Flashback on ECJ Cases – C-102/08 (SALIX Grundstücks-Vermietungsgesellschaft) – Taxable person if distortion of competition

On June 4, 2009, the ECJ issued its decision in the case C-102/08 (SALIX Grundstücks-Vermietungsgesellschaft).

Context: Sixth VAT Directive – Second and fourth subparagraphs of Article 4(5) – Option of Member States to consider activities of bodies governed by public law exempted under Article 13 and Article 28 of the Sixth Directive as activities of public authorities – Rules governing exercise of that option – Right to deduct – Significant distortions of competition

Article in the EU VAT Directive

Articles 4(5), 13, 28 of the Sixth VAT Directive (Articles 13, 135(1)(l) of the EU VAT Directive 2006/112/EC).

Article 13 (Taxable person – Public bodies)
1. States, regional and local government authorities and other bodies governed by public law shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with those activities or transactions.
However, when they engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition.
In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a small scale as to be negligible.
2. Member States may regard activities, exempt under Articles 132, 135, 136 and 371, Articles 374 to 377, Article 378(2), Article 379(2) or Articles 380 to 390b, engaged in by bodies governed by public law as activities in which those bodies engage as public authorities.

Article 135 (Exemption for other activities)
1. Member States shall exempt the following transactions:

(l) the leasing or letting of immovable property.

Facts

On 20 March 1995, Salix, a property letting company, concluded a ‘property leasing agreement’ with the Industrie- und Handelskammer Offenbach (Chamber of Industry and Commerce, Offenbach) (‘the IHK’), a body governed by public law. By that agreement, it undertook to lease to the IHK, for a term of 27 years, an office building to be constructed with an underground car park.
That year, Salix completed the building and leased it to the IHK. The latter allocated part of the offices for its own use and sublet the rest of the offices on a long-term basis to third parties that were liable to turnover tax. The IHK also reserved some of the spaces in the underground car park for its own use, sublet some on a long-term basis to the lessees of the offices and made the rest of the spaces available on a short-term basis for consideration to external customers.
In order to be able to deduct the input VAT paid in connection with the construction of the building and relating to the part of the building sublet by the IHK, Salix waived, pursuant to Paragraph 9(1) of the UStG, the exemption from turnover tax in respect of its letting transactions under Paragraph 4(12)(a) of the UStG. It considered that that waiver would entitle it to the deduction, since it let the building to another trader, the IHK, for the purposes of its business, which, in turn, used it in part for transactions giving rise to the right to deduct input tax.
However, in a tax inspection of Salix, the tax auditor refused that deduction for the part of the property sublet on a long-term basis on the ground that, in the context of that subletting, the IHK did not act as a ‘trader’ within the meaning of Paragraph 9(1) of the UStG.
In that regard, the tax auditor stated that it followed from the first sentence of Paragraph 2(3) of the UStG that legal persons governed by public law could act as a trader only in the context of a ‘commercial operation’, as defined in Paragraph 1(1)(6) and Paragraph 4 of the KStG.
According to the tax auditor, only short-term letting could be considered to be an activity carried out in the context of a ‘commercial operation’ within the meaning of those provisions, as long-term letting, being mere ‘property management’, does not come within that activity.
Consequently, on 20 April 2001 the Finanzamt issued an amended notice of VAT assessment for 1995 refusing the deduction of the input VAT paid by Salix in connection with the construction of the building and relating to the part of the property sublet on a long-term basis by the IHK.
The financial authorities responsible for the tax assessment of the IHK did not, however, share that view. They affirmed both that the IHK was a trader with respect to the entirety of its subletting activities and that its waiver of tax exemption of those activities was lawful.
Following the dismissal of its appeal against the amended notice of tax assessment, Salix brought proceedings before the Finanzgericht Düsseldorf (Finance Court, Düsseldorf).
The Finanzgericht Düsseldorf upheld the action brought by Salix. Whilst holding that the IHK had not carried on its long-term subletting transactions as a trader for the purposes of German tax law, the Finanzgericht Düsseldorf concluded that the IHK should nevertheless be considered to have acted, in that regard, as a taxable person and, therefore, as a ‘trader’, in accordance with an interpretation of the domestic law in conformity with the second and fourth subparagraphs of Article 4(5) of the Sixth Directive.
The Finanzgericht Düsseldorf was of the opinion that, by depriving the IHK of the possibility to opt for treatment as a taxable person and, consequently, to deduct input VAT, the refusal to recognise it as a trader would place it in a disadvantageous position compared to its private competitors on the relevant markets. That could create ‘significant distortions of competition’ that the second subparagraph of Article 4(5) of the Sixth Directive seeks to avoid.
Having brought an appeal before the Bundesfinanzhof, the Finanzamt claims that the judgment of the Finanzgericht Düsseldorf should be set aside and that Salix’s action be dismissed. In support of its appeal, the Finanzamt claims that it is apparent from the case-law of the Court that the concept of ‘significant distortions of competition’ aims exclusively to protect the private sector, that is to say taxable private undertakings, against competition from non-taxable bodies governed by public law. Consequently, an application of that provision in favour, also, of bodies governed by public law would run counter to the objective of that provision.
First, the Bundesfinanzhof tends towards the view that the Member States may rely on the option, under the fourth subparagraph of Article 4(5) of the Sixth Directive, to treat activities of bodies governed by public law which are exempt under Article 13 or Article 28 of that directive as activities of public authorities only if express legal provision is made to that effect.
In that regard, it is apparent from the order for reference that no express legal provision has been adopted in Germany concerning the treatment as taxable persons of bodies governed by public law carrying on activities of letting and leasing of immovable property. In the main proceedings, the treatment as taxable persons of those bodies where they carry on such transactions depends solely on the interpretation of the concept of ‘property management’. However, that concept does not appear in the relevant legislation, that is to say neither in Paragraph 2(3) of the UStG, nor in Paragraph 1(1)(6) of the KStG, nor in Paragraph 4 of the KStG, nor in a statutory authorisation conferred on the authorities by those provisions.
Second, the Bundesfinanzhof is uncertain whether the application of the fourth subparagraph of Article 4(5) of the Sixth Directive is precluded in the main proceedings, due to the fact that IHK itself, rather than one of its private competitors, could suffer significant distortions of competition within the meaning of the second subparagraph of that provision, if its long-term subletting transactions were treated as non-taxable.
The Bundesfinanzhof considers that, although the main objective of the second subparagraph of Article 4(5) of the Sixth Directive is to protect the private sector against the untaxed activities of bodies governed by public law, that would not, however, preclude those bodies from being able also to benefit from the competition exception provided for by that provision. In that regard, the Bundesfinanzhof points out that there is no restriction to that competition exception in the wording of that second subparagraph, the relevant factor being the occurrence of significant distortions of competition, no matter who is the victim of them. However, the Bundesfinanzhof considers that both of the two conflicting interpretations could find support in the case-law of the Court.

Questions

May the Member States ‘treat‘ activities of States, regional and local government authorities and other bodies governed by public law which are exempt from tax under Article 13 of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes (77/388/EEC) as activities in which they engage as public authorities within the meaning of the fourth subparagraph of Article 4(5) of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes (Directive 77/388/EEC) ¹ only where the Member States make express legal provision to that effect?
Can ‘significant distortions of competition‘ within the meaning of the fourth subparagraph in conjunction with the second subparagraph of Article 4(5) of the Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes exist only where treatment of a body governed by public law as a non-taxable person would lead to significant distortions of competition to the detriment of competing private taxable persons or also where treatment of a body governed by public law as a non-taxable person would lead to significant distortions of competition to its detriment?

AG Opinion

None

Decision

1. The Member States must lay down an express provision in order to be able to rely on the option provided for in the fourth subparagraph of Article 4(5) 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, according to which specific activities of bodies governed by public law that are exempt under Article 13 or Article 28 of that directive are considered as activities of public authorities.

2. The second subparagraph of Article 4(5) of Sixth Directive 77/388 must be interpreted as meaning that bodies governed by public law are to be considered taxable persons in respect of activities or transactions in which they engage as public authorities not only where their treatment as non-taxable persons under the first or fourth subparagraphs of that provision would lead to significant distortions of competition to the detriment of their private competitors, but also where it would lead to such distortions to their own detriment.

Summary

Member States must adopt an express provision in order to invoke the possibility provided for in the fourth subparagraph of Article 4(5) of the Sixth Directive to restrict certain activities of public sector bodies under Articles 13 or 28 of that directive. are exempt, to be regarded as government activities.

The second subparagraph of Article 4(5) of the Sixth Directive must be interpreted as meaning that public sector entities are to be regarded as liable for tax in respect of the activities or transactions which they carry out as public authorities, not only where the fact that they are not liable to tax under the the first or fourth paragraph of that provision leads to significant distortions of competition to the detriment of their private competitors, but also where it leads to such distortions to their own detriment.

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