Flashback on ECJ Cases – C-504/10 (Tanoarch) – Transfer of share of rights in an invention held by several undertakings to an undertaking authorized to exploit the invention in question in its entirety

On October 27, 2011, the ECJ issued its decision in the case C-504/10 (Tanoarch).

Context: Taxation – VAT – Right of deduction – Assignment of a share in the rights relating to an invention, held by a number of undertakings, to an undertaking which has the right to use that invention in its entirety – Abusive practice)

Article in the EU VAT Directive

Article 168 in the EU VAT Directive

Article (Deduction of VAT)

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:

a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

Facts

On 26 February 2007, a number of natural and legal persons, including Tanoarch and VARS Slovakia s.r.o. (‘VARS’), two companies having their registered office in Banská Bystrica (Republic of Slovakia) lodged an application with the Industrial Property Office of the Slovak Republic for a patent for an invention called ‘Method for the preparation of a high-purity talc product’.
On 5 July 2007, Tanoarch and VARS concluded a contract for assignment of co‑ownership of intellectual property rights. Under that contract, for the conclusion of which the two parties were represented by the same natural person Mr Kovanda, VARS assigned to Tanoarch 50% of its share of co-ownership in respect of the patent which was not yet registered.
The contract stated that the price of the assignment of the share of co-ownership in the rights relating to the invention had been fixed, on the basis of an expert report, at SKK 258 million and, on the basis of a complementary determination of value, at a sum of SKK 774 million. The price for the assignment of half of the rights of co-ownership was consequently laid down, pursuant to the abovementioned contract, at SKK 387 million net of VAT. Under the terms of the contract, the assignment of the rights relating to the invention was stipulated for a price which had to be paid in cash or in kind unless otherwise provided by the parties.
On the basis of an invoice dated 5 July 2007, Tanoarch, on 27 August 2007, filed a VAT tax return for the July 2007 tax period. In that tax declaration, reference was made to a sum of around SKK 73 530 000 being the VAT deductible on the invoice issued by VARS for assignment of the co-ownership share. That company had not paid the input VAT due in respect of that amount. VARS was placed in administration in the course of 2008.
Tanoarch also deducted VAT in respect of other invoices concerning the assignment of rights relating to the invention issued by VARS for the tax periods from August to September 2007.
In those circumstances, the Daňový úrad (tax office) of Banská Bystrica, in its capacity as the competent tax authority, carried out an audit at the offices of Tanoarch in order to establish whether the application for deduction of VAT was well founded. By decision of 24 June 2008, that tax office then refused to carry out the deduction as stated in Tanoarch’s tax declaration.
Tanoarch appealed against that decision. By decision of 23 October 2008, the Daňové riaditeľstvo Slovenskej republiky as the administrative authority responsible for dealing with the appeal, dismissed Tanoarch’s application and confirmed the tax office’s decision.
In the course of the fiscal audit, it was found that five of the companies which lodged a patent application, including Tanoarch and VARS, were established at the same address at Banská Bystrica. In addition, the same person, that is Mr Kovanda, was appointed as managing director of those companies.
On 13 January 2009, Tanoarch appealed to the Krajský súd (regional court) of Banská Bystrica for that decision of 23 October 2008 to be set aside. By judgment of 1 April 2009, that court dismissed the appeal.
Tanoarch thereupon appealed to the Najvyšší súd Slovenskej republiky (Supreme Court of the Slovak Republic).

Questions

1. Does Article 2(1) of the [Sixth Directive] permit a provision whereby a taxpayer may deduct, from his own tax liability, tax on goods and services which he uses for the purposes of his business as a taxpayer, if that tax has been charged to him by another inland taxpayer, on goods and services supplied or to be supplied, in circumstances where the plaintiff, in his capacity as co-applicant in respect of an invention in respect of which a patent has yet to be granted, already owns, as a matter of law, the right independently to use the invention which is the subject‑matter of the patent as a whole?

2. Does the [Sixth] Directive permit the interpretation that a taxpayer’s existing legal right independently to use a patent results in the legal impossibility of using a service for supplies of goods and services as a taxpayer, and that this results in the legal consumption of the service acquired?

3. Is the abuse of a taxpayer’s right to deduct input VAT pursuant to the judgment of the Court in Case C-255/02 Halifax and Others [2006] ECR I‑1609, affected by the fact that, in the case in the main proceedings, the invention has not yet been registered as a patent and only parts thereof are transferred?

AG Opinion

None

Decision

1) A taxpayer may, in principle, claim a right of deduction of input VAT paid or payable for the supply of a service, carried out for consideration, where the applicable national law permits the assignment of a share of the co‑ownership of an invention which confers rights relating to the invention.

2) It is for the referring court to establish, taking into account all the factual circumstances characterising the supply of the service in the case in the main proceedings, whether or not there has been an abuse of rights with regard to the right of deduction of input VAT.

Summary

Right to deduct — Transfer of share of rights in an invention held by several undertakings to an undertaking authorized to exploit the invention in question in its entirety — Abuse

A taxable person may, in principle, rely on the right to deduct input tax paid or due on a service supplied for consideration, where a share in the co-ownership of an invention conferring a right thereto can be deducted under the applicable national law. transferred.

It is for the referring court to determine, taking into account all the factual circumstances characterizing the service at issue in the main proceedings, whether there has been an abuse of the right to deduct input VAT.

Source: