On April 29, 2004, the ECJ issued its decision in the joined cases C-487/01 (Gemeente Leusden) & & C-7/02 (Holin Groep).
Context: Turnover taxes – Common system of value added tax – Article 17 of the Sixth Directive 77/388/EEC – Deduction of input tax – Amendment of national legislation withdrawing the right to opt for taxation of lettings of immovable property – Adjustment of deductions – Application to current leases.
Article in the EU VAT Directive
Articles 5(7)(a), 17, 20(2) of the Sixth VAT Directive (Articles 18, 167 and 187 of the EU VAT Directive 2006/112/EC)
Article 18 (Supply of goods)
Member States may treat each of the following transactions as a supply of goods for consideration:
(a) the application by a taxable person for the purposes of his business of goods produced, constructed, extracted, processed, purchased or imported in the course of such business, where the VAT on such goods, had they been acquired from another taxable person, would not be wholly deductible;
(b) the application of goods by a taxable person for the purposes of a non-taxable area of activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a);
(c) with the exception of the cases referred to in Article 19, the retention of goods by a taxable person, or by his successors, when he ceases to carry out a taxable economic activity, where the VAT on such goods became wholly or partly deductible upon their acquisition or upon their application in accordance with point (a).
Article 167 (Origin and scope of right of deduction)
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 187 (Adjustment of deductions)
1. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured.
Member States may, however, base the adjustment on a period of five full years starting from the time at which the goods are first used.
In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.
2. The annual adjustment shall be made only in respect of one-fifth of the VAT charged on the capital goods, or, if the adjustment period has been extended, in respect of the corresponding fraction thereof.
The adjustment referred to in the first subparagraph shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired, manufactured or, where applicable, used for the first time.
Facts
C-487/01
- The Gemeente Leudsen lets playing fields to various sports clubs.
- During 1990 and 1991, it had a field converted from a natural grass pitch into an artificial grass pitch at a cost of NLG 433 000, plus NLG 79 800 VAT. That pitch was then, as from 1 January 1992, let to the Mixed Hockey Club Leusden.
- The hockey club does not have a right to deduct VAT. However, the parties opted for taxation of the letting, which, because of the correlation between taxation and the right to deduct, enabled the Gemeente Leusden to deduct the input VAT paid on the cost of converting the pitch.
- It is not disputed that the Gemeente Leusden could not rely on the transitional provisions of the amending law, inter alia because the rent paid by the hockey club was less than the minimum percentage laid down by those provisions.
- Following the entry into force of the amending law, an additional assessment to VAT amounting to NLG 15 960 was served on the Gemeente Leusden for the period from 1 January 1997 to 31 December 1998. Following an objection, the additional assessment was upheld by decision of the tax inspector.
- The Gemeente Leusden brought an action before the Gerechtshof te Amsterdam (Amsterdam Court of Appeal) (Netherlands), but that action was dismissed by judgment of 5 June 2000. The Gemeente Leusden appealed to the Hoge Raad der Nederlanden.
- Considering a plea of breach of European law, the Hoge Raad observed that, in its judgment in Case C-381/97 Belgocodex [1998] ECR I-8153, the Court held that a Member State which has availed itself of the possibility provided for by Article 13(C) of the Sixth Directive and which has thus granted its taxpayers the right to opt for taxation of certain lettings of immovable property, may abolish, by means of a subsequent law, that right of option and thus reintroduce the exemption. The Court left it to the national court referring the question to determine whether the general Community law principles of protection of legitimate expectations and of legal certainty had been respected by the national legislature.
- The Hoge Raad also observed that, in its judgment in Case C-396/98 Schlossstraße [2000] ECR I‑4279, the Court interpreted Article 17 of the Sixth Directive as meaning that ‘a taxable person’s right to deduct VAT paid in respect of goods or services supplied to him with a view to his carrying out certain letting operations is retained where a legislative amendment post-dating the supply of those goods or services but pre-dating the commencement of such operations deprives the taxable person concerned of the right to waive exemption thereof, …’. However, according to paragraph 51 of the judgment, that rule is not applicable where adjustment is made under the conditions laid down in Article 20 of the Sixth Directive.
- The Hoge Raad held that this case-law does not enable it to assess the merits of the argument relied on by the Gemeente Leusden, namely that adjustment as referred to in Article 20 of the Sixth Directive is out of the question where a use which is subject to VAT is changed, merely by a legislative amendment, into a use which is exempt without any right to deduct.
C-7/02
- In the course of 1994 and 1995, G&S Properties BV (‘G&S’), one of the companies in Holin Groep, had a new office complex constructed on a plot of land it owned in Amsterdam. Holin Groep deducted the VAT charged in that connection.
- In the middle of 1994, G&S entered into negotiations with ING Bank NV (‘the Bank’) with regard to the leasing of part of the office complex or sale of those offices to the Bank. In these negotiations both G&S and the Bank assumed that in the event of leasing they would opt for taxation of the lettings.
- In December 1995, a lease was signed with effect from 1 January 1996. After this date the Bank finished the conversion work and fitted out the leased property. On 1 October 1996, the Bank commenced using the leased property for its banking activities which were exempt from VAT. Holin Groep, as lessor, and the Bank, as lessee, requested the tax inspector to make an exception and not apply the exemption from VAT with regard to the lease.
- In the light of the entry into force of the new law, that request was rejected and a VAT assessment amounting to NLG 33 051 was served on Holin Groep, on the basis of the provision of the Dutch law corresponding to Article 5(7)(a) of the Sixth Directive. In response to an objection, the tax inspector upheld the original assessment as regards the principal amount due.
- Holin Groep brought an action before the Gerechtshof te Amsterdam but that action was dismissed by judgment of 20 January 2000. The Gerechtshof held that at 18.00 hours on 31 March 1995 there was still no lease between Holin Groep and the Bank and that the transitional provisions of the amending law were not applicable, regardless of the fact that on that date there were already pre-contractual obligations between Holin Groep and the Bank with regard to the lease of the premises. Holin Groep appealed to the Hoge Raad der Nederlanden against that decision.
Questions
C-487/01
- 1. Do Articles 20(2) and 17 of the Sixth Directive or the principles, in European law, of the protection of legitimate expectations and legal certainty preclude adjustment – in a case involving no fraud or abuse or change of planned use as referred to in paragraphs 50 and 51 of the judgment of the Court of Justice in the Schlossstrasse case – of the VAT deducted by a taxable person, which he has paid on an item of (immovable) property supplied to him with a view to the letting (subject to VAT) of that property, for the years of the period of adjustment under Article 20(2) which have not yet elapsed at the time of the cessation of that right of option (in this case, in fact, 1 January 1996) for the sole reason that, as a result of a legislative amendment, the taxable person is no longer entitled to waive exemption for that letting?
2. If the answer to the first question is in the affirmative, is the legislative amendment inapplicable only in respect of the deducted tax mentioned in Question 1, or is it also inapplicable – until the period of adjustment has expired – in respect of the taxed status (subject to the provisions of Article 13(C) of the Sixth Directive) of the letting referred to in Question 1?
C-7/02
- 1. Do Articles 5(7)(a) and 17 of the Sixth Directive or the European law principles of the protection of legitimate expectations and of legal certainty preclude ─ in a case not involving fraud or abuse or any question of a change in planned use, as mentioned in paragraphs 50 and 51 of the judgment of the Court of Justice in Schlossstraße ─ the charging of tax on the basis of the abovementioned Article 5(7)(a) when a taxable person has deducted VAT which he has paid for goods delivered, or services provided, to him with a view to the planned leasing, subject to VAT, of a particular immovable property, on the simple ground that, as a result of a legislative amendment, the taxable person no longer has the right to waive the exemption for that lease?
2. Would an affirmative response to the first question also apply to a right to deduct arising in the period between notification of the legislative amendment mentioned in Question 1 and its entry into force? In other words, in the event of an affirmative response to Question 1, can tax still be charged, on the basis of Article 5(7)(a), on the elements of the cost price referred to in Article 11(A)(1)(b) of the Sixth Directive which were incurred after that notification date?
AG Opinion
(1) As regards the first question raised in Cases C-487/01 and C-7/02, the principles of the protection of legitimate expectations and legal certainty preclude the application to a taxable person of an adjustment, pursuant to Article 20 of the directive, or a charge to tax, pursuant to Article 5(7)(a) of the directive, on the sole ground that, as a result of a legislative amendment, that person may no longer charge VAT on the activity in relation to which it had acquired a right to deduct VAT under the directive.
(2) The second question submitted in Case C-487/01 is inadmissible. In any event, it is for the national court to assess whether, on the basis of the principles of its own legal order, those lessees who opted for taxation of the lease on the basis of the legislation in force at the time when the lease was drawn up should continue to be required to pay that tax even after the entry into force of a legislative amendment which removes the possibility of opting for taxation of that lease.
(3) As regards the second question raised in Case C-7/02, the answer to the first question also applies to the period following the announcement, in the press release issued by the Netherlands Secretary of State for Finance, that the Netherlands Government intended to introduce amendments to the VAT legislation in force.
Decision
- 1. Articles 17 and 20(2) 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, interpreted in accordance with the principles of the protection of legitimate expectations and legal certainty do not preclude the withdrawal by a Member State of the right to opt for taxation of lettings of immovable property which results in the adjustment of deductions made in respect of the immovable property acquired as capital goods which is let pursuant to Article 20 of the Sixth Directive 77/388.
Where a Member State withdraws the right to opt for taxation of lettings of immovable property, it must take account of the legitimate expectation of its taxable persons when determining the arrangements for implementing the legislative amendment. The repeal of legislation from which a taxable person has derived an advantage in paying less tax, without there being any abuse, cannot however, as such, breach a legitimate expectation based on Community law.
2. Article 5(7)(a) of the Sixth Directive 77/388 concerns the application of goods by a taxable person for the purposes of his business and not a legislative amendment withdrawing the right to opt for taxation of a financial transaction which is generally exempt.
Summary
Amendment of national scheme abolishing the possibility to opt for taxation of rental of immovable property – Revision of deductions
Articles 17 and 20 of the Sixth Directive, interpreted in accordance with the principles of legitimate expectations and legal certainty, do not preclude a Member State from abolishing the right to opt for taxation of the letting of immovable property, with the result that the the deduction made for the rented investment property is reviewed.
When a Member State abolishes the right to opt for taxation of the rental of immovable property, it must take into account the legitimate expectations of taxpayers when choosing the modalities of application of the legislative amendment. However, the abolition of the legal framework from which the VAT payer has benefited by paying less VAT, without there being any abuse, cannot in itself constitute a breach of a legitimate expectation based on Community law.
Article 5(7)(a) of the Sixth Directive concerns the allocation of goods by a taxable person for business purposes, and not an amendment to the law abolishing the right to opt for taxation of an economic transaction which is, in principle, exempt.
Source
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