On March 3, 2005, the ECJ issued its decision in the case C-32/03 (Fini H).
Context: Sixth VAT Directive – Status of taxable person – Right to deduct – Winding up – Direct and immediate link – Transactions forming part of the economic activity as a whole.
Article in the EU VAT Directive
Articles 4(1), 4(2), 4(3), 17(2) of the Sixth VAT Directive (Articles 9(1), 12 and 168 of the EU VAT Directive 2006/112/EC).
Article 9 (Tacable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
Article 12
1. Member States may regard as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in the second subparagraph of Article 9(1) and in particular one of the following transactions:
(a) the supply, before first occupation, of a building or parts of a building and of the land on which the building stands;
(b) the supply of building land.
2. For the purposes of paragraph 1(a), ‘building’ shall mean any structure fixed to or in the ground.
Member States may lay down the detailed rules for applying the criterion referred to in paragraph 1(a) to conversions of buildings and may determine what is meant by ‘the land on which a building stands’.
Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply, or the period elapsing between the date of first occupation and the date of subsequent supply, provided that those periods do not exceed five years and two years respectively.
3. For the purposes of paragraph 1(b), ‘building land’ shall mean any unimproved or improved land defined as such by the Member States.
Article 168 (Right to deduct 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;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.
Facts
- Fini H is a limited partnership which was created in 1989 with the object of running a restaurant. In order to carry on that activity, it leased premises from 20 May 1988. The lease, which was concluded for a term of 10 years, could be terminated only with effect from 30 September 1998.
- Fini H closed its restaurant at the end of 1993 and the premises subsequently remained unused. It sought to terminate the lease but the landlord refused to consent, and relied on the absence in the lease of a clause providing for early termination. Moreover, Fini H failed to find a replacement tenant to take over the lease, which came to an end only on its contractual date of expiry.
- During the period from the end of 1993 to 30 September 1998, Fini H remained registered in the VAT register even though it no longer carried on its restaurant business. It thus continued to deduct input tax paid by it on the costs incurred in relation to the lease in question, namely the rent and the heating, electricity and telephone charges. Once the restaurant was closed and there was no longer any output tax to declare, this resulted in net payments to Fini H.
- In September 1998, the told-og skatteregionen (regional tax authority ‘the authority’) demanded repayment of the sums paid to Fini H as negative VAT between October 1993 and March 1998. It also decided that the amounts of VAT yet to be paid in respect of the period from 1 April to 30 September 1998 would not be reimbursed. The authority argued that Fini H had not carried on any activity subject to VAT since the third quarter of 1993.
- That position was upheld by the Landsskatteretten (Supreme Administrative Tax Authority). It took the view that, following the cessation of its restaurant business, Fini H had not carried on an economic activity within the meaning of Article 3 of the VAT law. The lease could not, by itself, establish liability for VAT under that article. The Landsskatteretten added that the fact that the premises were, for a certain period, used for economic purposes in the form of a restaurant did not appear to justify a requirement that Fini H be regarded as a taxable person for VAT purposes under Article 3 once that activity had ceased.
- Fini H then brought an action against that decision of the Landsskatteretten before the Vestre Landsret (Denmark), which dismissed it by judgment of 29 August 2001. The Vestre Landsret held that entitlement to deduct input tax requires that the taxable expenditure relate to an independent economic activity within the meaning of Article 3 of the VAT law. It ruled that the expenditure on rent and charges incurred after Fini H had ceased its restaurant business, which were not attributable to normal winding-up operations, could not be regarded as operational expenditure linked to an independent economic activity within the meaning of Article 3 of the VAT law.
- Fini H lodged an appeal against that judgment of the Vestre Landsret before the Højesteret.
Questions
- 1. Can a person be regarded as independently carrying on an economic activity within the meaning of Article 4(1) to (3) of the Sixth VAT Directive in a situation in which the person concerned originally entered into a lease agreement as part of an independent economic activity but has now ceased that actual activity, even though the lease continues to exist for a particular period as a result of a non-termination clause, and in which, after the actual activity ceases, no transactions subject to VAT are conducted by application of the lease for the purpose of obtaining income therefrom on a continuing basis?
2. Does the question whether or not the person concerned actively seeks, during the remaining part of the period of non-terminability, either to utilise the commercial lease to conduct transactions subject to VAT for the purpose of obtaining income therefrom on a continuing basis or to dispose thereof have any bearing on the answer to Question 1 and does the length of the period of non-terminability or the remaining part thereof likewise have any bearing?
AG Opinion
(1) Articles 4 and 17 of the Sixth VAT Directive 77/388/EC are to be interpreted as meaning that where for the purposes of his taxable output transactions a taxable person enters into an obligation – such as a lease of business premises – to acquire taxable supplies of goods or services, but ceases to make taxable output transactions before the expiry of the obligation, continuing none the less to acquire the goods or services in question in pursuance of that obligation, he is in principle to be considered in that regard as retaining the status of taxable person acting as such and thus entitled to deduct the VAT on those goods or services for the duration of the initial obligation, provided that:
– the direct and immediate link between the supplies and the transactions for the purposes of which the original obligation to acquire them was entered into is not lost by their use for private purposes or for the purposes of a different economic activity; and
– the continued existence of that direct and immediate link can be established by objective evidence, if the tax authority so requires.
(2) The length of the period which elapses until the expiry of the obligation is in principle not relevant in that regard. The fact that the person concerned may actively seek to utilise the goods or services acquired for a purpose other than the original taxable output transactions is relevant only in so far as it may break the direct and immediate link with those transactions.
Decision
Article 4(1) to (3) 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, as amended by Council Directive 95/7/EC of 10 April 1995, is to be interpreted as meaning that a person who has ceased an economic activity but who, because the lease contains a non-termination clause, continues to pay the rent and charges on the premises used for that activity is to be regarded as a taxable person within the meaning of that article and is entitled to deduct the VAT on the amounts thus paid, provided that there is a direct and immediate link between the payments made and the commercial activity and that the absence of any fraudulent or abusive intent has been established.
Summary
A person who has ceased a commercial activity, but who continues to pay rent and additional costs for the space used for this activity, because the rental agreement contains a clause according to which the rent cannot be terminated, is considered a taxable person and is entitled to deduct VAT on the amounts thus paid, insofar as there is a direct and immediate connection between the payments made and the commercial activity and it is established that there is no intention of fraud or abuse.
Source
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