Flashback on ECJ Cases – C-277/09 (RBS Deutschland Holding) – Deduction of VAT when those goods are used for leasing activities in another Member State

On December 22, 2010, the ECJ issued its decision in the case C-277/09 (RBS Deutschland Holding).

Context: Sixth VAT Directive – Right to deduction – Purchase of vehicles and use for leasing transactions – Differences between the tax regimes of two Member States – Prohibition of abusive practices

Article in the EU VAT Directive

Article 17(3)(a) of the Sixth VAT Directive (Article 169 en 170 of the EU VAT Directive 2006/112/EC).

Article 169
In addition to the deduction referred to in Article 168, the taxable person shall be entitled to deduct the VAT referred to therein in so far as the goods and services are used for the purposes of the following:
(a) transactions relating to the activities referred to in the second subparagraph of Article 9(1), carried out outside the Member State in which that tax is due or paid, in respect of which VAT would be deductible if they had been carried out within that Member State;
(b) transactions which are exempt pursuant to Articles 136a, 138, 142 or 144, Articles 146 to 149, Articles 151, 152, 153 or 156, Article 157(1)(b), Articles 158 to 161 or Article 164;
(c) transactions which are exempt pursuant to points (a) to (f) of Article 135(1), where the customer is established outside the Community or where those transactions relate directly to goods to be exported out of the Community.

Article 170
All taxable persons who, within the meaning of Article 1 of Directive 86/560/EEC ( 1 ), Article 2(1) and Article 3 of Directive 2008/9/EC ( 2 ) and Article 171 of this Directive, are not established in the Member State in which they purchase goods and services or import goods subject to VAT shall be entitled to obtain a refund of that VAT insofar as the goods and services are used for the purposes of the following:
(a) transactions referred to in Article 169;
(b) transactions for which the tax is solely payable by the customer in accordance with Articles 194 to 197 or Article 199.

Facts

RBSD is a company established in Germany carrying on business providing banking and leasing services. Since 31 March 2000, RBSD has been a member of the Royal Bank of Scotland Group. It does not have any place of establishment in the United Kingdom, but it is registered there for VAT purposes as a non-established taxable person.
In January 2000, Vinci plc (‘Vinci’), a company incorporated in the United Kingdom, was introduced to RBSD with a view to RBSD supplying lease finance to Vinci. To that end, a number of agreements were entered into on 28 March 2001.
First, RBSD purchased motor cars in the United Kingdom from Vinci Fleet Services (‘VFS’), a subsidiary of Vinci. VFS, which is also incorporated in the United Kingdom, had acquired those motor cars from car dealerships established in the United Kingdom.
Second, RBSD and VFS entered into a Put Option Agreement in respect of those cars. Under the terms of that agreement, VFS granted RBSD the right to require VFS to buy back those cars from RBSD on a given due date.
Third, RBSD also concluded a leasing agreement with Vinci for a term of two years, which could be extended, called the ‘Master Lease Agreement’, under which RBSD was to act as lessor and Vinci as lessee in respect of the equipment identified in the schedules to that agreement, that is to say, motor cars. On the expiry of the lease, Vinci was liable to pay to RBSD the full residual value of the cars. However, if, as was expected by the parties, RBSD sold the cars to a third person, Vinci would be entitled to or liable for the difference between the sale prices of the cars and their residual value, depending on the circumstances.
Between 28 March 2001 and 29 August 2002, RBSD charged rentals of GBP 335 977.49 to Vinci and charged no VAT on those transactions.
On 29 August 2002, RBSD assigned the agreements in question to a German subsidiary of the Royal Bank of Scotland Group, Lombard Leasing GmbH (‘LL’). LL then charged rentals of GBP 1 682 876.04 to Vinci during the period from 29 August 2002 to 27 June 2004, charging no VAT on those rentals.
Subsequently, and until 15 December 2004, LL exercised the put option with VFS in relation to the cars covered by the leasing agreements. VFS bought back those cars for GBP 663 158.20, and output tax totalling GBP 116 052.75 was charged to it by LL, which amount was then paid to the Commissioners.
The rental payments, received first by RBSD and then by LL, were not subject to VAT in the United Kingdom since, under United Kingdom law, the transactions carried out under those leasing agreements were treated as supplies of services and consequently the United Kingdom tax authorities regarded them as having been made in Germany, that is to say, where the supplier had its place of business. Nor were those payments subject to VAT in Germany since, under German law, the transactions in question were treated as supplies of goods and were therefore regarded as having been made in the United Kingdom, that is to say, the place of supply.
Accordingly, no VAT was collected on the rental payments at issue in the main proceedings in either the United Kingdom or Germany. However, VAT was levied in the United Kingdom on the proceeds of the sale of the cars following exercise of the put option by LL.
Before the United Kingdom tax authorities, RBSD sought deduction in full of the input VAT of GBP 314 056.24 charged to it by VFS when it purchased the cars from that company. RBSD maintained, inter alia, that Article 17(3)(a) of the directive entitled it to deduct the input tax paid for the acquisition of those goods. Furthermore, RBSD maintained that the conditions governing application of the doctrine of abuse of rights were not met in this case, since these were leasing transactions conducted between three independent traders operating at arm’s length.
The Commissioners refused to allow RBSD the VAT deduction claimed and demanded repayment of the input tax which had been credited to RBSD. The Commissioners contended that Article 17(3)(a) of the directive did not permit deduction of input VAT paid in respect of the acquisition of goods subsequently used for transactions which were not chargeable to VAT. The Commissioners pointed out, inter alia, that input tax could not be deducted or refunded if no output tax had been charged. Furthermore, it was argued, RBSD had engaged in an abusive practice because the legal arrangement which it had put in place had the essential aim of obtaining a fiscal advantage contrary to the purpose of the directive. The leasing terms were drawn up in order to enable it to exploit the differences in the ways in which the directive had been transposed in the United Kingdom and in Germany.
RBSD appealed to the VAT and Duties Tribunal, Edinburgh, against the Commissioners’ decision. In its decision of 24 July 2007, the Tribunal held that the principle of fiscal neutrality did not require that a VAT deduction should be refused merely because there was no corresponding liability to output VAT. The VAT and Duties Tribunal, Edinburgh, also took the view that the arrangements at issue in the main proceedings did not amount to an abusive practice.
The Commissioners lodged an appeal against that decision before the Court of Session (Scotland).
That court finds that Article 5(4)(b) of the directive has been implemented in different ways in the United Kingdom and Germany. The Court of Session (Scotland) states that, in accordance with the relevant United Kingdom law, the transactions carried out under the leasing agreements at issue in the main proceedings were treated as supplies of services. Consequently, those transactions were regarded as having been made where the supplier had established its business, that is to say, in Germany. Under German law, those agreements were treated as supplies of goods, with the result that the Member State in which the VAT must be paid corresponds to the place of supply of the goods, which is to say, in the main proceedings, the United Kingdom. Accordingly, the leases were not charged to VAT in Germany. Thus, no output tax was charged on the rental costs in either of the Member States concerned.
In those circumstances, the Court of Session (Scotland), after finding that the case which has been brought before it is characterised by the following facts:
- a German subsidiary of a United Kingdom bank purchased cars in the United Kingdom with a view to leasing them, with a put option, to an unconnected company in the United Kingdom and paid VAT on those purchases;
- under the relevant United Kingdom legislation, the supplies consisting of the rental of cars were treated as supplies of services made in Germany and accordingly not subject to VAT in the United Kingdom. Under German law, these supplies were treated as supplies of goods in the United Kingdom and accordingly not subject to VAT in Germany. The consequence was that no output tax was charged on those supplies in either Member State;
- the United Kingdom bank selected its German subsidiary as lessor and determined the duration of the leasing arrangements with a view to obtaining the tax advantage of no VAT being chargeable on the rental payments,

Questions

(1) Is Article 17(3)(a) of the [directive] … to be interpreted as entitling the United Kingdom tax authorities to refuse to allow the German subsidiary to deduct VAT which it paid in the United Kingdom in respect of the purchase of the cars?

(2) In determining the answer to the first question, is it necessary for the national court to extend its analysis to consider the possible application of the principle of prohibiting abusive practices?

(3) If the answer to Question 2 is yes, would the deduction of input tax on the purchase of the cars be contrary to the purpose of the relevant provisions of the [directive] and thus satisfy the first requirement for an abusive practice as described in paragraph 74 of the decision of the Court in [Case C‑255/02 Halifax and Others [2006] ECR I‑1609] having regard among other principles to the principle of the neutrality of taxation?

(4) Again if the answer to Question 2 is yes, should the court consider that the essential aim of the transactions is to obtain a tax advantage, so that the second requirement for an abusive practice as described in paragraph 75 of the said decision of the Court [in Halifax and Others] is satisfied, in circumstances where, in a commercial transaction between parties operating at arm’s length, the choice of a German subsidiary to lease the cars to a United Kingdom customer, and of the terms of the leases, are made with a view to obtaining the tax advantage of no output tax being charged on the rental payments?’

AG Opinion

(1) Article 17(3)(a) 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 does not entitle the tax authorities of a Member State to refuse to allow a taxable person to deduct input value added tax paid on goods used for the purposes of leasing supplies provided in another Member State for the sole reason that those supplies have not actually given rise to the payment of output value added tax in the latter State.

(2) It is for the national court to determine, in light of the criteria formulated by the Court in Case C‑255/02 Halifax and Others ?2006? ECR I‑1609, whether, for the purposes of the application of Article 17(3)(a) of the Sixth Directive, transactions such as those at issue in the main proceedings can be considered to constitute an abusive practice under the Sixth Directive, with the result that the national tax authorities may refuse a taxable person the deduction of input value added tax paid in respect of those transactions.

In that regard, although allowing deduction of input tax in a situation such as that of the present case is – in so far as no output tax has been levied – in principle inconsistent with the system of deduction set up under the Sixth Directive and, in particular, with the principle of fiscal neutrality, that cannot in itself lead to a finding that that deduction would be contrary to the purpose of Article 17(3)(a) of the Sixth Directive. Furthermore, the fact that a foreign subsidiary is chosen to carry out a transaction instead of a supplier in the country concerned, with the effect that a tax advantage accrues, cannot in itself lead to a finding that the essential aim of the transaction at issue is merely to obtain a tax advantage.

Decision

1. In circumstances such as those of the main proceedings, Article 17(3)(a) 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 a Member State cannot refuse to allow a taxable person to deduct input value added tax paid on the acquisition of goods in that Member State, where those goods have been used for the purposes of leasing transactions carried out in another Member State, solely on the ground that the output transactions have not given rise to the payment of value added tax in the second Member State.

2. The principle of prohibiting abusive practices does not preclude the right to deduct value added tax, recognised in Article 17(3)(a) of Directive 77/388, in circumstances such as those of the main proceedings, in which a company established in one Member State elects to have its subsidiary, established in another Member State, carry out transactions for the leasing of goods to a third company established in the first Member State, in order to avoid a situation in which value added tax is payable on the sums paid as consideration for those transactions, the transactions having been categorised in the first Member State as supplies of rental services carried out in the second Member State, and in that second Member State as supplies of goods carried out in the first Member State.

Summary

Right to deduct — Purchase of vehicles and use for leasing purposes — Differences between the tax systems of two Member States — Prohibition of abuse

A Member State cannot refuse a taxable person the deduction of input tax on the purchase of goods made in that Member State when those goods are used for leasing activities in another Member State simply because no VAT has been paid in the latter Member State on the subsequent transactions.

If a company established in one Member State chooses to lease goods through its subsidiary established in another Member State to a third party company established in the first Member State in order to avoid VAT being charged on the considerations for these transactions, as these transactions are treated in the first Member State as leasing services provided in the latter Member State and supplies of goods in the latter Member State are regarded as supplies of goods made in the former, the principle of the prohibition of abuse does not preclude the right to deduct VAT.

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