way constitutes payment for the service of making the improvement, regardless of the fact that, under the contract, the owner of the asset is not required to pay any remuneration?

(2) Do Article 2(1)(c) and Article 26 of [the VAT] Directive preclude a national provision under which the supply of a service carried out free of charge and consisting in the improvement of a leased asset or of an asset the use of which has been assigned in some other way is in all circumstances to be regarded as taxable? Is it of significance for the purpose of answering this question, in circumstances such as those in the main proceedings, that:

– the party supplying the service carried out free of charge has exercised the right to deduct VAT on the goods and services used in making the improvements, a right which had not yet been refused him by a tax adjustment notice which had entered into force;

– at the time of the inspection, the company had not yet begun to use the building for taxable supplies, but the contracts had not yet expired?

(3) Do Articles 62 and 63 of [the VAT] Directive preclude a national provision according to which the chargeable event for the purposes of the tax on the supply does not occur at the time when the service is supplied (in this particular case, when improvements are made) but at the time when the asset which has been improved is actually returned, on the expiry of the contract or on the termination of its use?

(4) If the first and second questions are answered in the negative: under which provision of Title VII of Directive 2006/112 is the taxable amount for purposes of value added tax to be determined in the case where a transaction carried out free of charge does not come within the scope of Article 26 of the directive?

AG Opinion

None

Decision

Article 2(1)(c) 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 supply of services to fit out and furnish an apartment must be regarded as having been carried out for consideration if, under a contract concluded with the owner of that apartment, the supplier of those services, first, undertakes to carry out that supply of services at its own expense and, secondly, obtains the right to have that apartment at its disposal in order to use it for its business activities during the term of that contract, without being required to pay rent, whereas the owner recovers the improved apartment at the end of that contract.

Summary

Mutual benefits — Transactions for consideration — Taxable amount of a transaction where consideration consists of services

Repair and furnishing of an apartment must be regarded as a service rendered for consideration if the provider of that service, on the one hand, undertakes, in accordance with an agreement concluded with the owner of this apartment, to provide this service at his expense and, on the other hand, he has the right to use that apartment for his economic activity during the term of this agreement, without having to pay rent, while the owner gets back the furnished apartment at the end of that agreement.

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