Flashback on ECJ Cases C-184/04 (Uudenkaupungin kaupunki) – Member States are obliged to provide for a revision of the deduction of VAT in respect of investment goods

On March 30, 2006, the ECJ issued its decision in the case C-184/04 (Uudenkaupungin kaupunki).

Context: VAT – Deduction of input tax – Capital goods – Immovable property – Adjustment of deductions.

Article in the EU VAT Directive

Articles 13(c), 17(6), 20 of the Sixth VAT Directive (Articles 137, 176 of the EU VAT Directive 2006/112/EC).

Article 137 (Exemptions for other activities)
1. Member States may allow taxable persons a right of option for taxation in respect of the following transactions:
(a) the financial transactions referred to in points (b) to (g) of Article 135(1);
(b) the supply of a building or of parts thereof, and of the land on which the building stands, other than the supply referred to in point (a) of Article 12(1);
(c) the supply of land which has not been built on other than the supply of building land referred to in point (b) of Article 12(1);
(d) the leasing or letting of immovable property.
2. Member States shall lay down the detailed rules governing exercise of the option under paragraph 1.
Member States may restrict the scope of that right of option.

Article 176 (Restrictions on the right of deduction)
The Council, acting unanimously on a proposal from the Commission, shall determine the expenditure in respect of which VAT shall not be deductible. VAT shall in no circumstances be deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment.
Pending the entry into force of the provisions referred to in the first paragraph, Member States may retain all the exclusions provided for under their national laws at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.

Article 185 (Adjustment of deductions)
1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.
2. By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.
However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made.

Facts

Uusikaupunki renovated a building which it owns and let space in it to the Finnish State, one part from 1 June 1995 and the other part from 1 September 1995. From 31 August 1995, Uusikaupunki also let an industrial building which it had built to an undertaking liable to VAT. The costs for both projects included VAT amounting to FIM 2 206 224.
On 4 April 1996 Uusikaupunki applied to the Turun lääninverovirasto (Turku Province Tax Office) under Paragraph 30 of the AVL to become liable to VAT with respect to the letting of the two properties at issue in the main proceedings. The tax authority approved that application with effect from the date on which the application was made, since the application had not been made within six months of bringing the property into use, as laid down in Paragraph 106 of the AVL.
By two applications, dated 8 September 1998 and 30 March 2000, Uusikaupunki applied to the Lounais-Soumen verovirasto, under Article 20 of the Sixth Directive, for adjustment of the tax deductions and a refund of part of the VAT paid in connection with building and restoration work for the years 1996 to 1999. The sum applied for was FIM 1 651 653, plus interest at the statutory rate.
By decisions dated 3 May 2000, the Lounais-Suomen verovirasto rejected those applications on the grounds that deduction of VAT paid in connection with building and restoration work was possible under Paragraph 106 of the AVL only if the option to become liable to that tax had been exercised within six months of the properties being brought into use.
Uusikaupunki brought an unsuccessful appeal before the Helsingin hallinto-oikeus for those decisions to be set aside. The appellant in the main proceedings then appealed against that judgment to the Korkein hallinto-oikeus (Supreme Administrative Court).
The Korkein hallinto-oikeus is uncertain whether the conditions to which the AVL makes the deduction of VAT subject are contrary to the Sixth Directive in so far as Finnish law does not permit adjustment of deductions of VAT in connection with the letting of a property where that property was initially brought into use in non-taxable activity before being used in taxable activity unless the application for the letting to become liable to tax was submitted within six months of the property being brought into use.
According to the referring court, there is no doubt that Uusikaupunki acted as a taxable person with regard to the acquisitions made in respect of the new building and restoration work in question, and that those acquisitions were made for the purposes of the appellant’s economic activity.

Questions

(1) Is Article 20 of [the Sixth Directive] to be interpreted as meaning that the adjustment of deductions in accordance with that article is mandatory for Member States in the case of capital goods unless it follows otherwise from Article 20(5)?

(2) Is Article 20 of the [Sixth] Directive to be interpreted as meaning that the adjustment of deductions in accordance with that article is applicable even where the capital goods, in this case immovable property, were first used in non-taxable activity, in which case an initial deduction could not have been made at all, and only later in taxable activity during the adjustment period?

(3) May the second subparagraph of Article 13(C) of the [Sixth] Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?

(4) May the second subparagraph of Article 17(6) of the [Sixth] Directive be interpreted as meaning that a Member State may restrict the right to deduct for acquisitions relating to immovable property investments in the manner laid down in the Finnish Arvonlisäverolaki, where the right to deduct is excluded altogether in situations such as the present one?

AG Opinion

(1) Article 20 of Sixth Council VAT Directive 77/388/EEC is to be interpreted as meaning that Members States must provide for the adjustment of deductions in accordance with that article in the case of capital goods unless it follows otherwise from Article 20(5).

(2) Article 20 of the Sixth VAT Directive is to be interpreted as meaning that the adjustment is applicable even where the capital goods, in this case immovable property, were first used in non‑taxable activity, on which no deduction could have been made, and later in taxable activity.

(3) The second subparagraph of Article 13(C) and Article 17(6) of the Sixth VAT Directive are not to be interpreted as meaning that a Member State which allows its taxpayers a right to opt for taxation of the use of immovable property may exclude altogether the deduction of value added tax paid in respect of immovable property investments before an application is made for the leasing of the property to be taxable, if that application is not made within six months from the bringing into use of the property.

Decision

1. Article 20 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, subject to the provisions of Article 20(5) thereof, it requires Member States to make provision for adjustment of deductions of value added tax on capital goods.

2. Article 20 of Sixth Directive 77/388 must be interpreted as meaning that the adjustment provided for therein is also applicable where the capital goods were first used in non-taxable activity that was not eligible for deduction and were then used in activity, subject to value added tax during the adjustment period.

3. The second subparagraph of Article 13(C) of Sixth Directive 77/388 must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of value added tax on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

4. Article 17(6) of Sixth Directive 77/388 must be interpreted as meaning that a Member State which gives its taxable persons the right to opt for taxation of the letting of a property is not permitted by that provision to exclude deduction of value added tax on immovable property investments made before that right of option is exercised, where the application to exercise that option has not been made within six months of the property being brought into use.

Summary

Deduction of input tax – Investment goods – Immovable property – Revision of deduction

Member States are obliged to provide for a revision of the deduction of VAT in respect of investment goods.

Revision also applies if an investment good is first intended for an exempt activity, for which there was no right to deduct, and then used during the revision period for an activity subject to VAT.

A Member State which grants its taxable persons the right to opt for taxation of the rental of immovable property may not, pursuant to that provision, exclude the deduction of VAT on investments in immovable property made before the exercise of that option if the request with regard to this right of option has not been submitted within six months after the occupation of this immovable property.

Article 17(6) of the Sixth Directive must be interpreted as meaning that a Member State which grants its taxable persons the right to opt for taxation of the rental of immovable property may, under that provision, deduct VAT on investments in immovable property made before the exercise of this right of option may not exclude if the request with regard to this right of option has not been submitted within six months after the taking into use of this immovable property.

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