Flashback on ECJ cases C-17/01 (Sudholz) – Flat-rate limitation of the right to deduct VAT on vehicles not used exclusively for business purposes

On April 29, 2004, the ECJ issued its decision in the case C-17/01 (Sudholz).

Context: Sixth VAT Directive – Articles 2 and 3 of Decision 2000/186/EC – Flat-rate limit on the right to deduct VAT on vehicles not used solely for business purposes – Retroactive authorisation of a national tax measure).

Article in the EU VAT Directive

Articles 27 of the Sixth VAT Directive (Article 394 of the EU VAT Directive 2006/112/EC).

Article 27(1) to (4) of the Sixth Directive provides:

1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the amount of tax due at the final consumption stage.

2. A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them and shall provide the Commission with all relevant information.

3. The Commission shall inform the other Member States of the proposed measures within one month.

4. The Council’s decision shall be deemed to have been adopted if, within two months of the other Member States being informed as laid down in the previous paragraph, neither the Commission nor any Member State has requested that the matter be raised by the Council.’

Facts

Mr Sudholz runs a painting business. In April 1999, he purchased a passenger car for DEM 55 086.21, plus a sum equivalent to 16% of that price by way of VAT, amounting to DEM 8 813.79. He allocated the car to his business and used it as to 70% for business purposes and as to 30% for non-business purposes.
In his VAT return for April 1999, Mr Sudholz claimed the whole amount of the VAT charged on the purchase of the vehicle, and not part only of it. In that regard, he took the view that Paragraph 15(1b) of the UStG, under which he could only deduct 50% of the input tax paid, infringed Community law. That provision came into force on 1 April 1999, and applies to vehicles purchased after 31 March 1999.
In its turnover-tax prepayment decision for April 1999, the Finanzamt allowed a deduction in respect of only 50% of the input VAT paid.
The Finanzgericht granted the application brought before it by Mr Sudholz on the ground that he was entitled to rely on the more favourable rules contained in Article 17 of the Sixth Directive. That article permits the taxable person to deduct from the tax which he is liable to pay the whole of the input tax charged on expenditure incurred for the purposes of his taxable transactions.
The Finanzamt appealed on a point of law before the Bundesfinanzhof, relying on Article 2 of Decision 2000/186.
The Bundesfinanzhof notes that 70% of the use made by Mr Sudholz of the vehicle in question was for business purposes. Because the vehicle was purchased after 31 March 1999, it was subject to Paragraph 15(1b) of the UStG, adopted in accordance with Decision 2000/186, and accordingly could only give rise to a deduction of 50% of the tax charged on its purchase.

Questions

1. Is Article 2 of Council Decision 2000/168/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth Directive (77/388/EEC) on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment invalid because the procedure prior to the adoption of the decision did not meet the criteria laid down in Article 27 of Directive 77/388/EEC?

2. Is the first paragraph of Article 3 of Decision 2000/168/EC, under which the decision is to have retroactive effect from 1 April 1999, valid?

3. Does Article 2 of Decision 2000/168/EC meet the substantive requirements to be applied to such an authorisation, and do any objections to the validity of that provision arise as a consequence?

AG Opinion

the second sentence of Article 27(1) of Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes – common system of value added tax: uniform basis of assessment seeks primarily to ensure the neutrality of this tax on consumption at the various stages of the production chain;
it therefore follows that measures intended to simplify the procedure for charging the tax may not systematically affect the amounts of tax due at the final consumption stage;
in order also to prevent this, in individual cases the taxable person must demonstrate the extent to which he has claimed the goods and services supplied to him as being for business purposes.

Decision

1. Consideration of the procedure prior to the adoption of Council Decision 2000/186/EC of 28 February 2000 authorising the Federal Republic of Germany to apply measures derogating from Articles 6 and 17 of the Sixth 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 has disclosed no irregularity such as to affect the validity of that decision.

2. Article 3 of Decision 2000/186/EC is invalid in that it provides for the authorisation granted by the Council of the European Union to the Federal Republic of Germany to have retroactive effect from 1 April 1999.

3. Article 2 of Decision 2000/186 meets the substantive requirements of Article 27(1) of the 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 and is not invalid.

Summary

Examination of the procedure leading to the adoption of Council Decision 2000/186/EC of 28 February 2000 authorizing the Federal Republic of Germany to derogate from Articles 6 and 17 of the Sixth Directive has revealed no irregularity which may affect the validity of this Decision.

Article 3 of Decision 2000/186 is invalid in so far as it provides that the authorization granted by the Council of the European Union to the Federal Republic of Germany is to apply retroactively from 1 April 1999.

Article 2 of Decision 2000/186 satisfies the substantive requirements of Article 27(1) of the Sixth Directive and is not invalid.

Source