Flashback on ECJ cases C-269/03 (Vermietungsgesellschaft Objekt Kirchberg) – Immovable property rental exemption – Right to opt for taxation – Deduction of input tax – Prior approval by tax authorities

On September 9, 2004, the ECJ issued its decision in the case C-269/03 (Vermietungsgesellschaft Objekt Kirchberg).

Context: Sixth VAT Directive – Article 13(C) – Exemption of transactions of leasing or letting of immovable property – Right of option for taxation – Deduction of input tax – Obtaining prior approval of the tax authorities.

Article in the EU VAT Directive

Article 13(C) of the Sixth VAT Directive (Article 137 of the EU VAT Directive 2006/112/EC).

Article 137
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.

Facts

VOK had an office building constructed in Luxembourg which it let to a firm of auditors from 1 January 1993, the date of completion of the building’s construction. Since the commencement of the letting, VOK has sent that firm monthly invoices subject to VAT.
VOK exercised its right to opt for VAT by submitting to the Authority, on 29 June 1993, a declaration of option for approval. The approval was granted to VOK on 30 June 1993 with effect from 1 July 1993.
VOK submitted its VAT returns deducting all the VAT which it had paid on account of the construction works.
Pursuant to Article 5 of the Grand-Ducal Regulation, the Authority however refused the deduction of 50% of the input VAT paid, on the ground that the letting during the six months from January to June 1993 was exempt from VAT because it was not covered by the approval. As a result it issued notices correcting, of its own motion, the VAT returns.
VOK made a complaint to the Authority’s Director.
The latter adopted a decision in January 1998 on the basis of which new corrective notices were issued in the following February. He decided, first, that the date of commencement of the building’s use was 1 January 1993. Since the option took effect only from 1 July 1993, the letting of the building was not subject to VAT during half of 1993 and the input VAT could be deducted only up to 50%, which justified the correction of the 1993 return. He decided, secondly, that the exercise of the option should entail a second correction in 1994, namely that 9/10ths of the VAT which was not deductible in 1993 should be corrected in VOK’s favour. In the result 5% of the input VAT paid was not deductible and therefore payable by VOK.
VOK brought proceedings in March 1998 against the decision of the Director of the Authority. By judgment of 7 November 2001, the Tribunal d’arrondissement de Luxembourg (District Court, Luxembourg) upheld VOK’s claim by overruling the application of Article 5 of the Grand-Ducal Regulation and holding that VOK had carried on an activity subject to VAT during the whole of 1993.
The Authority and the État du grand-duché de Luxembourg lodged an appeal against that judgment on 14 March 2002.
Since it was uncertain about the lawfulness of an approval procedure such as that provided for by the Luxembourg legislation in the light of the provisions of Article 13(C) of the Sixth Directive relating to the leasing or letting of immovable property, considered in the light of the principle of the right of deduction, the Cour d’appel (Court of Appeal) decided, by judgment of 18 June 2003, to stay proceedings and to refer the following question to the Court for a preliminary ruling

Questions

Does subparagraph (a) of the first paragraph of Article 13(C) of the Sixth … Directive … permit a Member State which has exercised the power to allow taxpayers a right of option for taxation in cases of letting and leasing of immovable property to make full deduction of the input VAT conditional upon non-retroactive approval of the tax authorities first being obtained?

AG Opinion

Subparagraph (a) of the first paragraph of Article 13(C) 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 does not preclude a Member State which has exercised the power to allow taxpayers a right of option for taxation in cases of leasing or letting of immovable property from making the application of the tax subject to prior approval of the option where the approval procedure is directed solely at checking that the statutory conditions have been fulfilled, and it is designed in particular to prevent cases of evasion or abuse. Such an approval procedure is not in breach of the principle of the right of deduction where compliance with it guarantees to the taxpayer immediate and complete deduction of input tax.

Decision

The provisions of subparagraph (a) of the first paragraph and of the second paragraph of Article 13(C) 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 do not preclude a Member State, which has exercised the power to allow taxpayers a right of option for taxation on leasing or letting transactions of immovable property, from adopting legislation which makes full deduction of the input VAT paid conditional upon non-retroactive, prior approval of the tax authorities.

Summary

Immovable property rental exemption – Right to opt for taxation – Deduction of input tax – Prior approval by tax authorities

A Member State which has exercised the power to grant its taxable persons the right to opt for taxation of transactions relating to the leasing and letting of immovable property may not adopt a system which makes the full deduction of input tax dependent on a prior, non-retroactive approval by the tax authorities.

Source