Flashback on ECJ cases C-172/03 (Heiser) – Switch from taxation regime to exemption, without requiring an adjustment for capital goods, qualifies as state aid

On March 3, 2005, the ECJ issued its decision in the case C-172/03 (Heiser).

Context: VAT – Exemption for medical care provided in the exercise of the profession of medical practitioner – Adjustment of deductions.

Article in the EU VAT Directive

Article 20 of the Sixth VAT Directive (Article 187 of the EU VAT Directive 2006/112/EC).

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

Mr Heiser, the appellant in the main proceedings, is a medical practitioner specialising in dentistry.
By virtue of his transition to VAT exemption, in his 1997 VAT return, Mr Heiser claimed relief of approximately ATS 3.5 million for long-term orthodontic treatment which had begun after 1991 and had not been completed by 1 January 1997 and for which he had received payments on account on which VAT had been paid.
The tax office responsible took the view that in the case of long-term orthodontic treatment the service is supplied over the course of approximately a year. In its assessment of tax relating to turnover for 1997, of 4 October 1999 (‘the tax assessment’) it therefore allowed the VAT relief only in respect of treatment having commenced in 1996. It thus allowed only ATS 1 460 000 of the VAT relief applied for.
The appellant in the main proceedings appealed against the tax assessment.
The Finanzlandesdirektion für Tirol (appeals body, ‘the Finanzlandesdirektion’), the respondent in the main proceedings whose place was then taken by the Finanzamt Innsbruck, instructed the tax office, in a letter of 1 March 2002, inter alia to determine the extent to which deductions should be adjusted under Paragraph 12(10) UStG 1994 as of 1 January 1997 in the case of transition from VAT liability to VAT exemption where the deduction of input tax is not possible.
On 19 September 2002, in the light of the findings made by the tax office by agreement with Mr Heiser, the Finanzlandesdirektion made a decision dismissing the appeal before it and varying the assessment to the appellant’s detriment. By that decision, Mr Heiser’s tax credit was reduced by ATS 89 635.94 and ATS 164 870.15 through the adjustment of deductions.
In the appeal which he brought before the Verwaltungsgerichtshof, Mr Heiser challenged, inter alia, the adjustment of deductions made by the Finanzlandesdirektion. The appeal essentially relies on the fact that Paragraph XIV(3) of Federal Law 21/1995 expressly exempts medical practitioners from having to adjust deductions as of 1 January 1997.
In its defence before that court, the Finanzlandesdirektion countered that, when it considered the appeal brought against the tax assessment, it did not apply Paragraph XIV(3) of Federal Law 21/1995, because the failure to adjust deductions constitutes unnotified aid under Article 92 of the Treaty. Under Article 93(3) of the EC Treaty (now Article 88(3) EC), the authorities of a Member State may not implement aid which is not notified. Paragraph XIV(3) is, moreover, contrary to Article 20 of the Sixth Directive.
In its order for reference, the Verwaltungsgerichtshof states that it is inherent in the system of VAT applied within the European Union by Community directives, and by the Sixth Directive in particular, that liability to VAT on transactions should go hand in hand with the right to a full deduction of input tax by an undertaking, whereas those undertakings whose turnover is exempt from tax should be excluded from that entitlement. If a change occurs in the circumstances relied on to determine the amount of input tax to be deducted, Article 20 of the Sixth Directive requires the initial deductions to be adjusted. That court points out that, under Article 20(2) of the Sixth Directive, in the case of capital goods, an adjustment is to be made if, after the year in which the goods were acquired, variations in the deduction entitlement occur compared to entitlement during the year of acquisition.
The referring court adds that Paragraph XIV(3) of Federal Law 21/1995 provides that, in the case of services in the medical field, and for medical practitioners in particular, contrary to Article 20 of the Sixth Directive, the transition from liability to VAT for such services, which was the system applicable until 31 December 1996, to exemption, from 1 January 1997, should not entail an adjustment in deductions made for goods already acquired during the period of liability to tax even though those goods also continue to be used during the period of tax exemption, that is to say, are used to carry out exempt transactions. This provision means that the deduction of input tax continues to apply to goods that are used to carry out exempt transactions. The result of that rule is the maintenance of the deduction for goods used for such transactions.
In the view of the Verwaltungsgerichtshof, it is not inconceivable that orthodontists in Austria might be in competition with orthodontists in other EU Member States. This is particularly so in border areas. As a result of the rule in Paragraph XIV(3) of Federal Law 21/1995, that is to say, a rule excluding the reduction of deductions inherent in the system of VAT and expressly provided for by Article 20 of the Sixth Directive, the Austrian legislature has favoured national medical practitioners.
The deduction constitutes an advantage granted using State resources which strengthens the position of the undertakings on which it is conferred compared with other competing undertakings, which cannot make such deductions.
The Verwaltungsgerichtshof doubts whether Paragraph XIV(3) of Federal Law 21/1995, by which the Republic of Austria discontinued the adjustment of VAT deductions made by medical practitioners until 31 December 1996 (‘the measure at issue in the main proceedings’), was objectively justified in the sense discussed in paragraph 42 of the judgment in Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke [2001] ECR I-8365), particularly as the disadvantages of discontinuing the deduction of input tax to the parties concerned are in any event recompensed by way of State compensatory payments under the GSBG 1996, and Order 56/1997.

Questions

Does a rule, such as that contained in Paragraph XIV(3) of Federal Law 21/1995, as amended by Federal Law 756/1996, providing that in the case of supplies made by doctors the changeover from taxable to exempt status for the purposes of value added tax does not, in relation to goods that continue to be used in the business, entail the reduction of input tax already deducted that is prescribed by Article 20 of [the Sixth Directive], constitute State aid within the meaning of Article 87 EC (formerly Article 92 of the EC Treaty)?

AG Opinion

A rule, such as that contained in Paragraph XIV(3) of Federal Law BGBl. 21/1995, as amended by BGBl. 756/1996, which dispenses those engaged in the medical sector, in connection with the transition from taxable to exempt status for VAT purposes, from the general requirement under national law for deductions to be adjusted, constitutes State aid within the meaning of Article 87(1) EC.

Decision

Article 92 of the Treaty (now, after amendment, Article 87 EC) must be interpreted as meaning that a rule, such as that laid down by Paragraph XIV(3) of Federal Law 21/1995, as amended by Federal Law 756/1996, providing that the changeover for medical practitioners from taxable to exempt status for the purposes of VAT does not, in relation to goods that continue to be used in the business, entail the reduction of input tax already deducted that is prescribed by 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, must be classified as State aid.

Summary

A regulation according to which dentists go from a regime of taxation and not exemption to an exemption regime, without requiring the regularization that comes from the VAT paid on the acquisition of capital goods, must be qualified as aid of State, contrary to the TFEU art.107.

Source