Flashback on ECJ cases C-378/02 (Waterschap Zeeuws Vlaanderen) – Public authority – Transaction engaged in as taxable person and transaction engaged in as non-taxable person – Right to adjustment and deduction

On June 2, 2005, the ECJ issued its decision in the case C-378/02 (Waterschap Zeeuws Vlaanderen).

Context: VAT – Capital goods acquired by a body governed by public law – Public authority – Transaction engaged in as taxable person and transaction engaged in as non-taxable person – Right to adjustment and deduction.

Article in the EU VAT Directive

Articles 4(1), 4(2), 4(3), 4(5), 20(1) and 20(2) of the Sixth VAT Directive (articles 9, 12, 13, 184, 185, 186 of the EU VAT Directive 2006/112/EC).

Article 4(1), (2), (3) and (5)

‘1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. …

3. Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; Member States may determine the conditions of application of this criterion to transformations of buildings and the land on which they stand.

…

(b) the supply of building land.

…

5. States, regional and local government authorities and other bodies governed by public law shall not be considered 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 these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

…

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.’

Article 20(1) and (2)

1. The initial deduction shall be adjusted according to the procedures laid down by the Member States, in particular:

(a) where that deduction was higher or lower than that to which the taxable person was entitled;

(b) where after the return is made some change occurs in the factors used to determine the amount to be deducted, in particular where purchases are cancelled or price reductions are obtained; however, adjustment shall not be made in cases of transactions remaining totally or partially unpaid and of destruction, loss or theft of property duly proved or confirmed, nor in the case of applications for the purpose of making gifts of small value and giving samples specified in Article 5(6). However, Member States may require adjustment in cases of transactions remaining totally or partially unpaid and of theft.

2. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured. The annual adjustment shall be made only in respect of one fifth of the tax imposed on the goods. The adjustment 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 or manufactured.

By way of derogation from the preceding subparagraph, Member States may 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 10 years.’

Facts

WZV is a body governed by public law responsible for the public management of water in the territory of the Netherlands covered by it. In carrying out that activity, WZV acts as a public authority for the purpose of Article 4(5) of the Sixth Directive and is therefore not a taxable person in respect of VAT.
In order to perform the tasks entrusted to it, WZV arranged for the construction of a sewage treatment plant (‘the plant’), for which it paid by way of VAT the amount of approximately NLG 7.2 million. The plant commenced operations in 1990.
WZV and two other public water authorities agreed to make use of the plant for centralised processing of the slurry arising from the purification of sewage. Those two bodies made financial contributions towards the additional investment required for the use of the plant by the three organisations concerned. As from 1993, WZV has passed on to the other two bodies the share of the slurry processing costs respectively attributable to each of them, without, however, charging them VAT. In that regard, the inspector of taxes, by agreement with WZV, allowed VAT not to be charged to those two bodies on condition that WZV waive its right to deduct the input VAT paid.
In December 1994 WZV established a foundation for the promotion of the environment in Dutch Flanders (‘the foundation’), to which it sold the plant for about NLG 18 million exclusive of VAT.
In view of the circumstances under which the transfer of ownership took place, that transfer must, in the national court’s view, be regarded as a supply within the meaning of Article 5(1) of the Sixth Directive and Article 3(1) of the law, which is based on Article 5. On the day of the sale, WZV was granted a lease of the plant by the foundation for a term of nine years and two days.
WZV and the foundation submitted a joint request to the inspector of taxes under Article 11(1)(a) and (b) of the law designed to implement Article 13C of the Sixth Directive on the right to opt for VAT to apply in respect of the sale and letting of immovable property for the exemption in respect of the sale and the lease of the plant not to be applied.
Relying on Articles 13 and 13a of the implementation order, WZV calculated the proportion of the amount of the VAT invoiced in respect of construction of the plant, which, in its view, qualified for adjustment, at approximately NLG 3.6 million, namely 5/10 of that amount. That proportion was justified by the fact that five years had elapsed since the purchase of the plant and that an identical period had yet to elapse.
In its declaration relating to the fourth quarter of 1994, WZV applied to the inspector of taxes for a refund of approximately NLG 3.6 million.
That application was rejected on the ground that, at the time of supply of the plant, WZV was not entitled to an adjustment under the implementation order transposing Article 20 of the Sixth Directive.
WZV appealed against that rejection decision by the inspector of taxes. Following judgment on appeal by the Gerechtshof te Amsterdam, the case was appealed on a point of law before the Hoge Raad.
The national court maintains that, in so far as WZV carried out the sale transaction as a taxable person and submitted a joint request with the purchaser of the plant for the exemption in respect of that transaction not to be applied, an adjustment of the VAT paid by WZV on the construction of the property should in principle be allowed. However, the Hoge Raad has doubts in that regard in light of the Court’s case-law.
According to the Hoge Raad, the question arises whether a body governed by public law which has used goods as a public authority and has not therefore deducted the VAT paid at the time of acquisition of those goods, is entitled, in the same way as a taxable person who has used goods to provide exempt services, to the adjustment provided for in Article 20 of the Sixth Directive where it subsequently effects a supply of those goods as a taxable person and that supply is taxable.
The national court states that a further difficulty arises from the fact that WZV waived its right to deduct input tax owing to its agreement with the inspector of taxes. For that reason, WZV is regarded as having waived its right partially to assign the plant to its capital assets.
That court asks whether the case-law of the Court on the designation of capital goods, at the option of the taxable person, as private assets or business assets applies mutatis mutandis to bodies governed by public law.

Questions

1. Does a body governed by public law have, as regards a capital item acquired by it which it supplies for consideration to a third party, in respect of which supply it must be regarded as a taxable person, a right to adjust the turnover tax paid in respect of that acquisition pursuant to Article 20 (in particular paragraphs 2 and 3) of the Sixth Directive in so far as it has used that item for activities in which it engages as a public authority under Article 4(5) of that directive?

2. Under the Sixth Directive, is a body governed by public law entitled wholly to exclude from its capital assets a capital item used partly for activities engaged in as a taxable person and partly for activities engaged in as a public authority, as the Court of Justice has held in respect of taxable natural persons?

AG Opinion

A body governed by public law which acquires a capital item and later supplies it for consideration to a third party, thereby acting as a taxable person, has a right to adjust the VAT paid in respect of that acquisition pursuant to Article 20 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, only in so far as it acted as a taxable person when it initially acquired the item.

Decision

A body governed by public law which purchases capital goods as a public authority within the meaning of the first 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, that is to say as a non-taxable person, and subsequently sells those goods as a taxable person, is not entitled, in respect of that sale, to a right of adjustment based on Article 20 of that directive in order to deduct the VAT paid on the purchase of those goods.

Summary

A body governed by public law that, as a government within the meaning of Article 4(5), first subparagraph of the Sixth Directive (i.e. as a non-taxable person), purchases an investment good and subsequently sells this good as a taxable person, is not entitled to an adjustment on the basis of this sale in the context of this sale. of Article 20 of this Directive to deduct the VAT paid on the purchase of that good.

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